Hill International Inc (HIL) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Hill International 2009 Second Quarter Conference Call.

At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

I will now turn the conference over to Mr. Devin Sullivan. Please go ahead, sir.

Thank you, Christy.

Thank you, everyone, for joining us this morning. Our speakers on today's call will be David Richter, President and Chief Operating Officer of Hill International, and John Fanelli, Hill's Senior Vice President and Chief Financial Officer.

Before we get started, I would like to remind everyone that statements made during today's call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is our intent that any such statements be protected by the Safe Harbor created thereby.

Except for historical information discussed during this presentation, the matters set forth herein including but not limited to any projections of earnings or other financial items, any statements concerning plans, strategies, and objectives for future operations, and any statements regarding future economic conditions or performance are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, and assumptions and are subject to certain risks and uncertainties. Although Hill believes that the expectations, estimates, and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements.

Important factors that could cause actual results, performance, and achievements or industry results to differ materially from estimates or projections contained in the forward-looking statements include modifications and termination of client contracts; control and operational issues pertaining to business activities that Hill conducts on its own behalf or pursuant to joint ventures with other parties; difficulties Hill may incur in implementing its acquisition strategy; the need to retain and recruit key technical and management personnel; and unexpected adjustments and cancellations related to backlog.

Additional factors that could cause actual results to differ materially from forward-looking statements are set forth in the reports filed with the Securities and Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statement.

Thanks again for joining us this morning. I'd now like to turn the call over to David Richter, President and Chief Operating Officer of Hill. Please go ahead, David.

Thank you, Devin. Good morning, everyone, and thank you all for joining our CFO, John Fanelli, and I this morning for our Second Quarter 2009 Earnings Conference Call.

We are extremely pleased with our strong results for the second quarter of 2009, driven by solid organic growth, improved overhead efficiencies, and higher profits in the middle of what is certainly the most severe global economic contraction in our company's history.

Despite that, we are seeing signs that the economy's recovering, and we have high expectations for both our markets and our own performance for the second half of 2009 and heading into 2001.

For the second quarter, Hill's total revenue rose 8% to $104.3 million.

Our consulting fee revenue was up 12% to $91.5 million versus the earlier quarter. Of that consulting fee growth, 9% was organic and a little less than 3% was acquisition related.

Breaking down our consulting fees by operating segment, 78% for the quarter came from the Project Management Group and 22% came from the Construction Claims Group. The percentage of consulting fees from PM continues to grow as that side of our business continues to see stronger organic growth and larger acquisitions.

By geographic region for the quarter, 20% of our consulting fees came from the Americas, 30% came from Europe, 35% were from the Middle East, 14% were from North Africa, and 1% was from Asia Pacific.

Overall, Hill's operating profit for the second quarter was $6.5 million, up 15% from the second quarter of 2008, driven by a combination of organic growth and consulting fees and our recent overhead cost-cutting efforts.

Our SG&A expense for the second quarter as a percentage of CFR, consulting fee revenue, was 38.3%, which is down 60 basis points from the second quarter of 2008 and down 110 basis points sequentially from the first quarter of 2009.

Over the past four quarters, we have cut nearly $10 million in overhead expense from our business, and this began to have a significant positive effect on our operating profit in the second quarter. We expect this will have even a more pronounced impact positively on our earnings in the third and fourth quarters of this year.

As a percentage of consulting fees, our operating margin was 7.1%, up 20 basis points from a year earlier, but more significantly, up 240 basis points from the first quarter of 2009.

Net earnings attributable to Hill were up 24% this quarter to $4.7 million, equivalent to $0.12 per diluted share based upon 40.3 million diluted shares outstanding.

Hill's total backlog at the end of the second quarter increased sequentially to $611 million, up from $598 million at the end of the first quarter.

Our 12-month backlog at the end of the second quarter remained strong at $279 million, up $9 million from $270 million at the end of the first quarter.

Our net new work during the quarter, which is essentially our increase in total backlog less the consulting fees we've generated during the quarter, was $105 million. That is our fourth best sales quarter in the Company's history, and given the difficult economic environment, I think, was a real major achievement by our operational and business development teams.

Looking at our two operating segments separately, our Project Management Group achieved total revenues of $83.8 million, up 14% from the second quarter of 2008. Consulting fees for the Projects Group rose at a faster rate, up 21% to $71.6 million in the second quarter of this year. That growth consisted of 19% organic growth and 2% growth from our acquisition last year of Euromost.

Operating profit for the Projects Group in the second quarter rose 35% to $12.1 million for the quarter. That equates to 16.9% of consulting fee revenue, up 180 basis points in the same period last year, and up 380 basis points from the first quarter of 2009.

This level of operating profit gets us back into our historical range of 15 to 20%, which we are very pleased with, but we also expect that there is significant room for continuing improvement in the second half of this year.

The strongest areas for our Projects Group in the second quarter continue to be the Middle East, primarily in Abu Dhabi and Qatar, as well as North Africa. In Dubai, we continue to downsize our workforce there as work continues to drop and shift those resources to elsewhere in the Middle East, where we are seeing growth.

We made a management change at the beginning of this quarter in our US Project Management operation with the appointments of [Tom Spearing] and [Vince D'Ambrosio] to head up the operation and its business development efforts, respectively. We have already seen a significant difference in just a few months, with sales up and costs down, and we expect this region to continue to improve in the second half of this year.

We saw, unfortunately, significantly different results from our Construction Claims Group for the quarter, with total revenue in the quarter declining 12% to $20.6 million from the second quarter of 2008.

Consulting fees for the Claims Group in the second quarter were $19.9 million, down 11% from the prior-year quarter.

Organic growth and consulting fees was a negative 15% for the quarter, while Acquisition Group added 4% to consulting fees as a result of our acquisitions last year of PCI and Chitester.

A decline in work in the Middle East and the United Kingdom negatively impacted claims fee revenue in the second quarter, as did negative currency fluctuations of approximately $2.8 million versus the second quarter of 2008.

Operating profit for the Claims Group in the second quarter declined substantially to $900,000, a drop of 58% from the same period last year. The decrease in operating profit was primarily due to the decline in consulting fee revenue in the Middle East and operating losses in our Asia Pacific region.

Operating margin for the Claims Group was 4.4% for the quarter, well below our historical range of 10% to 15%. We are addressing the situation with the Claims Group from a number of fronts, including our closure last month of our office in Hong Kong.

That being said, Claims has won some significant new assignments recently, and June was the best month of the second quarter by far for that operation, so it's been trending positive.

We're also seeing some thawing on the litigation front and believe that the worst of the economic climate is behind us from the Claims business, and as a result, we have high expectations for a quick turnaround in that operation in the second half of this year.

Taking a look at our balance sheet, Hill ended the second quarter with cash and cash equivalents of $34.9 million, working capital of $93.9 million, total assets of $280 million, total debt of $30.2 million, and shareholder equity of $142.6 million. Netting our cash and our debt leaves us with a net cash position of nearly $5 million.

As we previously announced, on June 30, we entered into a new credit agreement with a consortium of banks led by Bank of America. That increased Hill's borrowing capacity from $60 million to $100 million. We believe that our strong balance sheet and expanded borrowing capacity gives us both the working capital we need to continue to run and grow our business, as well as sufficient capital to the acquisition opportunities that we see in the near term.

The most significant acquisition opportunity we saw in the second quarter was our own undervalued stock. During the quarter, we purchased more than 1.3 million shares of our common stock at a cost of approximately $5.7 million under our stock repurchase program, which we put in place in November of 2008. That equates to an average price of $4.26 per share for the quarter.

Since last November, when we put this program in place, we have acquired nearly 3.7 million shares of our own stock for a total purchase price of approximately $15.1 million, or an average price of $4.14 per share.

Yesterday, Hill's Board of Directors amended our stock repurchase program, increasing our authority to repurchase shares from 20 million to 40 million under the program and extending it until December 31, 2010.

As I said during our last earnings conference call, our expectations for 2009 were positive organic growth and an improvement in our earnings per share. We are certainly well on our way to achieving both goals for the year.

Being able to achieve these objectives while operating in what is still a very challenging economic environment is a testament to the quality of the professionals working in our company, their dedication to our mission, and their ability to provide our global client base with an unparalleled level and quality of service.

So with that being said, our CFO, John Fanelli, and I are happy to answer any questions that anybody has on the call.

(Operator instructions)

Your first question comes from the line of Tim McHugh of William Blair and Company.

Yes, congratulations on the quarter.

Given the expense cuts that you talked about making here, I was wondering if you could give us some sense where you expected the expense run rate to kind of move towards in the second half of the year, or maybe even just comment the type of margin improvement you might expect. Just trying to get a sense of how significant the cuts have been.

Yes, just to give a summary, Tim, in the third quarter of last year, we cut about $2.5 million of annual overhead costs. In the first quarter of this year, we cut an additional $5 million. And in the second quarter, we cut more than $2 million of costs, including making some difficult choices, like closing offices in Dallas and Hong Kong. And we've got obviously the need to keep a close eye on our expenses as we continue to move through this economy and continue to grow our business.

Our SG&A for the quarter was 38.3%, just a little above the range that we provided to the market of 36 to 38. We see that number continuing to drop in the second half of the year, and our expectation is still that for the full year, we'll be in that range.

Okay. And wondering if you could comment on cash flow. It seems like it was probably a little bit improved there as well as CapEx?

Yes, and this is John Fanelli. Yes, for the six months of cash flow, we had a positive cash book from operations around $6.6 million, and that's really attributed to our improvement in our DSOs. We improved around five days from quarter over quarter.

Okay.

Tim, we've had a very strong focus in the last six months on our receivables and collecting them and staying on top of our clients, and that's certainly paid off for us.

Okay. And then I was wondering if you could comment on your thoughts on how you might think about acquisitions versus share repurchases going forward at this point?

You know, we've been very conservative in the last six months about acquisitions. We've tried to refocus, given the environment, on our own business, on cutting costs. Frankly, we didn't see very many bargains out there that were better than our own stock. And we've been, what we think, a pretty active acquirer of our own shares, picking up nearly 10% of the share count since we put the plan in place.

We are back talking to firms. We are looking at acquisition opportunities. We see some good ones out there, and I would be very surprised if we didn't close an acquisition or two before the end of the year.

Okay, thank you.

Your next question comes from the line of Richard Paget of Morgan Joseph.

Good morning, David. Good morning, John.

Good morning.

With the new awards, I wondered if you could characterize them a little bit more, either geographically or types of projects?

You know, it's really all across the board. Let me start with the Claims Group because that's where we've been focused on winning the work.

We've won some very major projects in the Middle East, in Europe, and in the US. Unfortunately, given the nature of that business, they're almost entirely confidential.

In the Projects Group, we continue to say -- and I've gotten a lot of negative feedback about how much of our business is in the Middle East from some investors, but frankly, we have never understood why. It continues to be the fastest-growing operation in the company, it continues to drive a lot of our business, and we see a tremendous amount of growth opportunity there. I think a lot of people are under the misperception that the Middle East means Dubai, and that's very far from the case.

In the first -- in the second quarter, 35% of our business came from the Middle East. Our PM business in Dubai is only about 1% of our business now. We've had a significant drop-off. We've continued to see work coming out of Abu Dhabi, Bahrain, Qatar, Libya, places like that, and that business is doing very well. And we've also -- as I said before, we're starting to see a pick-up in the US business, which was very slow for about six months.

We see a very healthy pipeline of opportunities out there. We're continuing to win some of those. I wish we were winning more. I wish we were winning all of them, but I think that the second half of the year is going to be significantly better than the first half, and our expectation is that our backlog is going to be up for the year.

So I mean does it seem with oil bouncing back to this range that it has been -- and, anecdotally, we've heard that even in Dubai, the real estate market seems to have found a bottom -- I mean is that the sense you're getting over there, that your customers are a lot more comfortable to go ahead and start spending again?

You know, I've got to tell you, the clients that we have really are making month-to-month decisions based upon the price of oil, but the fact that it bottomed out around 35 and is now over 70, I think certainly bodes very well for the long-term spending trends in the Middle East.

Dubai has -- I think, as you've said, has started to find a bottom. The Dubai market's very different. It was based, in large measure, on the debt markets and on real estate speculation, which we don't see in other countries. They are much more conservative. And I think that the Middle East continues to represent the best opportunity for us to bring in significant new work.

And then back to the US market, I mean is this kind of expectations for the second half, some pent-up demand there? Is this on the institutional and maybe public side mostly maybe somewhat related to the stimulus package, or is this just -- you're just seeing pockets across the board?

No, I think very little of it is due to the stimulus package. I think most of it's just pent-up demand. I think the whole world just sort of stopped for six months and said, "Where are we going?" Spending levels dropped, decisions were slowed, and I think that's particularly true in the claims business, where we do much more short-term work, which is easy to defer or delay versus the PM business.

And we expect and are beginning to see that wave now coming to fruition. Our clients are hiring us again. Litigations are moving forward. Claims are being pursued. And that's why I think that market and that business is right on the verge of turning around.

And maybe this will help give a little bit more insight to that. Could you give us the backlog breakdowns between claims and PM?

Yes, Richard. The total backlog at June 30 for Project Management is $579 million, for construction claims was $32 million, for a total of 611. The 12-month backlog for Project Management was $251 million, and Claims was $28 million, for a total of $279 million.

Okay, so it looks like the Claims business then had another downtick sequentially, but you did say you started to see a lot more activity in June?

Yes, yes, we've started to be retained on some pretty big assignments. There's a lot of uncertainty regarding those when they start because you really don't know when they're going to finish, but they're some of the biggest claims in the world, and I think that our Claims Group is going to be significantly busier in the second half.

Utilization was a problem in the first half, keeping everyone busy, and as you know, when that business starts to get busy, there are very few marginal costs attached to that, and revenue gains drop right to the bottom line. And we saw -- as I said before, despite a bad quarter, we really had a terrible April and May, and June was a very good quarter for the Claims Group, and we see that continuing.

Now, I know there's the pent-up demand issue, but I mean is this that customers are more confident with their own cash flows that they're going to go ahead and spend on that, or, to a certain degree, you have a bunch of either contractors or owners who might not be as busy and then are looking to claims as maybe another source of revenues that they haven't been focusing on?

You know, contractors are always focused on claims as a source of revenue and profit. I think it's really been a cash issue. You've got clients, particularly developers, who are cash strapped. You've got contractors who are struggling, in many cases, for survival, and nobody was willing to open up their wallets and start spending things they didn't have to, absolutely have to spend on. And to a large degree, litigation and pursuing claims is part of that.

We also have a -- reality is today probably there's a much smaller part of that business that is claims and disputes. It's doing more risk analysis and contract advisory work and lender advisory work than it ever has before, and that kind of stuff happens at the beginning of project, and with the slowdown in new projects, that business was impacted. We're starting to see that business come back as well, and I think it's really just been a cash flow issue for many clients.

Okay, thanks. I'll get back in queue.

Thanks.

Your next question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Hi. Good morning, guys.

Good morning.

Good morning, Joe.

Just a couple quick questions here. First, on the demand environment, obviously, there wasn't any guidance given. Now, maybe you could walk us through the thought process of not giving guidance at this time and also just how we should look at sort of our modeling. I know you'd given some parameters about a certain percentage of your CRF over 12 months, usually what revenue looks like. Has that revenue realization changed at all?

Yes, I mean the reason we don't give guidance is very simple, which is that we don't own a crystal ball. And, frankly, I don't know how companies do it. The reality is they're just guessing, and even though we're inside the company and seeing things firsthand, it's still just a guess, and we've tried to avoid playing any kind of game where we're guessing and then we have you second-guessing us next quarter about why our guesses were wrong. It's better for us just to spend our time running the business, keeping our clients happy and bringing in new clients than it is sitting in committee meetings trying to figure out what our guesses are going to be for next quarter or next year. So it's a game we've decided not to play, and then we very much think it is a game.

The demand environment, we think has been, as we've seen, getting stronger. We're winning more work, and we certainly see in certain markets it turning around significantly. Of the US business, there's one. That was the result of a management change that we made last quarter. I think in large part some cost cutting. We think Texas is a great market long term, but in the short term, that office just was not going to succeed, and we feel the same way about Hong Kong. And those are the kinds of decisions you have to make when you're trying to maximize your profitability, which we very much are right now.

Okay, so guidance, I mean just [inaudible] -- you probably won't revert back to a situation where you do end up giving guidance. It's not because the business is still in flux; it's more based on an organizational change in view towards guidance?

No, no, we've never given guidance, so we're not going to revert to it.

I got you, okay, not even just around the margins or color on the margins or any of that stuff?

We've given some guidelines. We certainly have talked about an SG&A range for the year of 36 [inaudible - technical difficulty] 38%. We've talked about positive organic growth expectations for the year, an improvement in EPS, but beyond some basic guidelines, it's pretty difficult for us to guess with any precision what's going to happen because there are so many factors that have yet to happen, most importantly, our sales in the second half, to give us any kind of accurate prediction about how we're going to perform.

Okay. Has visibility changed at all compared to last year? And I can imagine if you're thinking there's some level of stability, has it improved then?

Yes, I think it has. I mean the ratio that we've historically used and which you asked about before, our conversion of 12-month backlog to NAV revenue, that number's come down a little bit as we saw some slowing sales in the first quarter. I don't expect that it's going to do anything but revert to what it's historically been, which is that we convert net revenue to consulting fees, about 140 to 150% ratio.

And now you're looking at maybe 120 or--? Just for general modeling purposes.

No, no, the opposite. I think it was down a little bit in the first quarter. I don't see any reason why it's not going to be in the 140/150 range going forward.

Okay. Thanks for the color there. And I want to squeeze maybe two more in here.

I think you talked a little bit about cash flows, and it looks like there was an improvement there, which is very good. I was curious; was your free cash flow negative this quarter, or was it positive on the free cash flow side?

Joe, I did not calculate it. I believe it's on the positive side.

Okay. And then --

Joe, one of the benefits of our slowing growth was that it frees up a lot of cash flow. When you're 40% organic growth rate, we had been in the last two years --

Sure, no, I know.

-- that throws off cash.

Right, exactly. And then just sticking with that, did you tap your credit facility any more during the quarter?

Yes, we did, Joe.

Okay. And what amount did you tap it by?

Around 13.4 million.

13.4. And could I get a -- I mean if it's quick, there's a breakdown, or we could take it offline if you don't have it right in front of you.

Of the increase?

Yes.

Well, it was attributable to a few factors. One, the buyback program.

Yes.

We paid a earn-out on one of our acquisitions in Poland; we paid a note that was in consideration that was paid a year later and executive bonuses were paid; we had to support some of the domestic losses from January to June; and the acquisitions that we did not complete in the fist quarter. So all those factors contributed to the increase in the [loans with].

Okay.

Despite that, Joe, we still are in a net positive cash position.

Yes, I know. I saw that. That's very good.

And then just one last one. You talked about acquisitions. Can you maybe just talk a little bit about where you're targeting? I know I think last time you were kind of looking in California. Is there any -- are you still looking domestically here in the US?

We're still looking domestically here in the US in the Project Management area. We're looking at acquisitions all over the country. The West Coast has been a target of ours for a while, but we're also looking at acquisitions in the Southeast, the Northeast, and the Midwest. We're looking at a few smaller acquisitions in Europe, and all of these are on the Project Management side.

Sure. And just to be clear, you're looking in North America not because the Middle East is soft but because you want to add a better balance to your business?

For multiple reasons. One is we want to provide better balance in the United States, and being a little less regional, we're still principally a Northeastern [EM] firm in the US, and we'd like better national balance.

We'd also like to maintain the US as a big component of our operation. It's as small today as it's ever been. It's 20% of our business because we're seeing faster growth internationally because of the acquisitions we did last year in Europe, and we'd like to keep the company in geographic balance. We think that helps us to manage risk.

And it's also where the opportunities are. There are a lot of small, independent regional project management firms in the US. There are almost none in the Middle East that we want to acquire. There's some in Europe. We've been looking in Asia Pacific, as well. But the same reason John Dillinger robbed banks; that's where the money is. The same reason for the US; that's where the most companies are to be acquired.

Okay, great, great. Thanks you, guys. Appreciate it.

Your next question comes from the line of David Gold of Sidoti and Company.

Hey, good morning.

Good morning.

A couple of questions. One, David, on the 7.5 million of cost cuts, say, over the past nine months or year, or at least for the most recent, can you speak to percentage-wise or sort of otherwise how much of that was project management versus construction versus claims?

Yes, we don't have that number broken down. My guess is it's about 50/50.

Okay, okay. Gotcha. And I guess as we look at the business now with PM feeling a little bit better, presumably if there's more to be done, it would be on the Claims side?

I'm sorry, David, can you ask that again?

If there were more cost cutting to be done, with PM feeling a little better, it would be focused on the Claims side at this point?

It's really focused on where the problems are. We've had some issues with some offices that either just were facing a difficult market or had the wrong management team in place.

Historically, about a year or two earlier, it was with trying to turn those around and carry them. This kind of environment, we had to make the tough choices and just eliminate them.

The two most recent ones, as I said, Dallas was a Project Management office, Hong Kong was a Claims office. We feel we deal with those where and when they arise. We think Hong Kong being closed, Asia Pacific is a lot stronger operation. Our office in Sydney has been winning work lately. The Middle East, we think, is poised to turn around, and the UK, as well.

Gotcha, gotcha. And then another question. When you spoke about net new work of about $105 million, can you give a sense for how many projects that is? Are there any real large projects in there, or is it a bunch of smaller ones?

No, I don't think there was any one really significant project that drove that $105 million. It's just -- this is a business of hitting a lot of singles, and I don't know what the biggest one was in that group, but it was no -- one that counted for probably more than 20% of it.

Okay, okay, so it's a handful, presumably at least.

And then just one minor -- last quarter, obviously, bad debt was an issue. Can you update us on sort of where that stood for the quarter?

Yes, David. Based on what David had mentioned earlier, we've had a long focus on our receivables, and we're seeing some benefits on that focus looking at our receivables on a month-to-month basis worldwide, and we're seeing collections improving. And that's why this quarter we feel pretty good with our reserve balances.

Okay, so presumably, no big adjustments there then this quarter, either positive or negative?

Correct.

Perfect, perfect. Thank you both.

Thank you, David.

Your next question comes from the line of Bill Sutherland of Boenning and Scattergood.

Thanks. Hey. John, this is for you, just a little housekeeping. The tax rate for the year, can you go through that with us?

Yes. For the third and fourth quarter, our best guess is that we'll probably in the 25% range, and again, as we stated previously, our effective tax rate may fluctuate in any future period really due to our mix of our foreign and domestic pretax earnings and where those earnings are being generated because of certain areas that are low tax rate or none at all.

So our best guess right now for the balance of the year for the third and fourth quarter, 25% is what we're using.

Okay. And what were shares at 6/30?

Our outstanding shares is around no less than 39 million --

Okay.

-- outstanding shares.

Right. And then last one; I noticed a tick up in the equity income in the second quarter. Can you provide any direction on that line for the back half?

Yes, the increase was attributable to two items. One is our Iraq business with Stanley Baker Hill -- they had a tremendous quarter -- and with our joint venture in Egypt with [TMG].

On an ongoing basis, we believe that that number will range anywhere between 1.5 million to 2 million for the third and fourth quarters.

Per quarter?

Yes.

Okay. David, the European picture, I wonder if you could just do a little more color maybe by country, to some degree, and just kind of want to understand where you think those markets are as far as the cycle? Thanks.

Yes, I think those markets are where everybody is, which is bottoming out and beginning to get better. Spain is a market we've talked about that was -- saw a significant downturn in their real estate market and their overall economy. That being said, our Spanish operation, [Gerens Hill], was profitable for the second quarter.

[All one], where we also did an acquisition last year, has seen some difficult times. I think they were slower to see the effects. Western Europe saw them certainly first and then they spread to Eastern Europe, but that's been a challenging market for us, as well.

Our operation in the UK in Project Management is relatively small and has been kept busy by work generated overseas, primarily North Africa, so that hasn't been a problem for us, as well, but the UK market itself has been in very bad shape.

On the Claims side, the claims business is down. Almost all that work is done in the UK, with a small operation in Germany, and that market was down a little bit in the second quarter, and we see that coming around in the second half of the year.

So when you look at new business development in those major PM offices you have, it's just starting to feel better as far as activity? Is that kind of where you are?

Yes, I think it's starting to pick up. I don't expect any radical change but it getting a little bit better as opposed to a little bit worse.

Right. And, again, back to Claims, and you mentioned that June was definitely the best month of the quarter for the group overall, you were referring just to like the new sales activity more than anything else or--?

No, I was referring to profitability.

Profitability, okay.

There can be big swings in a claims operation even month to month --

Sure.

-- upon how busy the operation is and how much work is coming in the door.

I know you're way off of your target margins for that group. Is it something that can come back with the right level of business almost like in a quarter's time, or is this going to be more of a progression, do you think?

There's really two things that can help it.

One is obviously getting work in the door. As I said, when a claims operation gets new work, and assuming they don't have to hire new people to do the work, they just increase utilization. The profitability can shoot up dramatically because basically all the revenue drops to the bottom line.

At the same time, we've been doing cost cutting. We took out an operation in Hong Kong that lost $0.5 million in the second quarter, just that one office. And as I said before, the whole Claims Group made $900,000. So that's an area for significant improvement.

And as some of these big claims that we've been winning, as they start to move forward and we get notices to proceed and we start getting people billable and on work, I think we're going to see a dramatic turnaround. And it's, unfortunately, just a business that has that kind of variability in performance up and down, with a lot less predictability than the project group does. It's just the nature of the business.

Right. Thanks for the color.

Thank you, Bill.

Thank you, Bill.

Your next question comes from the line of Arnie Ursaner of CJS Securities.

Hi. Good morning. Just to clarify with John Fanelli, you mentioned the end of quart-- the checkout was 39 million. That's the end of quarter fully diluted count?

No, it's not, Arnie. That's the outstanding shares, but the fully diluted, it's around 40 million, 40.7 million. But going forward, you're going to have to consider our continued buyback program and additional diluted shares from our option.

That doesn't equate. Your press release had 40.3 million, which would've been an average number. You're saying the end of quarter fully diluted was--?

No, no, the average is 40.7.

Right. What was your end of quarter fully diluted share count?

Well, I don't have that right here. I just have the average.

Well, we bought -- Arnie, we bought 1.3 million shares during the quarter.

But it depends on timing of when you bought it, David, and as I said --

Yes.

-- in the press release, you have 40.3, which would reflect your average, not the end of quarter, so --

Well, what I was about to tell you was about 300,000 of that was bought in May; $1 million of it -- 1 million shares were bought on June 30.

Okay.

So you're probably not too far off just basically taking $1 million off the average --

Which answers my next question --

-- a million shares off the average.

So that answers my next question. You actually did buy your father's million-share block on June 30?

Yes, we did.

Correct.

Okay. And you mentioned on the equity an affiliate that you obviously saw unusually positive activity from Iraq and from TMG. How sustainable should we be thinking about the equity and affiliate line going forward?

I think that we don't have the same expectations for the third and fourth quarter. I think that was probably the best quarter that Stanley Baker Hill is going to have. We see the work dropping slightly over the third and fourth quarters of this year and then staying at about that same level in 2010, and then beyond that is anybody's guess.

More questions if I can. You were obviously asked many questions by the 10 or 12 questioners previous to me about the claims consulting and profitability.

What was your Q2 utilization, and with the headcount reductions you've taken, what sort of utilization are you at currently, and what sort of expectation do you have for the back half of the year for utilization?

Well, we don't report on utilization either corporately or among the two groups. In Claims, it was down significantly. In Projects, it was, I think, down slightly, almost [negligible] now, so we've got a lot of room for improvement in the Claims Group, and that's going to be a combination of either trimming staff or new work or both.

You mentioned you lost 500,000 in Hong Kong, you were profitable in Spain, and it sounds a little unclear where you stood on the UK and Poland, which were very important offices for you. Overall, what was your profitability in Europe? Did you make money in the quarter, and what do you see for the balance of the year?

I'll tell you what. Give us about a minute to flip through some papers, and we'll throw that answer back.

Okay, thank you.

Your next question comes from the line of Kevin Liu of B. Riley and Company.

Hey, good morning. First question, just in terms of looking at your bench strength today, I mean what's the bench strength look like both on the PM group as well as the claims side? And I guess what I'm getting at is if you can get into some more detail regarding kind of what type of capacity, either on the backlog or revenue side, you can support in both businesses before needing to make some additional investments, that might be helpful.

You know, Kevin, capacity is really not that much of an issue for us, and certainly with utilization being down significantly in the Claims Group, we think we have more than sufficient capacity for whatever new work comes our way, either with our existing people or with new hires. And right now is a fairly good time to be hiring. There's a lot of resumes out there, a lot of good people that don't have jobs that we can bring into the company if and when we get the work for them.

In PM, because we don't keep a very deep bench, like we don't keep much of a bench at all, and when we [inaudible] do work in a region, it's typically with new hires.

And as I just said, that's -- we're probably in the best hiring position we've been in in a long time. A year or two ago, I was telling people our biggest challenge was staffing and recruiting because the market was just so hot in almost everywhere we were doing business that it was very difficult to find good people, and that's no longer the case. So that's -- frankly, capacity is the least of our concerns today.

Got it. And then on the SG&A side, you guys have brought down those costs two quarters in a row now. How much of that 7.5 million you cited before was actually realized in terms of the cost savings so far, and how much more is there to go?

I think most of it has been put in place. I don't expect significant cost cuts going forward. We think the business is getting stronger, and we're focused very much on business development, making sure we have the work in hand to keep our people busy and continue our organic growth.

And if I could, let me jump in and just say in response to Arnie's question, in the Project Management Group in the second quarter, that business made in Europe about a -- make sure I have the right number -- about a 10% operating profit despite what I think is a pretty difficult economy over there, and the Claims Group was significantly better at about 17% operating profit.

Kevin, did you have any more questions?

Just one more. On the US business, you mentioned the management changes have brought a pretty significant improvement. What exactly were kind of some of the processes or things that were changed to drive the improvement, and were you referencing more so on the profitability area, or have there actually been some things done that have driven improvement in either the backlog or revenue growth?

There was really two things. One is we replaced two executives with two people who were already here in the company, so we took out some significant cost. They were very high-level people making significant salaries, so just literally the replacement of two people saved us a lot of money.

We have gone through and cut some significant costs, particularly in the West, the Western US, in that operation. We closed the Texas office in Dallas. We've made some cuts in the Northwest and improved utilization throughout that whole operation.

We terminated the head of the Northwest region, and right now, that operation's reporting directly to Tom as the president of the group and acting head of the region.

We've been focused on trying to maximize the work coming in the door, improve the process by which we sell work, working better as a team.

[Vince D'Ambrosio's] done a great job in trying to pull together the sales organization and have them sell as one unit, as opposed to a bunch of individual salespeople operating independently.

And Tom has done a great job, I think, in refocusing on where we see the biggest markets in the US, and that is with a transportation market.

The prior president came out of a long career with the Corps of Engineers and was focused on, I think, that market, as well as some others, where we don't see a lot of opportunity.

The transportation market in the US we see as the biggest market for us, especially with the stimulus package going forward, and that's across a lot of different areas, you know, rail and transit, highways, bridges, airports, those kinds of things are the biggest projects and the biggest contracts out there. So we've redoubled our efforts, and Tom has the capability to be able to sell that work and talk to that client base.

So we are very optimistic about the US business moving forward.

Great. Thanks a lot.

(Operator instructions)

Your next question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Hey, guys. I won't take too long. I just had one follow-up. I know you talked about SBH, the joint venture, being very profitable, having a good quarter. Maybe you could just talk about why that was and just what your expectations are for it going into next year?

They've been very busy over there. We've gotten a lot of task orders from the Corps of Engineers, including on the effort to go through and inspect all the electrical work that was done in country in response to several soldiers and marines being electrocuted, and that was a pretty significant effort on our behalf.

We, I think, mobilized something like 60 or 70 master electricians in the course of about 60 days to Iraq. That work, that began, I think, about the fourth quarter of last year and continued to the second quarter this year.

I think contrary to a lot of expectations, when Obama came in that Iraq was just going to be turned off, we're clearly not seeing that. We are looking right now at whether our contract is going to be extended or whether it's going to be recompeted. If it's recompeted, we have very high levels of expectation that we're going to succeed and get a renewal of that contract.

Our people have done a great job for the Corps of Engineers in Iraq, and they're going to continue to need -- no matter what they do at the troop levels, they're going to continue to need to spend money and time and effort rebuilding that country.

Thanks, guys.

Thanks, Joe.

There are no further questions. I will now turn the conference back to management.

Thank you, everybody. We appreciate your time today. We think we had a very good second quarter, especially given the market conditions. I think the market agreed today, given how our stock has reacted.

We appreciate your time, your attention, and your investment in our Company, and we're going to get back to work and hopefully have an even better third quarter. Thank you all very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.