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Executives

Betsy Brod - MBS Value Partners, LLC

John J. Brennan - Chairman and Chief Executive Officer

Vincent Paccapaniccia - Executive Vice President and Chief Financial Officer

Analysts

Bob Evans - Craig Hallum

Howard Smith - First Analysis

Ali Motamed - Boston Partners

David Koning - Robert W. Baird

Shlomo Rosenbaum - Stifel Nicolaus

William Sutherland - Boenning & Scattergood

Josh Vogel - Sidoti & Co.

ICT Group, Inc. (OTCPK:ICTG) Q2 2009 Earnings Call July 30, 2009 9:00 AM ET

Operator

Greetings and welcome to ICT Group Inc. 2009, Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Betsy Brod of MBS Value Partners, Thank you Ms. Brod. You may begin.

Betsy Brod

Thank you operator and good morning everyone. Thank you for joining us on today's second quarter conference call with the management of ICT Group.

Since we will be discussing certain forward-looking statements during today's conference call, that are subject to risks and uncertainties including those related to ICT Group's future revenues and earnings projections the company claims protection of the Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Now I'd like to turn the call over to John Brennan, Chairman, Chief Executive Officer and President of ICT Group. John you may begin.

John J. Brennan

Thank you Betsy and good morning everybody. With me this morning is Vince Paccapaniccia, our Executive ice President and Chief Financial Officer of ICT.

I would like to thank you for participating in today’s call. And we’ll begin the call with the review of the highlights of ICT Group’s second quarter performance including key operating and business development initiatives.

Vince will then provide you with the details of our second quarter financials as well as our outlook for the third quarter and I will follow that up with a brief discussion of our longer term outlook for ICT Group. At that point, we’ll open the call for Q&A.

Second quarter performance; I’m very pleased with we met or exceeded our operational and financial objectives for the second quarter of 2009. So the revenue increased modestly as expected from 96.1 million in the first quarter to $98.4 million in the second quarter, but was down from a 109.6 million which was achieved in the year ago, in the second quarter of 2008.

This is as a result of our strategy to focus on our core business services and markets as well as the impact of the stronger US dollar on revenue recognized in the foreign markets we serve. The FX impact represented about half of the shortfall or the decline in revenues between ‘08 and ‘09.

Consistent with our guidance, core business revenue comprised of North American customer care, BPO, technology and international operations increased 7% year-over-year on a constant currency basis, driven by a 13% increase in core production volume, which is indicative of the demand for our services. Core business revenue totaled $94.4 million in the second quarter and accounted for 96% of our total revenue.

We maintained our gross margin above 40% as projected and kept our SG&A expenses down in absolute dollars on both a year-over-year basis as well as sequentially from the first quarter of 2009. Excluding $1.3 million restructuring charge related to facility closures in the period, earnings before taxes increased dramatically from $16,000 in the first quarter to $953,000 or just shy of a million dollars in the second quarter of 2009, while diluted earnings per share increased from a $0.01 loss in the first quarter to a $0.06 profit in the second quarter which exceeded expectations.

We were able to accomplish these achievements through strong program execution with effective cost managements. Improved operational and financial performance within our international units also contributed to the gains we achieved. We further reduced our operations in Ireland, which supported the UK market as we implemented our previously announced strategy to focus on higher margin offshore support for our higher cost markets in the UK and Australia.

I‘m pleased to report that over 50% of the hours produced for our clients in UK and Australian markets came from our lower cost offshore operations in the second quarter of 2009 compared to less then 10% a year ago in the second quarter of 2008. Worldwide capacity utilization reached 79% in the second quarter of ‘09, up from 73% in the second quarter of ‘08.

In addition, our balance sheet remains very strong and net cash increased from $37.6 million at the end of the first quarter to $42.3 million as of 6/30, 2009. Free cash flow for the period was $6.3 million.

Lastly but perhaps most importantly, we closed almost 30 million of new business from new and existing clients during the second quarter, our best performance over the past year. Approximately 65% of the value of the wins came from the financial services sector, 20% from the telco technology sector and 15% from health care and other sectors

Approximately 80% of the wins were from clients in the U.S. during the past quarter, with the balance coming from clients in Canada, Mexico and Australia. What's interesting is 60% of the U.S. wins will be implemented onshore with the balance being supported from our offshore operations in Asia and Latin America. Some of those new business started to ramp up late in the second quarter. Most will ramp up in the third and fourth quarters and the remaining few programs will begin in the first quarter of 2010.

The pipeline for new business remains strong for our course service offerings, particularly in the financial services and the telco technology sectors. There does appear to be some shortening of decision cycles but it varies from client to client and program to program. Pricing pressure remains part of the nature of the outsourcing business. But we don't believe it's out of the ordinary for most of our engagements. It appears to us, that the current lack of significant onshore and offshore excess capacity has created some level of price stability.

In addition to the new business wins, we've also seen increased demand to support volume growth for certain existing programs and we've also seen less call (ph) volumes in certain consumer based programs that we saw earlier in the year and at the end of 2008 and we view this as also encouraging.

Overall, as I said earlier, we're very pleased with our second quarter performance and the progress we are making in renewed revenue and earnings growth which has benefited from the actions we've taken to expand our core service offerings, reduce our exposure to discretionary non-core services and to focus on supporting our higher cost international market with an offshore delivery model similar to that which we've implemented for the U.S. clients.

Strength in our core business revenue was driven again this quarter by strength in the financial services and telco sectors. Within financial services, our core financial services totaled $40 million for the second quarter of '09, up 4% year-over-year we mentioned on a constant currency basis. This was driven by a 14% increase in core production volume over the period.

Outsourcing opportunities continue to grow within the sector as financial institutions seek to reduce their infrastructure costs. Expanding our service mix to include first party collections, outbound IVR message alert services, locked out processing and other BPO services to compliment our traditional customer care service, we've been able to increase wallet share for many of our larger clients.

Revenue from our first party collections business continues to grow rapidly and profitably and is expected to exceed $20 million in 2009, almost double that achieved in 2008. We will continue to invest in management operations and technology to take advantage of the opportunities we see in this business segment which we are aggressively pursuing with new and existing financial clients in the U.S. as well as in the international markets we serve. In addition, we recently launched and are getting interest from our clients in our loan modification service offering to leverage our position amongst mortgage lenders.

Within our core telco technology sector, revenue was driven by a 25% increase in production hours and it continues to grow rapidly, revenues from this sector which reached $36.1 million in the second quarter, up 23% on the constant currency basis from the second quarter of 2008. We're currently in the process of responding to increase volume requirements from new and existing programs both onshore and outshore, from several U.S. Canadian and Australian clients. In addition, the telco technology sales pipeline remains particularly strong, which should support continue growth for the balance of 2009 and then into 2010.

Core healthcare sector revenue amounted to $10.9 million in the second quarter, down 11% in the second quarter of last year reflecting the net effect of fall back in health insurance and prescription assistance work which was partially offset by growth in patient systems programs, pharmaceutical clients and patient access management services for hospitals. To counter this decline we've added seasoned sales resources to target this sector and expanded our service offering. We're encouraged by the initial receptivity of hospitals to our patient management access offering and have several interesting opportunities in our sales pipeline.

At this point of time I'd like to turn the call over to Vince who will provide you more financial details of our second quarter 2009 performance as well as our outlook for the third quarter.

Vincent Paccapaniccia

Thank you, John. We'll reference reconciliation tables for non-GAAP financial measures and quarterly core volumes statistics may be found at the company's website. In addition, our discussion of gross margin, EBITDA, operating profit, net income and diluted earnings per share for the second quarter 2009 is before the impact of restructuring charges which I will address separately.

As John noted, we made significant progress in improving the company's profitability, strengthening our balance sheet and enhancing our liquidity during the second quarter of this year.

So the revenue for the second quarter of '09 was $98.4 million, increasing 2% sequentially versus 96.1 million in the first quarter of this year. Adjusted gross margin was 40.3% in the second quarter of '09, increasing approximately 270 basis points versus the second quarter of 2008, primarily driven by favorable foreign exchange rates, principally in the Philippine peso and the higher amount of work produced offshore.

SG&A expenses were reduced by $3.6 million, 8% to $38.6 million in the second quarter of '09 versus the prior year and were 541,000 or 1% lower than the first quarter of this year. The reduced SG&A levels are primarily the result of the company's cost reduction efforts.

We continued to make significant progress, reducing our infrastructure cost during the second quarter by an additional $2 million, increasing the $16.4 million of annual cost savings that we announced last quarter to approximately $80.4 million on an annualized cost savings at June 30. Due to the implementation of the previously announced cost reductions in combination with these additional savings, we've realized approximately 83% of these savings or $3.8 million in the second quarter of 2009.

Second quarter, 2009 adjusted EBITDA increased 13% both sequentially and year-over-year to $6.8 million, 6.9% of revenue. Adjusted operating profit for the second quarter of 2009 totaled $1 million or 1% of revenue. During the second quarter of this year, the Philippine peso against the US dollar by 10% versus the second quarter of last year. We had approximately 80% of our Philippine peso exposure hedged for the second quarter of 2009 at 43.70 pesos for the dollar. In the second quarter of 2009 total Philippine peso denominated cost comprised 21% of the company's consolidated cost structure.

Net interest expense of $18,000 in the second quarter of '09 increased versus the second quarter of 2008, net interest income of $57,000 primarily due to higher amortization of the deferred financing charges for the credit facility, combined with lower interest rates on our invested cash balances. Adjusted pretax income for the second quarter of '09 was $991,000 for the second quarter of 2009. We recognize $38,000 of adjusted income taxes resulting in adjusted net income of $953,000 or $0.06 per diluted share. At our projected 20% effective income tax rate, adjusted earnings per share would have been $0.05.

The second quarter 2009 financial results reflect the impact of share based compensation of $901,000 compared to $527,000 in the second quarter of 2008. Now our adjusted restructuring charges; in the second quarter of 2009, the company accelerated this plan and recognize both the second and third quarter restructuring charges in the current quarter. During the second quarter of 2009, the company incurred 1.3 million restructuring charges, primarily associated with downsizing our European operations.

At June 30, we had 12,400 workstations in operation, declining by 123 workstations during the second quarter of 2009, primarily reflecting the reduction of our European operations. We grew our cash and cash equivalents by $4.7 million during the second quarter of this year. And cash and cash equivalents totaled $42.3 million at June 30 and the company continues to remain debt free. Approximately two thirds of our June 30 cash balances were maintained offshore and we would incur additional taxes if we repatriated those funds to the U.S.

We continued our focus on receiving timely payment of our customers' receivables. We received a large payment from one customer just before March 31 and their comparable second quarter payment was received just after June 30. As a result, we had an increase in our day sales outstanding from 57 days at the end of the first quarter to 61 days at the end of the second quarter.

In the second quarter of 2009, property and equipment purchases totaled $2.5 million or 2.5% of revenue. Capacity utilization for the U.S. and Canada increased from 62% in the second quarter of 2008 to 70% in the second quarter of 2009. Capacity in the Philippines remains over 90% utilized, while total company 2009 capacity utilization was up 79%, that's up six points versus the second quarter of 2008. We generated $8.8 million of cash flow from operations in the second quarter and free cash flow totaled $6.3 million.

During the second quarter of 2009, we made payments totaling $1.1 billion for restructuring charges that were reported in trial periods.

Now I our adjusted guidance for the third quarter. The company does not expect to incur any restructuring charges in the second half of 2009 and accordingly all guidance discussed below is exclusive of any such charges. Total revenue for the third quarter of 2009 is projected to range between 98 and 102 million, primarily driven by the 6 to 8% sequential growth in core revenue measured in constant currency. Non-core revenue in the third quarter of 2009 is expected to decline by approximately 17% versus last year remaining relatively flat compared to the second quarter of '09.

Projected foreign exchange rates are expected to result in approximately $4 million less revenue in the third quarter of 2009 compared to the prior year quarter. We currently project combined U.S. and Canadian capacity utilization to increase to the mid 70% in the fourth quarter of '09 and to maintain the high levels of capacity utilization, we enjoyed in the Philippines.

We continue to hedge six forward quarters for the Philippine peso and we currently are hedged at approximately 45.50 for full year 2009 and we have hedged approximately half our 2010 Philippine peso exposure at 49.30.

We continue to focus on cost reductions and capital preservations. We projected our cost savings programs will result in additional 500,000 hours of savings to give approximately $4.3 million of cost savings in the third quarter of 2009. And we plan to continue our efforts to reduce our cost structure. For 2009, we expect to keep capital expenditures to approximately 3 to 4% of revenue.

The effective income tax rate for 2009 is still expected to approximate 20% for the full year. However, we continue to anticipate that quarterly income taxes will continue to fluctuate based on the geographic distribution in the company's profits in each respective quarter.

We project that our pretax profits for the third quarter of 2009, will the modestly above our second quarter 2009 adjusted pretax profit. At this point, I'd like to return the call to John.

John J. Brennan

Thank you, Vince. While the business continues to be subject to vagaries of macroeconomic conditions around the world, we're very encourage that it appears to have stabilized and we expect to continue to see sequential revenue growth and profitability improvement quarter-to-quarter throughout the balance of 2009.

We continue to believe that business conditions will drive companies to outsource more of their infrastructure costs and that ICT Group is well positioned with both onshore and offshore solutions through a broad base of service offerings across multiple targeted verticals and country markets.

On the cost side operating leverage will be achieved through productivity and process improvements that we are implementing which will reduce, further reduce agent attrition and lower our cost for recruiting training quality control and work force management. We are focused on increasing work station utilization which will enable us to continue to limit CapEx spending so as to maximize cash flow and maintaining good liquidity. Our targeted objective is to increase corporate capacity utilization above 80% in the second half of 2009.

In closing I'd like to thank the thousands of ICT employees worldwide for their contributions to the achievements of revenue and earnings growth of ICT Group and I would like to end by saying that I am increasingly optimistic about ICT Group's prospects for 2009 and that I expect us to reach mid single digit operating margins in the 4 to 6% percent range within the next 12 to 18 months.

We'll now open the call for questions and answers.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will be conducting your question-and-answer session. (Operator Instructions). Our first question comes from the line of Bob Evans with Craig Hallum Capital. Please proceed with your question.

Bob Evans - Craig Hallum

Good morning. And thanks for taking my call.

John Brennan

Good morning Bob.

Bob Evans - Craig Hallum

Good morning. Well, John you brought up one of my favorite topics at the end, your target margins, you said 4 to 6% in 12 to 18 months. Can you give us the sense of maybe perhaps, what would you think about maybe, by the end of this year and is that 4 to 6% is that kind of end of -- is that on a quarterly run rate? Is that end of Q4 '010, or just, trying to get a sense of what are you thinking?

John Brennan

Our thinking on the 4 to 6% is in the third fourth quarter of 2010. So, we think we ought to be able to break through a percent fee by the third quarter of next year.

Bob Evans - Craig Hallum

Okay. Can you give us a greater sense of maybe, what you might be thinking by the end of this year?

Vincent Paccapaniccia

Bob, it's Vince. I'll see if I can put some color around that. We think with the growth, revenue growth that we're seeing currently, 6 to 8% in the core side of the business and the cost controls that we have on the SG&A line, we're going to -- we've been running about is 39. I think its going to be in this 39 to $40 million range, as a dollar amount as we look forward.

We believe we can add some -- and again I am going to talk more from a target standpoint, not from the guidance standpoint but as we see this evolving we think we can add in the area of 75 to 100 basis points sequentially for the next two quarters of this year. Then as we look forward into 2010, we think we'll be in the mid single digits in the fourth quarter of 2010.

Bob Evans - Craig Hallum

Okay, so that's very good progress. Then on a different topic and I just want to make sure, I heard right. In terms of a new business signed where--what is kind of this seat dispersion if you will from a market standpoint.

John Brennan

The -- if you look at the U.S., it represent about 80% of the win so we've had over 20 million of wins just with U.S. clients alone and for that 60% of the seats will be in the U.S. and it's probably for the first time in many quarters that the majority of the seats would be onshore versus offshore. So it's very contract-to-contract and but 60% of the seats for those wins would be in the U.S. and the other 40% will be a combination of the Philippines and Latin America, and the Mexico and Costa Rico.

Bob Evans - Craig Hallum

Okay. And is that using existing -- in the U.S. is that using existing seats or do you have to build new?

Vincent Paccapaniccia

No. We don't plan on opening up any additional facilities in the U.S. for the balance for the year. We do have room in some of the stations and a few unutilized locations that will be pretty much maxed out as these programs ramp-up mostly likely by the first quarter of next year.

Bob Evans - Craig Hallum

And did you say are those for new customers or existing?

Vincent Paccapaniccia

About 80% them are for new customers. And about 20% is the dollar value is for new customers, but 80% is for existing customers. And most of that wins with existing customers are programs that are significantly different. It's not expansion of existing programs. It is really totally new projects, going to different divisions of these companies, providing customers service, providing IVR.

Everything that against (ph) the number of wins that are providing a back office processing services which would be done offshore at these three banks, two of them are existing customers for our customers service work. And one is completely new customers. And all of those will be ramping up in the third quarter

Bob Evans - Craig Hallum

And there is logic behind using the U.S. process offshore or political sensitivities or... ?

John Brennan

Yeah it wasn't our choice, but I'd say political sensitivities, we've even some of the companies we're dealing with are really wanted to stay, they're going to offshore, want to stay closer to Latin America, than going to Asia. With that happening, the political consideration that Mexico seems to be getting increasingly for the process of expanding and upgrading our facility in Mexico City because of the amount of interest for offshore support, most of the work we do there is for Mexican clients.

But in parts of Mexico some companies view that as a politically acceptable route to go. So it varies from company to company and the stage of their outsourcing and off shoring.

Bob Evans - Craig Hallum

Okay, all right thank you.

John Brennan

Thank you, Bob.

Operator

Our next question comes from the line of Howard Smith with First Analysis. Please proceed with your question.

Howard Smith - First Analysis

Yes. Thank you and congratulations, Vince and John on improving results, they are very impressive. Three questions, one very quick, I was wondering if you had total production hours available. I know you have called in the press release.

John Brennan

It's 4.9 million, Howard.

Howard Smith - First Analysis

It's 4.9?

John Brennan

Yeah.

Howard Smith - First Analysis

Okay, thank you. And then, you mentioned your first party collections as well as some low modification I think good growth there I was wondering if you can talk about how are you be with the durability of some of the business you are currently signing if the economy were to improve or are these kind of what one year type time frame business that may not have long like to and how are you thinking about that?

John Brennan

I think they are all have cycles, I think what happened is that the, some of these programs like, we do look at the first party collections business, we're paid its on a non-contingence basis though its been very attractive for us and I'd believe that our position there, I think we're increasing market-share, doing very well at it, it's always existing clients that we've been servicing particularly in the mortgage and consumer loan arenas. And as the economy improves the volume of that may be get into level off down.

So if you have to look at a year from now. But I think at the other end if we're, have established ourselves pretty attractive position and we've set up a certain subsidiary we're looking at but not interested at the moment of entering the third party collection business like many of our competitors like West, NCO and SITEL and Convergys agree it's not a good time for contingency collections but we expect to leverage the infrastructure, the management that we brought to run that first party collections business and we expect that business as the economy begins to improve, the third party collections business will improve. So that might be sometime in the middle of 2010.

So we're, we set to broaden our positions so that we could extend. We may do that either organically or through acquisitions. A little notification, I think it's a short-term opportunity, but we continue to provide customer service support to a number of mortgage companies and I think as they recover we make get less loan work and more mortgaged customer service again.

Howard Smith - First Analysis

Okay. And last question has to do with the pricing environment which you commented is kind of a typical normal pricing pressure. One of your competitors this morning, said they're starting to see some competitors do, what they consider us sustainable or irrational pricing. Just trying to reconcile kind of the two statements here and maybe, you could just amplify some of your comments for us.

John Brennan

I think the lack of -- we don't have pretty little access capacity anywhere in the world. And so there are suppliers out there who are sitting with empty buildings. Then they may end up going through as you would say irrational behavior. I think there is certain companies that are -- certain clients or prospects that are in more troubled financial condition because of the economy and I think those are putting more pressure on suppliers like ICT and others. I think they are the minority of clients and prospects out there.

So we haven't -- price is always important and we haven't really seen any kind of untenable there's been some companies out there that you can -- they always offer you a lousy price point, so we don't bother a lot of the low end prospects as I call it.

Howard Smith - First Analysis

All right. Okay, well thank you very much and congratulations again.

John Brennan

Thank you very much, Howard.

Operator

Our next question comes from the line of Josh Vogel with Sidoti & Co. Please proceed with your question.

Josh Vogel

Thank you. Good morning Vince and John how are you?

Vincent Paccapaniccia

Hey Josh.

John Brennan

I am good. Thank you.

Josh Vogel

You know, it's good to see some more volumes comeback into the U.S. but typically that -- it's entire revenue producing volume that typically brings lower margins with that. If you start to see a big push into the U.S. and you are handling more volume here is that -- could have put the crimp into getting margins up to 4 to 6% in the back end of 2010?

John Brennan

No. I don't think so. Right now we have 65% of our U.S. production is handled offshore and stated over the last couple of years, I think that numbers for ICT is going to be in the 60 to 70% range. And we are seeing companies, I would say to some extent they end being more showcase activities that they may announce that they are moving work back to the U.S. and at the other end they are adding substantial volumes of core volumes to offshore locations.

So I think it's going to be a balancing act. I think it's probably put a -- maybe an artificial limit as to how much will be moved offshore but I think the large majority, it's just more cost effective for our clients. Yes, there is little -- there is less margin percentage wise for doing in the U.S. Right now, the -- because of the economy and unemployment recruiting and attrition is less problematic than it was a year ago. It's always a factor but so the, the ability to generate the profits from the work done in the U.S. is a lot of more favorable today than it was a year or two ago.

I think there's a limit as to how much will be -- what the ratio will be and I think the majority still much more cost effective doing it offshore.

Josh Vogel

Okay. Great. Shifting gears a little bit, obviously the move away from the short-term telesales projects has been a good move for you guys thus far. But is this a definitive strategy, a strategic shift away from that business altogether or if short-term telesales programs come back to life and start entering the pipeline, would you entertain handling those types of deals?

John Brennan

David (ph), what we've said is that the, with certain -- large financial price we have, we would maintain relationships with them that if they involved telesales activity, we would probably participate in it, but we would certainly limit our exposure to it because we do know certainly much more cyclical. The short-term opportunity that, we thought that we would get a particular bounce in a particular quarter, we may think that either we had available capacity but we do not intend to build capacity to handle some more sales work in future.

Josh Vogel

Okay, great and just lastly, can you may be comment on what healthcare reform here in the U.S. could do for your business. You did see a fall up in health insurance and prescription assistant work. Do you think you would see a big bounce back there or do you think this is business you would win or are you losing any of this business to your competitors.

John Brennan

If I'd break it down to the pharmaceutical industry I think there is an increasing pressure on pharmaceutical companies and we're in the region of patient assistance where we some examples are it's over the counter drugs or medical device products and so forth, we're providing significant size customer service operations to support clients in that arena.

The pharmaceutical companies continue to look for ways to cut costs because everybody is concerned about pricing pressure and government pressure. So there, I think they are many opportunities, I suppose to large scale opportunity. In the health insurance business where there is high degree of uncertainty, we've seen a slowdown of volumes from clients and there we're seeing some of them consolidate. Vendors we are seeing some of them new to our packing in house.

And on the other hand, I think there is a quandary as what's going to happen if there is a single pair system and a federal alternatives, so I can think there is an, the timing there is that there is a lot of the clients and prospects, we're unsure what direction things are going to be going. So but we are -- we've added additional sales resources to individuals who want to pursue outsource cust -- we know they all have to get cut costs and so we are pursuing outsourced customer service and we're also looking at back office opportunities, including claims adjudication. So we're unsure what's going to happen to that industry.

The third part of it is the hospital area that we've recently targeted. We think there's a lot of opportunity there. Hospitals are surely going to be under more cost pressure then they have in the past. They are pretty much not the typical well run process based operation that corporate America is like. And I think they are facing the issues, they are going to have more lower reimbursements for people who are being ensured by the federal government.

So they are looking for ways to save money anywhere they can. And we think our patient access management service is catching a lot attention. So it's an area where I think we will do better in that sector next year. I think there is uncertainty and cost pressure and across the board. It should lead to additional outsourcing opportunities but there's a lot of non-decision making going on right now.

Josh Vogel

All right that's helpful. Thank you very much for taking my questions.

John Brennan

Thank you, Josh.

Operator

Our next question comes from the line of Ali Motamed with Boston Partners. Please proceed with your question.

Ali Motamed - Boston Partners

Hi guys. I was wondering if you could talk a little bit about your expectations for CapEx, specially considering what you talked about being little bit tight on capacity and how that will play out going into next year?

Vincent Paccapaniccia

I will take that one. As we look at, I will start with the second half of this year and I will talk about 2010. This year as John mentioned, we don't really see a lot of growth in from seat perspective. I think will remain full year 2009, in the little low freeze by 3 to 4% of revenue range.

As we look into 2010, again looking at a very high level, we think we are out somewhere in the 1000 feet range which is about $10 million of capital. We see maybe 2 to 250 basis point improvement or increase in capital spending in 2010. So I think our three to four, say it's going to be probably a 5 to 5.5% number something like that.

Ali Motamed - Boston Partners

So we should start going back sort of just D&A levels maybe about $5 million charge next year.

Vincent Paccapaniccia

$5 million a quarter?

Ali Motamed - Boston Partners

No, for the year. So we then spend about 20 million bucks next year, or maybe more than that?

Vincent Paccapaniccia

We're going to spend, I think it is going to be probably in very low 20's, I'd say 20 or 22, something like that in calendar 2010. Our D&A levels are running about $5.8 million a quarter now. I think what's your point is we're probably declining right now in D&A. I think as we move through 2010 we'll start increasing, D&A will start increasing as a dollar amounts as we grow through 2010. Does that answer that question?

Ali Motamed - Boston Partners

Yeah, perfect, thank you very much.

Vincent Paccapaniccia

You're welcome.

Operator

Our next question comes from the line of David Connie with Robert W. Baird. Please proceed with your question.

David Koning - Robert W. Baird

Yeah, hey guys. Nice job this quarter.

John Brennan

Thank you very much David.

David Koning - Robert W. Baird

Yeah, and first of all just on the G&A savings. It sounds like you had 18 million annualize savings now that you've achieved and its sounds like 83% of those hit in Q2. So there is may be sounds like 3 million or so of annualize savings last, will that all start to be in the numbers in Q3?

Vincent Paccapaniccia

Just about all about David. We got about $0.5 million growth from Q2 to Q3. So we think it will be about 4.3 million will benefit the third quarter. And of course maybe 100 and 200 after that but it will be 90 plus percent will be in Q3.

David Koning - Robert W. Baird

Okay. Is these are more cost savings that could continue to come there if you feel like if you are pretty close to cap out on the cost savings?

Vincent Paccapaniccia

I think there is more to come. I think it will -- the rate of the increase will probably slowdown a little bit. But we've a pretty comprehensive project working on it now we got people focused on, just looking at combination of process improvements and performance improvement based on those lines. So I do continue to see this growing but some of the low hanging fruits, so I think we're certainly beyond back stage. But I think we will continue to see it and I think it will stay at probably not at $2 million per quarter run rate, but will continue to see cost savings.

John Brennan

We're in the process of moving of the last set of what we call sales verification and quality control operations, reporting operations out there in the U.S. and in Europe. Moving forward that would be in the Philippines and in India by the end of the year. That will provide additional couple of hundred thousand dollars per quarter of cost savings.

We've initiated a centralized monitoring, maybe about half of our clients have signed up for it where rather then having monitors in centers in the U.S. and Canada which are standard part of the call center operation, to have somebody monitoring the calls. We have now built a centralized monitoring operation in the Philippines at about 25% of the cost and all of scoring and so forth is done there. So we've reduce our monetization to some degree, the quality assurance supervisors, their head count is going down in the U.S.

So we continue to see opportunities to move infrastructure costs to lower price areas and to use more automation as part of the process. So we've a group of people about 220-16 people now put on to teams to continue to look for process improvement and profit improvement.

David Koning - Robert W. Baird

Okay, and just one other question. It's on Virgin Mobile, USA, I guess it got acquired yesterday or the announcement I guess, was yesterday. Does that potentially have any impact either on given the chance that they get in to spread, I think if they acquire and/or could Sprint take that stuff and put it out to other vendors, may be just a little comment on the opportunities are there?

John Brennan

Well, we are in the process of looking to -- to talk to the senior management there. But I think it's a good thing for ICT. The Head of Virgin Mobile is now taking over as the Head of all the prepaid work for Sprint. So we ended up on the top side of the deal. They have a prepaid offering. I think its called Boost. It's about two third the size of Virgin Mobile and they're going to be integrating that into the Virgin Mobile and I think they're keeping the Virgin Mobile brand. So we have the relationships with the right people and we're hoping that there's more upside than and no downslide to the merger there.

I don't think its going to be pulled into the Sprint operation and we do provide. We currently are a supplier, one of the more smaller suppliers to Sprint directly. So we do have the relationships with Sprint as well.

David Koning - Robert W. Baird

Great, thank you.

John Brennan

Thank you.

Operator

Our next question comes from the line of Shlomo Rosenbaum with Stifel Nicolaus. Please proceed with your question.

Shlomo Rosenbaum - Stifel Nicolaus

Hi. Could you on the underlying cost cuts. It's finally starting to bear some fruit. One thing I'm just wondering is, are you expecting the ramp up of some of the new planned wins to impact the third quarter. I would have thought given, you're going to see two to $3 million of the cost savings going through in the third quarter that we would have seen a much bigger sequential bump.

Vincent Paccapaniccia

I will start on the savings. I'll let John address rather the revenue. But from the cost savings standpoint we generated about $3.8 million of our cost savings in that third quarter somehow. We see that growing by about $0.5 million sequentially third -- excuse me, second to third. So we expect to see $4.3 million of savings in Q3.

Okay, from the revenue prospect of we continue to see the core business in the 6 to 8% range. We think that's what we've been seeing currently. We think our full year 2009 will be in the 8 to 10% range. You want to provide more color to that customer....

John Brennan

I think on the ramps that are taking place, I'd say about half of them we're receiving a -- we are getting paid for. The -- some of the expansion of existing programs which we're being asked to provide increased volume support for a couple of companies. But both in the U.S. as well as offshore there will be some costs associated with the ramp-ups. We don't have any program that's going to be $20 million program, that's going to be done onshore. That's going to require significant ramp-up costs associated with it. So we have one of the bigger ones. We've two of them that are ramping up in Costa Rico in the certain fourth quarters. And another one has been in the Philippines and the cost of those ramp-ups are significantly less than what we incurred in the U.S. We expect to have a pretty tight control over our labor cost and labor productivity through the balance for the year.

Shlomo Rosenbaum - Stifel Nicolaus

Thanks a lot.

Vincent Paccapaniccia

You're welcome.

Operator

(Operator Instructions). Our next question comes from the line of Bill Sutherland with Boenning & Scattergood. Please proceed with your question.

William Sutherland - Boenning & Scattergood

Thanks a lot and hey Vince and John.

Vincent Paccapaniccia

Morning.

William Sutherland - Boenning & Scattergood

I apologize in advance for any background noise. The - - Vince I missed what you said. I guess you didn't call it guidance, you just called it targeted margin expansions for the third and fourth quarters, can you just repeat that for us.

Vincent Paccapaniccia

Absolutely, we're -- our targets are for Q3 and four of 2009 to grow sequentially by 75 to 100 basis points and that's a two to three and three to four. As we look forward to 2010, typically what happens first quarter of '010 we will have some higher costs and then we will resume the margin expansions throughout 2010. At our fourth quarter 2010 our projection is we will be in the mid single-digit operating margin range. That help?

William Sutherland - Boenning & Scattergood

Yeah that's exactly what I was hopping to go through. To what degree is the improvement in the cost structure in UK and Australia contributing? Is that part of what you re accounting for the saving you quoted or is that part in that?

Vincent Paccapaniccia

We are not commenting like generic savings improvement profitability anything like that. We are counting on elimination of seat or centers. We are counting elimination, primarily elimination of head count.

William Sutherland - Boenning & Scattergood

Okay.

Vincent Paccapaniccia

Those types of actions and in this $2 million were these second quarter additions to these analyzed cost saving programs, Bill. And there is a significant amount of reductions in there, that are associated with ground pricing (ph) in our European operations.

William Sutherland - Boenning & Scattergood

And where are you, you think in the process of getting that tightened down or a place where you're happy with it?

Vincent Paccapaniccia

From our Q2 perspective, we think we've taken the actions, we were planning on taking as we shared -- we don't plan any restructuring charges in Q3 or 4 of this year. So the European loss, we think is where, its in the couple of level on the second half of 2009. And then we will be, what we're working with now is the asset we want, that is to focus all the UK efforts onto selling offshore. It's been very, very successful in the Australian operations. And we think we have a good platform now. We have the organization in place where we can sell European, primarily UK based companies to have their work reduced in the Philippines.

John Brennan

We have reduced our European centers. We had four operations and we reduced that to two. One in Western Ireland and one in the UK. We reduced the size of the one in the UK. So they're basically, I'll call it showcase locations and it's not a lot to we're not looking to completely eliminate it but we are going to have a sort of a hybrid model that majority of the work and focus of the sales force is to sell offshore. That is why we have two centers in Australia. They are at full capacity but at the same time, about 70% of their work is now being done in the Philippines.

So, and seeing where TeleTech is saying they are offshoring a lot of their Australian and New Zealand work, we've been in a rapid expansion of interest in Australia to offshore and so the model's working really well in Australia right now. We are providing from a losing proportion a year ago, its providing probable EBIT margins to the company. So we're hoping to -- we're about a contract away from getting in the same mode in the UK.

William Sutherland - Boenning & Scattergood

That's sounds good. Thanks a lot.

John Brennan

Okay.

Vincent Paccapaniccia

Thanks Bill.

Operator

There are no other questions in the queue at this time. I'd like to hand it back to Mr. Brennan for closing comments.

John Brennan

Thank you very much everybody. And obviously we've been pleased to relay to you the progress we've made year-to-date. And we certainly believe we are out of the tunnel. We still have a way to go. But we'd have -- the company is I'd say right sized. And our ability to bring an incremental growth is going to provide incremental profits and improved operating margins for the bottom line.

We look forward to discussing our results for the third quarter with you in October and thank you very much for your participation.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

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Source: ICT Group Q2 2009 Earnings Transcript
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