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Executives

David Richter - President and Chief Operating Officer

John Fanelli - Vice President and Chief Financial Officer

Devin Sullivan - Investor Relations

Analysts

Richard Paget - Morgan Joseph

Arnold Ursaner - CJS Securities

Chase Jacobson- Sterne Agee

Timothy McHugh - William Blair & Co.

Bill Sutherland - Boenning & Scattergood

Jeff Rossetti – Janny Montgomery Scott

Bob Sullivan - Satuit Capital Management

Kevin Liu - B. Riley & Company

Hill International Inc., (HIL) Q2 2010 Earnings Call August 5, 2010 11:00 AM ET

Operator

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.

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 would like to remind everyone that certain statements contained in today’s call maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Hill intends that any such statements be protected by the safe harbor created thereby except for historical information contained in this call, the matter set forth hear in 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 economic conditions or performance of 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 contract, control and operational issues pertaining to business activities conducted on Hill’s own behalf or pursuant to joint ventures with the parties, difficulties incurred in implementing 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 Securities and Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statements.

I’d now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International; go ahead David.

David Richter

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 of 2010 versus second quarter of 2009. Still we’ll look more closely on our sequential performance 2010 second quarter versus the first quarter of 2010. Our management team is reviewing Hill’s performance entirely. This is what we focus on more closely, see how our business has changed over the past 90 days and how we can approve our performance over the next 90 days.

Towards the end, I will also discuss our two recent acquisitions; 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 in the second quarter of last year.

Consultancy 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 3.4% growth from acquisition. Major positive changes for the second quarter in our consultancy revenue year-over-year included increases of $3.3 million in North Africa Project, $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 the U.K claims, $2.1 million in Europe projects and $1.9 million in Middle East projects.

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

Operating profits 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 consultancy 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 SG&A dropped even more from 7.1% to 6.9% of consultancy.

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 to 38.3% from $4.7 million or $0.12 per diluted share based 40.3 million shares for the second quarter of last year.

Looking at our financial performance sequentially, May versus the first quarter and to much more I could picture where our business is heading on 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 in the first quarter to 38.0% in the second quarter. This decline was primarily as a result of our cost cutting efforts in March and April this year as well as increased civilization 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 U.K claims operations, 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, Hill’s 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 was $70.2 million, an increase of 4.3% from the first quarter. With higher gross margin and lower SG&A for the group, operating profits 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 to 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 as I mentioned before that was not repeated in the second. [Indiscernible] Claims Group’s performance was relatively comparable quarter-over-quarter.

With respect to backlog, Hill total backlog at June 30 rose to $569 million from $550 million at the end of the first quarter. Twelve 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 included a $15 million contract with the New York City of School Construction Authority, a $13 million contract to manage construction of the new headquarters complex for ADNOC, the Abu Dhabi national oil company, a $12million contract to support environmental Pin-Up for the U.S Department of Energy, two contracts totaling $10 million for the New York City Department of Parks and Recreation, two contracts totaling $4 million for the Washington State Department of Transportation and a contract to provide oversight and the $5 billion expansion of the Panama Canal; a contract which has an [indiscernible] amount to it at this stage but we expect to generate revenues anywhere from $ 5 million to, on the worse case, to probably $20 million or more on the best case.

These new contracts translated 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. McLachlan’s 50 employees added to our existing 10 in the country, gives us a much larger presence in a place that has pretty much been 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 have always been providing claims services that there are 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 of those numbers were in $U.S.

In July, we also acquired the Construction Management Division of DCK Worldwide. DCK, formerly known as Dick Construction, is $500 million a year construction contractor that felt that the size of their agency business made a non strategic to them. We felt differently, from our perspective we thought it was very strategic for us and we acquired a business that provides program management, agency CM and construction and inspection services primarily on the highway and bridge projects in Pennsylvania, Ohio and Florida adding about 90 employees to our projects management group. For DCK and CM division, we paid approximately $5.4 million for the business. In both acquisitions, the consideration was all cash, Hill’s shares ratio just part of either transaction.

During the second quarter, we purchased approximately $1.6 million shares of our common stock in the open market for about 4% of our total outstanding shares. This is pursuant to our previously authorized and announced $40 million stock re-purchase program.

The quote for the shares in the second quarter was $6.7 million, on 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, the total purchase price of $21.8 million on 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.

Now with that, John Fanelli, our CFO and I are happy to take any questions that anybody might have.

Question-and-Answer session

Operator

(Operator instructions).. Please stand by for your first question. Your first question comes from the line of Richard Paget of Morgan Joseph.

David Richter

Good morning, Richard.

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 to mean -- [our saying] is definitely getting better and which areas do you see as kind of being continued areas of strength, whether it’s geography or end-markets?

David Richter

We continue to see the strength for us meaning most likely areas for potential growth in Newark, bididing North Africa and the United States. The Middle East has been relatively flat; Europe is still flat although we have seen some signs of some green shoots in Europe so to speak. We’ve been winning work in Poland, which was a nice turnaround to see. Spain has been doing reasonably well and part of the U.K market has been the most challenging although we have relatively small PM operation there, much bigger claims operation. North Africa, we have made a major -- we have established a major presence there in the last three years from potentially nothing to probably 17% of our business I think in the second quarter. We have a pretty sizeable 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 it becoming a better market, we are winning work here. Most of our work is, as you know, in the public sector, probably 85% or more, and the work that we are seeing there is across the board geographically and we expect that to continue.

Richard Paget - Morgan Joseph.

Okay, and then could we just get the breakdown between PM and Claims with total backlog in 12 months?

David Richter

John, do you -- ?

John Fanelli

Yes, I should 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. That’s an increase of 3.5% over our second quarter. The 12 month backlog for CM was 206 million and 35 million for the Construction Claims business for a total of 241 million.

Richard Paget - Morgan Joseph

Okay, thanks. I’ll get back in queue.

David Richter

Thanks, Richard

Operator

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

Arnold Ursaner - CJS Securities

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

John Fanelli

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

Arnold Ursaner - CJS Securities

Fully diluted please

John Fanelli

Fully diluted, 40.4 million.

Arnold Ursaner - CJS Securities

That’s in the quarter or average? I’m looking for end of quarter.

John Fanelli

The average, I don’t have that Arnie with me, I can get that to you.

Arnold Ursaner - CJS Securities

Okay, because it makes a difference obviously from model building on a go forward basis. And tax rate due for the year it was quite low this quarter; what is your thought for the year?

John Fanelli

Well the second half, we estimate it to be around 15% and that’s driven to a couple of factors. One, we have a tax benefit that we realized in the second quarter resulting from our US net operating losses which is 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 tax jurisdictions.

Arnold Ursaner - CJS Securities

And a real quick question on your 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 you haven’t had any cancels since June 30th.

John Fanelli

I’m not sure what communication problems you’re referring to.

Arnold Ursaner - CJS Securities

We could follow up offline if needed

John Fanelli

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

Arnold Ursaner - CJS Securities

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

John Fanelli

I think the only one we made after the -- actually though, the most recent one was the Department of Energy and that was in the quarter. I think anything else we made after the quarter were included in the backlog. There is generally a one to two month delay in press releases.

Arnold Ursaner - CJS Securities

Okay. David, it 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 sizeable of 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.

David Richter

Yeah I’d be happy to. As far as 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 a higher level, more discreet service. My guess is that in the short term we have about four or five people that’ll 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 it’s just -- there’s 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 and so 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 and $20 million, but till we go through the project we just won’t know.

Arnold Ursaner - CJS Securities

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

David Richter

Over five years.

Arnold Ursaner - CJS Securities

Okay, thank you very much.

Operator

Your next question comes from the line of Chase Jacobson of Sterne Agee.

Chase Jacobson- Sterne Agee

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

David Richter

No, because we’ve been very conservative in that regard. When we have essentially a task or a contract which is what this is, where the client will give us direction as to the level of staffing over the course of it. Well, we don’t know what that is in advance, we typically will just put in the specific task orders that we get and 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.

Chase Jacobson - Sterne Agee

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 it’s on the EPC side, 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?

David Richter

It doesn’t change them at all. We’re very anxious and aggressive in trying to expand the capabilities that we have outside of our core areas. Obviously about 80% percent 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 -- actually 9% percent of our business in the first half; and 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 others firms we were looking at that are very strong in transportation and we’ve developed, I think, a pretty strong resume now through the acquisitions of highway bridge business which is a national business and I think we’ll be seeing more work in that regard.

You saw an announcement regarding an oil and gas project in Egypt, which was our first under the joint venture that we have with the Egyptian Ministry of Petroleum. I think that will be the first of [penny] 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 in all those choices at a higher flow to manage back to our higher back to the manage floor for the firm like ours to come in and manage either one of them.

Chase Jacobson - Sterne Agee

Okay.

David Richter

And we’re looking at others 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 the environmental management but given what we do, we give those specific markets site is off limits; we can manage any project anywhere.

Chase Jacobson - Sterne Agee

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

John Fanelli

I don’t have the breakout between TM and claims but overall, the second quarter was negatively impacted by the currency exchange by bottom line around almost $500,000. Our revenue was impacted by around 2.6 million or slightly less than 3%. But our operating cost was impacted negatively by around 500,000.

David Richter

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

Chase Jacobson - Sterne Agee

Through organic growth -- that includes the currency impact right?

John Fanelli

Yes.

Chase Jacobson - Sterne Agee

Okay. Alright thank you.

John Fanelli

You’re welcome.

Operator

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

Timothy McHugh - William Blair & Co.

Yes, first question to be acquisitions; the two most recent ones here; can we assume you paid close to one times revenue if we think about the contribution from them?

David Richter No, very different prices paid based upon the profitability of the two businesses.

Timothy McHugh - William Blair & Co.

Okay

David Richter

Based on McLachlan Lister we paid more than revenue, more than one times and the case of DCK we paid about half of revenue.

Timothy McHugh - William Blair & Co.

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

David Richter

The acquisitions?

Timothy McHugh - William Blair & Co.

Yes

David Richter

McLachlan Lister was, DCK was not.

Timothy McHugh - William Blair & Co.

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

David Richter

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 -- because 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.

Timothy McHugh - William Blair & Co.

Can you give any more color on it? Was that -- what drove the increase in accounts receivable?

John Fanelli Well, basically it’s collection effort.

David Richter

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 has seen 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.

Timothy McHugh - William Blair & Co.

Okay and then the last question. The claims contingency fee so was it -- I guess you were hinting $2 or $3 million in the first quarter?

David Richter

No, the first quarter was exactly $2.0 million.

Timothy McHugh - William Blair & Co.

Okay

David Richter

Contingency fee are earned on a project, contingency fees are extremely rare for us where we take them on and assuming we’re getting a contingency fee of that size was rare as well. We sort of backed that number out when we’re looking at the quarter-over-quarter comparison -- per second over first. In comparing the claims business which looks like a significant decline but it had that windfall fee in the first quarter which we don’t expect to be repeated going forward.

Timothy McHugh - William Blair & Co.

Okay, thank you.

Operator

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

Bill Sutherland - Boenning & Scattergood

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

John Fanelli

The DSO for the quarter increased to around a 107 days primarily from North Africa and European operations.

Bill Sutherland - Boenning & Scattergood

And remind us what was Q1

John Fanelli

Q1 was a 104 days.

Bill Sutherland - Boenning & Scattergood

And that was

John Fanelli

This is consolidated DSO.

Bill Sutherland - Boenning & Scattergood

Right, what’s -- clearly you don’t want to keep it that level, what can you do at this point?

John Fanelli

Well, we’re doing the same things we’ve always done. We’re been very aggressive, our management team is staying very close to our clients and try to get payments through the system faster.

As you know there’s not a lot we can do overall, our clients are driving the process as far as the payment schedules and our contracts. We try to get those as soon as possible; they try to get it as long as possible. I think it’s primarily a result of the economic environment we’re in; that 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, for the last 18 to 20 months we’ve been as aggressive as we can making sure that 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 perform better than most as far as having to deal with the write downs or write offs of receivables.

Bill Sutherland - Boenning & Scattergood

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 can get to.

David Richter

The lower the number the better. One of the other reasons we’ve been affected is that in North Africa, we have a very slow pay environment. As I said, it’s gone from zero to 17% of our business in the last 2 years.

Bill Sutherland - Boenning & Scattergood

Okay

David Richter

It’s a significant part of receivables and just a lot slower than our typical clientele. So if you look at the business over that period in time, the DSOs have been increased.

Bill Sutherland - Boenning & Scattergood

Okay. Hey David, on McLachlan, I was -- I didn’t know it would go into claims. Can you give us a little more color on the business and kind of where you may be moving at?

David Richter

McLachlan isn’t really doing much claims work, we had an operational study that did but they sort do a hybrid more of like a management consulting type of business where they’re involved in shorter time assignments, advise 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 their all strain operations already claims, we felt the claims group was better strategic place for them.

Bill Sutherland - Boenning & Scattergood

Okay. And what did they add to backlog in the -- at June 30?

David Richter

It was about $4 million.

Bill Sutherland - Boenning & Scattergood

Okay, how would you characterize sale cycles at this point David, I guess [indiscernible] one answer but are they in most markets holding, improving, deteriorating?

David Richter

It depends with the 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 at about the summer of 2009.

We’ve seen it strengthening over the last year in the 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 the best shape are the US, North Africa as I’ve mentioned. Certainly Europe is slow. The Middle East; there’s still a lot of projects out there so we’ve certainly seen a lengthening of the sales cycle especially in that region of the world.

Bill Sutherland - Boenning & Scattergood

And that’s almost without exception in the Mid East as far as the countries?

David Richter

No, I’d say probably the UAE and Qatar. That’s the level of construction that has happened to date. I think it’s just a little bit of a slow down there, in other areas North Africa, Saudi Arabia, we’re seeing a lot of opportunities

Bill Sutherland - Boenning & Scattergood

Okay and then last number question on second half acquisition payment you’ll be needing to finance or pay other than the acquisition that you did in July.

David Richter

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

Bill Sutherland - Boenning & Scattergood

I didn’t say it very well, the run outs and another acquisition related payments that you will be making in the second half in addition to the July acquisition.

David Richter

Am not aware of any and John is shaking his head as well

Bill Sutherland - Boenning & Scattergood

Okay, good, thanks gentlemen

David Richter

Thanks Bill. Whoever put us on hold if you could take us off we’ll appreciate it

Operator

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

Kevin Liu - B. Riley & Company

Hi good morning, first question to start just a housekeeping one, John if you have the DNA by the segment?

John Fanelli

I have the total, it’s around 4.6 million for the six months

Kevin Liu - B. Riley & Company

Okay, I’ll get the – I’ll find it and David I think you mentioned that utilization had improved in the quarter, just wondering how that tracked versus your internal expectations and how much more improvement you could expect given from the projects you’ve won?

David Richter

Utilization is kind of the same answer as the DSO’s, there’s no magic target number, obviously a higher view lays the better, the claim business by 8 to 10 have low utilization averaging around 65 to 70%, versus 85 and 90% for project management. But we saw a significant uptake, a better uptake in project manager which is positive, 75% of our business at 150 basis points quarter-over-quarter is a pretty strong improvement, and I think that’s the combination of the cost cutting that we made. We took out just 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 double.

Kevin Liu - B. Riley & Company

I mean the margin in the CM Group has kind of been in the high team historically, you guys are trying to get back there with some leverage coming back from the projects. But curios kind of what the time frame for getting back to those levels are and whether you’ll need some more some more cost steps to get there.

David Richter

I think the operating margins are really driven in large measures by the economy, and when we were growing while and everybody was busy and everybody was humming, we were operating right within those ranges that we had historically. Obviously given the challenges we’ve had with that operation, and some areas falter for lack of work, and I think the historical range for PM we’ve talked about 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 cross cutting required going forward, we expect that we are 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 expect that we will be doing acquisitions going forward, probably one or more in the second half of this year, so there’s more opportunities there and obviously when you bring new companies on board until we can cut their overheads that adds to your SGNA, and has a short term impact on your operating margin.

We are 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 [indiscernible]..

Kevin Liu - B. Riley & Company

And last question, you guys had a pretty significant level of networking there and just wondering if that’s unusually high or whether the pipeline going forward still supports some more high levels of booking.

David Richter

No, I think it’s not usually high than given where we are now, we’ve had several, in fact more than several $100 million quarters and no bookings. We are doing $92 million in consulting season the second quarter, we are going backlog we’ve got to sell more than that. So that’s sort of the range we are targeting now about what we’re looking to see. Obviously in the first quarter the net number was something like $125 million for net bookings but that included 35 million of cancellation

We’ve been pleased with the second quarter showed none of those, the third quarter so far has shown none of those, and we feel like that’s a very positive sign.

Kevin Liu - B. Riley & Company

Dave, thanks a lot.

Operator

Your next question comes from the line of Bob Sullivan of Satuit Capital Management

Bob Sullivan - Satuit Capital Management

Thank you and good morning gentlemen. Question about your backlog, and I don’t know if you’ve addressed it on the call or not. But could you give us some kind of 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 break down of your backlog?

David Richter

Two things, one, I think the gross margin on our backlog is the same as our ongoing business, I know some have danced a lot whether or not there’s a lot of price competition going on right now and therefore the new work we are 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 to 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 the geographic breakdown but I think John is knowing that he has those numbers

John Fanelli

Yes Bob I have those, I’ll break it down in total backlog, what we classified as America’s around 209 million of the total backlog, Europe107 million, Middle East 184 million, North Africa 61 million, and Asia Pacific 7 million. That should give you a total of 569 million. The 12 month backlog breakdown of 241 million, the America’s at 78 million, Europe 54 million, Middle East 80 million, North Africa 22 million, and Asia Pacific 6 million.

Bob Sullivan - Satuit Capital Management

That’s a great color gentleman, thank you very much

John Fanelli

You are welcome

Operator

Your next question comes from the line of Joe Foresi of Janny Montgomery Scott.

Jeff Rossetti – Janny Montgomery Scott

Good morning, this is Jeff Rossetti for Joe Foresi here. Thank you for talking my question, just wanted to see how you saw the nice sequential pickup in the PM revenue and given that the backlog, 12 month backlog is down from the end ’09. Just wanted to see if you see any trajectory for the PM revenue going forward.

David Richter

Now we see a strengthening incrementally quarter-by-quarter. I think the one bit of aspect of what we saw in the second quarter was this big drop that 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 and third quarter going forward. We see new work coming in, significant new work into the project groups and so we expect the positive trend to continue certainly for the second half of this year.

Jeff Rossetti – Janny Montgomery Scott

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

David Richter

I wouldn’t call it target, like the other numbers I talked about, the higher the better. So 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 of quarters when they are well outside pf those range.

Jeff Rossetti – Janny Montgomery Scott

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

David Richter

Yes, certainly with the people that are coming off the Iraq work, we hope to relocate them to other projects in and out of the Middle East. We are chasing other work through the Stanley Baker Hill Joint Venture. We have some work with Michael Baker in Afghanistan, we are chasing some relatively small work in Iraq going forward and we are constantly in and out of that joint venture, we are constantly chasing work with other companies through project specific JV and I expect that’ll continue. But the big contract that we had for Iraq is certainly going to be over by beginning of fourth quarter.

Jeff Rossetti – Janny Montgomery Scott

Thank you

Operator

(Operator instructions). You next question is a follow up from the line of Bill Sutherland of Boenning & Scattergood

Bill Sutherland of Boenning & Scattergood

Thanks. John, when you look at the kind of the overhead level that you’re running going to the back half and after some of the improvements you’ve made plus the trend in a on applied labor, what kind of percent of revenue are you short circling there for the back half of the year?

John Fanelli

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

Bill Sutherland of Boenning & Scattergood

The 38%?

John Fanelli

Yes

Bill Sutherland of Boenning & Scattergood

Okay and so you’ll be outside your targeted range, I know you’ve been shooting to get down to – what was it, 36 to 7 or remind me again.

John Fanelli

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

Bill Sutherland of Boenning & Scattergood

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

John Fanelli

For the whole year?

Bill Sutherland of Boenning & Scattergood

No, for the next two quarters, and I didn’t think the back half would still be at 38%

John Fanelli

No, we should be around 37.5 range

Bill Sutherland of Boenning & Scattergood

For the year?

John Fanelli

For the second half.

Bill Sutherland of Boenning & Scattergood

Okay, that’s helpful and then last, since you’ve looked at quarter-over-quarter trends David in your comments, and I noticed CM even adjusted for the contingency fee looks flat slightly off, what is the forward looking trend for clients in the second half?

David Richter

The short term trends that we see right now because there are really no long term trends in claims, the short term; but right now we are 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, it’s just in the UK and the US as well and we’ve got some big assignments coming in the door, 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.

Bill Sutherland of Boenning & Scattergood

That sounds good, thanks guys.

David Richter

Thanks Bill

Operator

Your next question is a follow up from the line of Arnie Ursaner of CJS Securities.

Arnold Ursaner - CJS Securities

Sorry I was on mute, just want to follow up a little bit on the question you just got. When we had talked about the claims consulting business at year end, you had a number of projects and other work that it seems as if people were deferring starting it up and not trying to incur the cost over the beginning of the year.

Can you freshen whether some of those did move in to Q1, were some of those wrapped up, because claims consulting my understanding is it tends to not take several quarters to resolve but tends to be a little shorter time frame?

David Richter

It runs again but there was time it could be 90 days or less and some that take several years. We are talking about clients pushing off work to delay the cost, [indiscernible] lawyers or fighting it out. I think there was pretty much through the last quarter and first half of 2009, I think the claims road has been moving back towards more of a normalized environment. We’re seeing activity, some specific 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 in most of the reports I’ve seen about the litigation environment has been pretty weak to the first half of this yea. We see that business is getting stronger in the short term.

Arnold Ursaner - CJS Securities

So given your manpower, can you give us a sense of where utilization is now? I know it’s a broad number but could you give 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 margin given the tremendous leverage increase in the business?

David Richter

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

Arnold Ursaner - CJS Securities

No, claims specifically.

David Richter

Claims, I don’t have the exact number even though we certainly 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, now it was up 100 basis points. We see that trending up in the second half of the year.

Arnold Ursaner - CJS Securities

And in the past you’ve run somewhere in the 70 75 when things were humming pretty well?

David Richter

It’s actually probably a little higher than that, let me give you down to the numbers just so you guys have everything you probably need. The produce 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, 150 basis points that I referred to before.

Arnold Ursaner - CJS Securities

And those are about the ball parks where they run?

David Richter

We see both of those two groups doing better in the second half than they did in the second quarter.

Arnold Ursaner - CJS Securities

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

David Richter

No, utilization doesn’t have an impact on gross margin, the pricing of the work that we do does. The people on billboard falls out of direct close and falls into unapplied labor which is part of our SGNA.

Arnold Ursaner - CJS Securities

Got it, okay, thank you

Operator

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

John Fanelli

Thank you very much. While 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 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 and opportunities in those markets and for our company’s financial performance there’s a result there not only in the second half but heading into 2011

Thank you all for you participation in today’s call, we look forward to the next call in about 3 months, thank you.

Operator

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

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Source: Hill International Inc. Q2 2010 Earnings Call Transcript
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