Hill International Inc (HIL) 2010 Q2 法說會逐字稿

Good day everyone and welcome to the Hill International 2010 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.

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

Before we get started, I'd like to remind everyone that certain statements contained in today's call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And it is Hill's intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information contained in this call, 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 forward-looking statements include modification and termination of client contracts, control and operational issues pertaining to business activities conducted on Hill's own behalf or pursuant to joint ventures with other parties, difficulties incurred in implementing the Company's 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. I'd now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead, David.

Thank you very much, Devin. And good morning to everyone joining us for our quarterly earnings conference call. Yesterday we announced our financial results for the second quarter of 2010. First let me review the numbers in detail relative to our year over year performance, meaning second quarter 2010 versus second quarter 2009. Then we will look more closely at our sequential performance, 2010 second quarter versus the first quarter 2010.

When our management team is reviewing Hill's performance internally, this is what we focus on more closely seeing how our business has changed over the past 90 days and how we can improve our performance over the next 90 days.

Towards the end, I'll also discuss our two recent acquisitions, on McLachlan Lister and the CM Division of DCK Worldwide.

For the second quarter of 2010, Hill's total revenue grew to $108.2 million, a 3.7% increase from the second quarter of last year. Consulting fee revenue for the second quarter was $91.6 million, unchanged from the prior year's quarter. This was due to a 3.4% organic decline, offset equally by a 3.4% growth from acquisitions.

Major positive changes for the second quarter in our consulting fee revenue year over year included increases of $3.3 million in North African projects, $2.5 million from our acquisitions of Boyken and TRS late last year, $1.9 million in Middle East claims, and $1.6 million in New York projects, offset by declines of $5.8 million in Iraq, $2.8 million in UK claims, $2.1 million in Europe projects, and $1.9 million in Middle East projects.

We continue to see our biggest upside in the short term being our project management operations in North Africa and the United States. Our work in Iraq, however, continues to wind down as mentioned above and we are expecting the work in Iraq to end completely by the end of the current quarter.

Operating profit for the second quarter of 2010 was $4.3 million, a 34.5% decrease from the second quarter of 2009. Our operating margin as a percentage of CFR, consulting fee revenue, was 4.6%, down from 7.1% in the year earlier quarter. Our overall SG&A as a percentage of CFR dropped slightly from 38.1% to 38%. Our corporate overhead, which is a component of our SG&A dropped even more from 7.1% to 6.9% of consulting fees. Our net earnings for the second quarter were $2.9 million, or $0.07 per diluted share based on 40.4 million diluted shares outstanding, down 38.3% from $4.7 million or $0.12 per diluted share based on 40.3 million shares for the second quarter of last year.

Looking at our financial performance sequentially, meaning versus the first quarter, it paints a much more accurate picture of where our business is heading than the numbers I gave earlier for year over year performance. From the first quarter to the second quarter, Hill's total revenues were up 3.6% and our consulting fees were just slightly down, a 0.4% drop. Our gross profit was unchanged, but our SG&A expense was down 5.8%.

This equated to a drop from 40.2% of consulting fees the first quarter, to 38.0% in the second quarter. This decline was primarily the result of our cost cutting efforts in March and April of this year as well as increased utilization during the second quarter which was up 150 basis points companywide versus the first quarter. As a result, our operating profit improved dramatically, up 57.6%, and our net earnings were up 17.4%.

We achieved these results in the second quarter relative to the first quarter despite three major hurdles. One, the continuing wind down of our assignment in Iraq. Two, that we earned an unusual $2 million contingency fee in the first quarter in our UK claims operation. And three, that we had a large income tax benefit in the first quarter, but an income tax expense in the second quarter. Despite these three challenges, we improved our EPS from $0.06 to $0.07 from the first quarter to the second.

Looking at the sequential performance of our two operating segments separately, Hills Project Management Group had a much improved second quarter. Total revenues for the group in the second quarter were $86.2 million, an increase of 9% compared to the first quarter. Consulting fees for the Projects group were $70.2 million, an increase of 4.3% from the first quarter. With this higher gross margin and lower SG&A for the group, operating profit rose significantly to $9.0 million, a 76.2% increase. Operating margin for the Projects group increased to 12.9% in the second quarter from 7.6% in the first quarter. Again, that performance was despite a significant drop in revenues and profits from our work in Iraq.

For our Construction Claims group in the second quarter, total revenue was $22.0 million, a 13.4% decline from the first quarter. Consulting fee revenue in the second quarter was $21.3 million for the Claims group, a 13.3% drop. And operating profit was $1.5 million, a 63.9% decline from the first quarter. Operating margin for the group was down 7.1% from 17.2% in the first quarter. This result was driven largely by the $2 million contingency fee we earned in the first quarter that I mentioned before that was not repeated in the second. Absent that, the Claims group's performance was relatively comparable quarter over quarter.

With respect to backlog, Hill's total backlog at June 30 rose to $569 million from $550 million at the end of the first quarter. 12-month backlog was $241 million, up slightly from $240 million at March 31. Our increase in total backlog was driven by net bookings in the quarter of $111 million, an excellent quarter for the Company and significantly better than what we saw in the first quarter.

Major new contracts that we announced publicly over the last quarter include a $15 million contract with the New York City School Construction Authority, a $13 million contract to manage construction of the new headquarters complex for ADNOC, the Abu Dhabi National Oil Company, a $12 million contract to support environmental cleanup operations for the US Department of Energy, two contracts totaling $10 million for the New York City Department of Parks & Recreation, two contracts totaling $4 million for the Washington State Department of Transportation, and a contract to provide oversight on a $5 billion expansion of the Panama Canal, a contract which has an indeterminate amount to it at this stage, but we expect to generate revenues anywhere from $5 million in the worst case to probably $20 million or more on the best case.

These new contracts translate into a major improvement in our business development success for the second quarter. And unlike the first quarter, we had no major cancellations to our backlog.

In June we acquired McLachlan Lister, an Australian firm that provides project consulting services from its offices in Sydney and Brisbane. It comes with 15 employees added to our existing 10 in the country gives us a much larger presence in a place that has been pretty much unaffected by the global recession and where we expect to see great opportunities for growth in the coming decade.

The acquisition also gave us a platform to build a project management operation in that country as we had been only providing claims services there to date. The price we paid was approximately $10.2 million for the business plus potential earn out of $2.6 million if they hit a certain earnings target in the first year. And both those numbers were in US dollars.

In July we also acquired the construction management division of DCK Worldwide. DCK formerly known as Dick Construction is a $500 million a year construction contractor that felt that the size of their agency CM business made it non strategic to them. We felt differently. From our perspective we felt it was very strategic for us and we acquired a business that provides program management, agency CM, and construction inspection services, primarily on highway and bridge projects in Pennsylvania, Ohio, and Florida, adding about 90 employees to our project management group. For DCK CM Division we paid approximately $5.4 million for the business. In both acquisitions, the consideration was all cash. No Hill shares were issued as part of either transaction.

During the second quarter we purchased approximately 1.6 million shares of our common stock on the open market or about 4% of our total outstanding shares. This is pursuant to our previously authorized and announced $40 million stock repurchase program. The cost of the shares in the second quarter was $6.7 million or an average price paid of $4.33 per share. Since we began the program in November of 2008, we have purchased approximately 5.2 million shares for a total purchase price of $21.8 million, or an average price of $4.19 per share. We continue to view our shares as undervalued and I expect that we may very well continue to be a buyer of our shares in the public market going forward.

With that, John Fanelli our CFO and I are happy to take any questions that anybody may have.

(Operator Instructions) Richard Paget, Morgan Joseph.

David, you kind of talked a little bit about some of the projects that you won, but given the uptick in new awards in the quarter, any trends that have continued? Are things definitely getting better? And which areas do you see as kind of being continued areas of strength, whether it's geography or end markets?

We continue to see the strength for us, meaning most likely areas for potential growth and new work, being North Africa and the United States. The Middle East has been relatively flat, Europe is still flat although we've seen some signs of some green shoots in Europe so to speak. We've been winning work in Poland which was a nice turnaround in the state. Spain has been doing reasonably well, and probably the UK market has been the most challenging. We have a relatively small PM operation there and much bigger claims operation.

North Africa, we've made a major, we've established a major presence there in the last three years from essentially nothing to probably 17% of our business I think in the second quarter. We have a pretty sizable operation there and we continue to see some huge opportunities there where we really don't see a lot of competition. The United States we clearly see becoming a better market. We're winning work here. Most of our work is, as you know, in the public sector, probably 85% or more. And the work that we're seeing there is across the board geographically. And we expect that to continue.

Okay, and can we just get the breakdown between PM and Claims with total backlog and 12 month?

Yes, Richard, I have that information here. As of June 30, the total backlog for CM was $533 million and Construction Claims was $36 million for a total of $569 million, that's an increase of 3.5% over our second quarter. The 12 month backlog for PM was $206 million and $35 million for the Construction Claims business for a total of $241 million.

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

Arnie Ursaner, CJS Securities.

Hi, good morning. A couple of quick ones for John. What was your end of quarter share count please?

End of quarter share count in total was 38,900,000.

Fully diluted please.

Oh, fully diluted, 40,400,000.

That's end of quarter? Or average? I'm looking for end of quarter.

Yes, average. I don't have that, Arnie, with me. I can get that to you.

Because it makes a difference obviously for model building on a go-forward basis. And tax rate view for the year? It was quite low for the quarter, what is your thought for the year?

For the second half we estimate it to be around 15% and that's driven through a couple factors. One, we have a tax benefit that we realized in the second quarter resulting from our US net operating losses which was primarily due to the lower profits from our Iraq business. And that rate of 15% is really contingent on our future mix of profitability from the various sectors.

Okay, and a real quick question on you backlog, again, given some of the various communication issues we've had over the last year or so, I just want to be absolutely certain, you mentioned you had no contract cancels as of June 30th. I just want to be very clear that you haven't had any cancels since June 30th.

Yes, I'm not sure what communication problems you're referring to.

We can follow up offline as needed.

We haven't had any cancellations in the quarter or since the quarter.

Okay, and with the acquisitions you've made which were at the end of the quarter or after the quarter, would they be adding to your backlog?

I think the only one we made after the quarter -- actually the most recent one was the Department of Energy and that was in the quarter. I think any announcements we made after the quarter were included in the backlog. There's generally a one to two month delay in press releases.

David, you might take a minute if you wouldn't mind and explain the difference between project oversight and project management because again, the Panama Canal on the surface appeared quite sizable, a $5 billion opportunity. Again, it's a very different business model than project management. Could you take a moment and perhaps explain the difference between the two and how it affects your margin and your risk profile if you will?

Yes, I'd be happy to. It's not a different business model, it's really just a different service. There is a program manager overseeing the $5 billion Panama Canal expansion. We were hired under a different contract to provide project oversight services which is a much higher level, more discrete service. My guess is that in the short term we have about four or five people who will begin work on that project. Long term it may become multiples of that. Like most clients, once we get in the door and they see what our capabilities are and the value add that we bring to their project, our role typically expands. But given the nature of the contract, there was no way we could put a number to the press release. I had several shareholders call me and say, well typically you make maybe 3% on a project management assignment, 3% times $5 billion is a pretty big number. I said that's not this case at all. So as I said I think during the main presentation we expect our revenues to be somewhere between $5 million and $20 million. But until we go through the project, we just don't know.

And the $5 million to $20 million would be over the length of the contract, correct?

Over five years.

Okay. Thanks very much.

Chase Jacobson, Sterne Agee.

Hi, how are you? First, can you tell us how much -- in terms of the Panama Canal project, are you assuming kind of the midpoint of what's in your backlog right now, or is there --

We've been very conservative in that regard. When we have essentially a cash quarter contract, which is what this is, where the client will give us direction as to the level of staffing over the course of it, where we don't know what that is in advance, we typically will just put in the specific task orders that we get. So right now, John may have the exact number, but I think we have probably less than $2 million of that contract in our backlog.

Yes.

Okay, good. And then, in the past I think you've talked about in terms of expanding your business, maybe trying to expand internationally outside of the buildings business which has been your core into more of the infrastructure type work or energy work. With some of the larger EPC contractors focusing on that now and who may have more experience, even if it's on the EPC side in those energy and infrastructure markets, what or how does that change your efforts to grow in those areas, particularly in the Middle East and in Asia?

It doesn't change them at all. We are very anxious and aggressive in trying to expand the capabilities that we have outside of our core areas. Obviously about 80% of our business is in buildings just because most projects are buildings. Transportation is an area we've identified where we expect to do a lot more business. I think it was about 9% of our business the first half, we see that growing. We're winning transportation work in the US. We've done some acquisitions lately as you can see from the DCK business, the TRS, and some other firms we're looking at that are very strong in transportation. And we've developed I think a pretty strong resume now through the acquisitions of a highway bridge business which is a national business. I think we'll be seeing more work in that regard. You saw an announcement regarding oil and gas projects in Egypt which was our first under the joint venture we have with the Egyptian Ministry of Petroleum. I think that will be the first of many that will start to build our capability and resources in the oil and gas market which is a huge one. The EPC contractors do exactly that, they design, they procure, they construct. And we see a need in the industry for a project management participant. So an owner's choice isn't to hire floor to manage Bechtel or hire Bechtel to manage floor, but a firm like ours to come in and manage either one of them.

And we're looking at other areas, too. The DOE contract that we just won is a pretty significant one, we hope the first of several, that will expand our capabilities in environmental management. But given what we do, we view no specific market sectors as off limits. We can manage any project anywhere.

Okay, and then can you just, maybe John, tell us if there was any currency impact in the quarter? I guess specifically in the construction claims side of the business? Or even excluding the benefit the margin was lower sequentially?

I don't have the break out between PM and Claims, but overall the second quarter was negatively impacted by the currency exchange by bottom line around almost $0.5 million. Our revenue was impacted by around $2.6 million or slightly less than 3%. But our operating profit was impacted negatively by around $0.5 million.

And that was driven by currency fluctuations in the Euro and the pound primarily.

So organic growth, that included the currency impact, right?

Yes.

Okay. All right, thank you.

Tim McHugh, William Blair & Co.

Yes, hi, guys. First, the acquisitions, the two most recent ones here, can we assume you paid close to one times revenue as we think about the contribution from them?

No. Very different prices paid based upon the profitability of the two businesses. In the case of McLachlan Lister we paid more than revenue, more than one times. And in the case of DCK we paid about half of revenue.

Okay. And then just to clarify, did you say that those were included in the quarter end backlog that you gave?

The acquisitions?

Yes.

McLachlan Lister was, DCK was not.

Okay. And then can you give us what was operating and cash flow and then CapEx for the quarter?

CapEx, I'll start there, was around $2.4 million, that's for the six months. So it's probably half that, around $1.2 million. And we break it out not by quarter but by six months, and our six months net cash flow used in operating was around $15 million negative for the six months primarily resulting by the increase in accounts receivable.

Can you give any more color on was that, what drove the increase in accounts receivable?

Well basically just collection efforts.

Yes, we continue to see some delays in collections primarily out of Europe, the Middle East and North Africa. We don't anticipate any major problems, but the industry I think as a whole is seeing those kinds of delays. Clients are being more cautious with their money, they're paying slower. And we've certainly seen that impact our level of collections, but we didn't see any major collection problems for the quarter that required any major kind of reserves.

Okay, and then the last question, the claims contingency fee, I guess you were hinting at $2 million or $3 million in the first quarter?

No, in the first quarter it was exactly $2.0 million.

Right contingency fees earned on a project. Contingency fees are extremely rare for us, we rarely take them on. And certainly getting a contingency fee of that size was rare as well. So we sort of backed that number out when we were looking at the quarter over quarter comparison, second over first, in comparing the claims business which looks like it has a decline, but it had that windfall fee in the first quarter which we don't expect to be repeated going forward.

Okay. Thank you.

Bill Sutherland, Boenning & Scattergood.

Thanks. Good morning guys. The cash flow question, could you tell us the DSO, John, for the quarter?

Yes, the DSO for the quarter increased to around 107 days primarily from North Africa and Europe being in operation.

And remind us where it was Q1.

Q1 it was 104 days. It's just consolidated DSO.

Right. What's -- clearly you don't want to keep it that level. What can you do at this point?

Well we're doing the same things we've always done. We're being very aggressive. Our management team is staying very close to our clients in trying to get payments through the system faster. As you know, there's a not a lot we can do overall. Our clients are driving the process as far as the payment schedules in our contracts. We try to get those as short as possible and they try to get them as long as possible. I think it's primarily a result of the economic environment we're in. People being much more cautious with their cash and doing everything they can to delay payments. We have some clients that are having cash flow problems and we've been very careful with those accounts. And I would say beginning of the fall of '08, so the last 18, 20 months, we've been as aggressive as we can be in making sure we're not putting ourselves at risk with any major clients. I think if you look at the industry as a whole I think we've performed better than most as far as having to do write-downs or write offs of receivables.

So the goal is just to whittle it down, you don't have any targeted number at this point it sounds like that you think you could get to?

The lower the number the better is the target. One of the other reasons we've been affected is that in North Africa we have a very slow pay environment. As I said, that's gone from zero to 17% of our business in the last three years. That's existing on part of the receivables and just is a lot slower than our typical clientele. So if you look at the business over that period of time, the DSOs have been increasing.

Okay. Hey, David, on McLachlan, I was -- I didn't know it had gone to claims. Can you give us a little more color on the business and kind of where you may be moving it?

Yes, McLachlan Lister didn't really do much claims work. We had an operational cell that did. But they sort of do a hybrid, more of like a management consulting type of business where they're involved in shorter term assignments, advising at the beginning of projects. And we see using them as an opportunity to build a PM business, but given the nature of their business and the fact that our Australian operation was already claims, we felt the claims group was a better strategic fit than them.

Okay, and what did they add to backlog at June 30?

It was about $4 million.

Okay. How would you characterize sales cycles at this point, David? I guess it's kind of too general to say one answer, but are they in most markets holding, improving, deteriorating?

It depends what time period you're talking about. Obviously the first quarter we saw not a lot of new sales. I don't think it was the environment, I think it was just timing. Over the last 18 months I think it bottomed out in about the summer of 2009. We've seen a strengthening over the last year in work that's out there, the RPs that are out there, the work that's moving forward, the projects that are on the drawing board. I think that the areas that are probably in the best shape are the US and North Africa as I mentioned. Certainly Europe is slow. The Middle East there are still a lot of projects out there but we've certainly seen a lengthening of the sales cycle, especially in that region of the world, expecting new work.

And that's almost without exception in the Mideast as you look to countries?

No, I'd say probably the UAE by far, the level of construction that's happening to date. I think there's just a little bit of a slowdown there. In other areas, North Africa, Saudi Arabia we're seeing a lot of up.

Last, a number question on the second half acquisition payments you'll be needing to finance or pay other than the acquisition that you did in July?

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

Yes, I didn't say it very well. The earn outs and other acquisition related payments that you'll be making in the second half in addition to the July acquisition?

I'm not aware of any and John is shaking his head as well.

Okay, good. Thanks, gentlemen.

Kevin Lui, B. Riley and Company

Hi, good morning. First question to start, just a housekeeping one. Wondering, John, if you have the D&A by the second?

I have the total, it's around $4.6 million for the six months.

Okay, I'll get the breakout offline then. And David, I think you mentioned that utilization had improved in the quarter. Just wondering how that had tracked versus your internal expectations and how much more improvement you could expect given some of the projects you've won?

You know, utilization is kind of the same answer as the DSOs. There's no magic target number. Obviously the higher the utilization the better. The claims business by its nature tends to have lower utilization, averaging around 65% to 70% versus 85% to 90% for project management. But we saw a significant uptick, a better uptick in project management which is positive, that's 75% of our business. That 150 basis points quarter over quarter is a pretty strong improvement and I think that's a combination of the cost cutting that we made, we took out about 50 people in March and April of this year, combined with the fact that I think the work is just starting to come in the door. And people that were sitting there waiting for the work to start are now getting billable.

And that -- the margins in the PM group have kind of been in the high teens historically. You guys are starting to get back there with some leverage coming back from the projects. I'd be curious kind of what the timeframes for getting back to those levels are and whether you'll need some more cost cuts to get there?

I think the operating margins are really driven in large measure by the economy. And when we were growing and everybody was busy and everybody was humming, we were operating right within those ranges that we had historically. Obviously given the challenges that we've had, we've had operations in some areas falter for lack of work. I think the historical range for PM we have talked about is 15% to 20%. We were at -- what was the number, about 12%, in the second quarter heading back up from 7%. I think that's going to be back in that range before too long. I don't think there's going to be a significant amount of cost cutting required going forward. We expect that we're going to be in growth mode. Any cost cutting is probably going to be the result of acquisitions where we can consolidate the companies in and cut their overhead. And I suspect that we will be doing acquisitions going forward, probably one or more in the second half of this year. So there will be some opportunities there. Obviously when you bring new companies onboard, until you can cut their overhead, that adds to your SG&A and has a short term impact on your operating margin. We're doing everything we can to maximize our profitability given the current environment and we were pleased in the second quarter to see such a major improvement in our PM business.

And last question, you guys had a pretty significant level of net bookings there. I'm just wondering if that's unusually high or whether the pipeline going forward still supports some high levels of bookings?

No, I don't think it's unusually high. I think given where we are now, we've had had several, in fact more than several $100 million quarters in new bookings. We're doing, what did we do $92 million in consulting fees in the second quarter? If we're going to grow our backlog, we've got to sell more than that. So that's sort of the range that we're targeting now or what we're looking to see. Obviously in the first quarter that number was something like under $25 million for net bookings, but that included $35 million of cancellations. We've been pleased that the second quarter showed none of those, the third quarter so far has shown none of those. And we feel that's a very positive sign.

Great. Thanks a lot.

Bob Sullivan, Satuit Capital Management

Thank you. Good morning, gentlemen. Question about your backlog, and I don't know if you addressed it on the call or not, but could you give us some kind of a sense for what the margin looks like in the backlog as you go forward? And if you look at the projects to be completed between now and the end of the year, can you kind of characterize the margin on those projects and should we expect to see an incremental boost in the margin going forward because of those projects being completed? And then my final question, I don't know if you did this or not, but can you give a geographic breakdown of your backlog?

Two things. One, I think the gross margin on our backlog is the same as our ongoing business. I've asked a lot whether or not there's a lot of price competition going on right now and therefore the new work we're winning is a lower margin than the old work, and that's not the case. It may be with construction contractors, in fact I'm pretty sure it is the case, but not for professional services because we really don't compete on price. The one exception to that is the work in Iraq which was a high margin contract for us, significantly higher margin than our typical contracts. And with that project winding down, that's had an impact on our bottom line. And we don't announce a geographic breakdown but I think John is nodding that he has those numbers.

Yes, Bob, I have those. I'll break it down in total backlog. What we classify as Americas is around $209 million of the total backlog. Europe $107 million, Middle East $184 million, North Africa is $61 million, and Asia Pacific $7 million. That's to give you a total of $569 million. The 12 month backlog breakdown of $241 million, the Americas is $78 million, Europe $54 million, Middle East $80 million, North Africa $22 million, and Asia Pacific $6 million.

That's great color, John. Thank you very much.

Joseph Foresi, Janney Montgomery Scott.

Good morning. This is Jeff Rosetti for Joe Foresi. Thank you for taking my question. I just wanted to see -- you saw a nice sequential tick up in the PM revenue and given that the backlog, the 12 month backlog is down from the end of '09, I just wanted to see if you see any trajectory for the PM revenue going forward.

We see it strengthening, strengthening incrementally quarter by quarter. I think the one critical aspect of what we saw in the second quarter was the big drop we saw in the first quarter. But certainly the market has stabilized, the cancellations that we saw was not a trend, that was a onetime event. We've not seen that in the second or third quarter going forward. We see new work coming in, significant new work into the projects group. So we expect the positive trends to continue certainly for the second half of this year.

Okay, thanks. And you mentioned the PM operating margin target around 15% to 20% for construction claims. Does that operating margin target continue to be about 15%?

I wouldn't call it a target. Like the other numbers I talked about, the higher the better. But what we've seen historically is for PM operating margins in the 15% to 20% range and for claims in the 10% to 15% range. But obviously there are times and quarters when they're well outside of those ranges.

Okay. And one final question, with the JV winding down, is there any other potential opportunities for those resources?

Yes, certainly with the people that are coming off the Iraq work, we look to relocate them to other projects in and out of the Middle east. We're chasing other work through the Stanley Baker/Hill joint venture. We have some work with Michael Baker in Afghanistan. We're chasing some relatively small work in Iraq going forward. And we're constantly, in and out of that joint venture, we're constantly chasing work with other companies through project specific JVs and I expect that will continue. But the big contract that we had for Iraq is certainly going to be over by the beginning of the fourth quarter.

Thank you.

(Operator Instructions). Bill Sutherland.

Hey, thanks. John, when you look at kind of the overhead level that you're running at going into the back half, and after some of the improvements you've made plus the trend in unapplied labor, what kind of percent of revenue are you sort of circling there for the back half of the year?

I would say around the same level we are now, maybe slightly better.

The 38%?

Yes.

Okay. And on -- so you'll be outside your targeted range. I know you've been shooting to get down to what was it, 36% to 37%? Remind me again.

We talked about to 38%.

We've talked about 36% to 38%, I think that's what it was last year. We've talked about probably improving that this year. 35% to 37% I think was the last range we gave. And by the end of the year, we'll be in that range but for the overall year, all four quarters, we're probably likely to be closer to 38%.

Okay, so maybe John didn't understand my question. I was asking kind of where you thought you'd be --

For the whole year?

No, for the next two quarters. And I didn't think the back half would be still at 38%.

No, we should be around 37%, 37.5% range.

For the year?

For the second half.

Okay. That's helpful. And then last, since you looked at quarter over quarter trends, David, in your comments I noticed CM, even adjusted for the contingency fee is flat to slightly off. What is the forward looking trend for claims in the second half?

The short term trends that we see right now, because there really are no long term trends in claims, they're all short term. But right now we're seeing a lot of work coming in the door. Particularly in the Middle East, in the UK, which is about half of the claims business, just in the UK, and the US as well. And we've got some big assignments coming in the door and I think the utilization is going to pick up, I think the profitability is going to pick up through at least the second half of the year, maybe into 2011.

That sounds good. Thanks, guys.

Arnie Ursaner.

Sorry, I was on mute. I just want to follow up a little bit on the question you just got. On the -- when we had talked about the claims consulting business at yearend, you had a number of projects and other work that it seemed as if people were deferring starting it up and trying not to incur the costs until the beginning of the year. Can you freshen up whether some of those did move into Q1 or some of those wrapped up? Because claims consulting my understanding is tends to not take several quarters to resolve but tends to be a little shorter timeframe?

It runs the gamut. There are assignments that could be 90 days or less and there's some that take several years. We're talking about clients pushing off work to delay the costs, whether it be paying us, paying lawyers who are fighting it out. I think that was pretty much through the first half, through the last quarter and first half of 2009. I think the claims world has been moving back towards more of a normalized environment. We're seeing activity, significant activity in areas. We see a lot of big assignments coming in that I think will impact us this year. I don't think -- obviously nobody wants to spend money they don't have to spend and most of the reports I've seen about the litigation environment have been pretty weak through the first half of this year. We see that business getting stronger in the short term.

So given your manpower, can you give us a sense of where utilization is now? I mean I know it's a broad number, but could you gives us a sense of where it is now, how that might increase in the back half of the year, and what sort of impact that could have on the margin given the tremendous leverage it creates in the business?

You're talking about the claims business specifically or companywide?

No, claims specifically.

Claims -- I'll be happy to give you some exact numbers even though we generally don't report on utilization. Claims was at, in the second quarter, 63.4% utilization. And that was up from 62.4 in the first quarter, so it was up 100 basis points. We see that trending up in the second half of the year.

And in the past you've run somewhere in the 70%, 75% when things are humming pretty well?

It's actually probably a little higher than that. Let me give you the balance of the numbers just so you guys have everything in front of you you need. The Projects group in the second quarter ran at 83.8% utilization. That was up from 81.3% in the first quarter so that was up 250 basis points. And companywide we were at 76.4% utilization, up from 74.9% in the first quarter, the 150 basis points I referred to before. And those are about the ballparks where they run. We see both of those two groups doing better in the second half than they did in the second quarter.

So again, typically unless there's price degradation, this should have a pretty meaningful positive impact on your gross margin.

No, utilization doesn't have an effect on gross margin. The pricing of the work we do does. If the people aren't billable, it falls out of direct costs and falls into unapplied labor which is part of our SG&A.

Got it. Okay. Thank you.

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

Thank you very much. While our earnings per share only improved by a penny versus the first quarter, we feel that the underlying metrics of our business improved substantially in the second quarter. As 2010 progresses, our management team feels increasingly confident that the worst of the recession's effects are behind us and that the second half of the year should be significantly better for the markets we are pursuing for our new business development opportunities in those markets, and for our Company's financial performance as a result thereof not only in the second half, but heading into 2011. Thank you all for your participation in today's call. We look forward to the next call in about three months. Thank you.

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