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Executives

Devin Sullivan – The Equity Group

David L. Richter - President, Chief Operating Officer & Director

John Fanelli. III - Chief Financial Officer & Senior Vice President

Analysts

Tim Mchugh – William Blair & Company, L.L.C.

David Gold – Sidoti & Company

Arnold Ursaner – CJS Securities

Kevin Liu - B. Riley & Company, Inc.

Chris [Bemen] – Morgan Joseph

William Sutherland – Boenning & Scattergood, Inc.

Michael Chapman – [Enrossi] Capital

Hill International, Inc. (HINT) Q4 2007 Earnings Call March 20, 2008 11:00 AM ET

Operator

Good day everyone and welcome to the Hill International fourth quarter 2007 and year end financial results 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 call over to Mr. Devon Sullivan of The Equity Group. Please go ahead, sir.

Devin

Good morning everyone. Thanks for joining us today. Our speakers on today’s call will be David Richter, President and Chief Operating Officer and John Fanelli, Senior Vice President and Chief Financial Officer. Before we get started I would like to remind everyone that statements made during today’s call may fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties, overall economic and market conditions, competitors’ and clients’ actions and other conditions which could cause actual results to differ materially from those anticipated including those risks identified in Hill’s filings with the Securities and Exchange Commission. Accordingly such statements should be considered in light of these risks. Any prediction by Hill is only a statement of management’s belief at the time the prediction is made. There can be no assurance that any prediction once made will continue thereafter to reflect management’s belief and Hill does not undertake to update publicly its predictions whether as a result of new information, future events or otherwise.

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

David L. Richter

Good morning everyone. Thank you for joining us for our quarterly earnings call. We’re very excited about what was a terrific and record year for Hill International in 2007 and we are very excited and looking forward to an even better 2008. I’m going to review the fourth quarter financials only not the full year. But certainly during the Q&A you’re welcome to ask questions about anything, quarter or year. First let me explain one change that we made in our financial statements that many of you may have noticed. After some back and forth with the SEC we have slightly revised our financial reporting and done away with the term RLRE, revenue less reimbursable expenses or what we used to call net revenue and we now have a category called consulting fee revenue which is actually the top line, total revenue is below it. So we generally talked about consulting fees first.

Let me go through first a brief overview of our performance during the fourth quarter 2007 including some breakdown between our two business segments, project management group and the construction claims group. In the fourth quarter of 2007 total companywide revenue rose 28% to a record $86.3 million. Consulting fee revenues for the fourth quarter were up 38% for a record $57.8 million. In the project management group our consulting fees were $40 million for the quarter up 51% from the 2006 fourth quarter. Of that growth about 35% was generated organically and that was primarily from our growth recently in the Middle East and North Africa and about 15% was due to the one PM acquisition we did last year which was KJM & Associates. Consulting fee revenue for our construction claims group rose 16% which was entirely organic to $18.7 million for the fourth quarter. Both of those groups were well beyond our expectations for growth. During the fourth quarter our consulting fee revenue breakdown was approximately 32% in the Americas region, 41% in Middle East and North Africa, 24% in Europe and 3% in Asia Pacific. By client type our consulting fee revenues were as follows, 27% were from US Federal, state and local governments, 17% was from foreign governments and 56% was from the private sector. Our overseas operations outside of the Americas accounted for approximately 68% of our total revenues in the quarter. We continue to see our strongest growth overseas in both projects and claims.

The company’s gross profit rose by nearly 40% in the fourth quarter to $28.2 million which equates to 48.1% of consulting fee revenue. Gross profit for the prior year’s quarter was $20.2 million or 47.4% so we’ve seen an increase margin percentages. Our SG&A expense companywide rose reflecting costs associated with both the Knowles and KJM acquisitions as we inherited their SG&As. Continued growth in our senior management team and corporate overhead expenses including some significant increases in our IT costs and to our recent growth and increases both in the US and overseas as we’ve continued to build out a much stronger business development team help us support future growth. During the fourth quarter of 2007 our SG&A as a percentage of consulting fee revenue was up only slightly to 40.9% compared to 40.7% in the same period in 2006. Our operating profit for the fourth quarter rose to $5.0 million up 47% from the fourth quarter of 2006. Operating profit as a percentage of consulting fee revenue increased to 8.5% from 8.0% in the fourth quarter of 2006. Our operating margins were down slightly from 10.0% in the third quarter of 07 due to some unusual expenses that we incurred in the fourth quarter, a little over $1 million of expense that we don’t see reoccurring first quarter of 08. That included about $800,000 worth of bonuses that were incurred in the fourth quarter, paid in early 2008. Bonuses tied to either annual performance or discretionary bonuses that we weren’t able to approve for during the course of the year.

We also had about $200,000 related to year end holiday parties and we have now about 70 offices around the world and that’s become a higher expense and one we may look at given the size and we had about $50,000 in expenses related to the exercise of the warrants in the fourth quarter. So we had a little over about $1,050,000 that was unique to the fourth quarter that we don’t see reoccurring.

In the project management group our operating margin declined slightly to 18% from 20.4% in the fourth quarter of 2006. This was primarily due to a decrease in our operating margins on our Iraq work which strange enough results from a significant increase in the work that we’re doing directly where we have significant operating costs as opposed to just getting potentially dividend payments from our SGH joint venture. So the margins for that job have gone down as we’ve seen a lot of growth and increased profitability. It also related to some significant start up and mobilization costs as we’ve ramped up over the last six months what we think is a pretty significant business in North Africa in both Egypt and Libya. In construction claims group our operating margin was up significantly to 13.8% from 6.1% in the fourth quarter of 2006. This was due principally to improved operating margins specifically in the UK operations as we have integrated Hill’s operations there with Knowles and to what we think is a successful and now complete integration of Knowles into Hill and the cutting of some significant costs there.

Our income taxes declined by about $700,000 in the fourth quarter even though our taxable income rose by about $1.7 million. This was due to a continuing drop in our effective tax rate as we see more and more profits in overseas jurisdictions that have little if any tax as well as to a significant tax credit resulting from the reversal of a prior year’s uncertain and, yes, that was written by an accountant amounting to about $600,000. We’re going to see in the first quarter of 2008 another significant tax credit equal to about $2.5 million. This amount will directly reduce our income tax expense for the first quarter. The company’s net income grew by 89% to $5.1 million for the fourth quarter which is equal to $0.14 per diluted share. That’s up from $2.7 million or $0.11 per diluted share in the fourth quarter of 2006. As noted in our press release our diluted share count for the quarter rose by about 45% due primarily to the increased stock price during the end of last year but more significantly due to the redemption of all of our warrants which added about 14 million shares of common stock.

As of the end of the year our financial position at Hill was the strongest it’s ever been. It included cash, cash equivalents of $66.1 million, a working capital nearly $103 million and shareholders’ equity of $128 million which is about 3 times our net worth as of the end of 2006. As of the end of the year we had no outstanding borrowings under our $35 million credit line with LaSalle Bank although we did have about $7.7 million of outstanding letters of credit on various projects overseas which does reduce our availability for borrowing by the same amount. Our backlog continued to grow in 2007, we had an extraordinary third and fourth quarters of new sales and business development. We ended the year with a record $416 million of total backlog which is up about 10% from the end of the third quarter. Our 12 months backlog also grew by about 10% to a record $196 million from $179 million as of the end of the third quarter.

Regarding acquisitions, 2007 actually surprised us by how few acquisitions we did. We did one acquisition which was KJM back in May. We had a lot more discussions than one but we found that price expectations were rather high. Despite that we have a very strong pipeline of companies that we’re talking to right now. We’ve closed two acquisitions since the beginning of the year which I’ll talk about in a second. We have a rather strong pipeline of companies we’re in active discussions with and if anything I think the current market has lowered some seller’s price expectations and I think that’s going to work out to our benefit. We’ve announced some major activities so far this year, a couple acquisitions and a couple joint ventures. Let me talk about those in a little more detail. In January of 2008 we acquired a company called John Shreeves Holdings and its operating subsidiary John Shreeves & Partners, Ltd. Shreeves is a London based firm that provides project management and cost management services on primarily private sector projects throughout the UK. At their last fiscal year which was April 30, 2007 Shreeves had revenues of approximately $4.9 million and we think they’re going to be a key component of let’s say growing for us, a growing UK operation. We now have a little more balanced service line there. Before Shreeves it was probably 99% claims and we found that growing by organic growth in the UK one person at a time was not getting us very far and we think with Shreeves in the fold we’re now a much stronger PM presence in history we’re going to see some good things in the UK.

In February of 2008 we acquired majority control of a company called Gerens Management Group, S.A. which is now since the acquisition been renamed Gerens Hill International, S.A. and Gerens is a major and leading project management firm in Spain with offices in Madrid, Barcelona and in Cancun, Mexico. In 2007 Gerens achieved unaudited total revenues of approximately $31 million. We know the company and its management well. We were a co-founder of Gerens 10 years ago and we’re a minority shareholder in the company so we divested our interest a couple years later for what then was a very good price. We paid significantly more for the company today but it’s had a tremendous amount of growth and really became one of the leading project management firms not just in Spain but throughout Western Europe.

On the joint venture side we announced two joint ventures earlier in the year including one just this past week. We’ve established a real estate development joint venture called [McCann] Hill International, Ltd. with a merchant banking firm called McCann Capital Group. McCann is owned by Saudi Prince [Abdah Lazeez Binbahad Bindallah Alsoud] which is not easy to say or remember but he is an ideal partner. McCann is going to raise at least $500 million in an equity fund that Hill will not be contributing to, it will be raised from outside investors and together we will develop projects commercial, residential, mixed use and other types of projects throughout the Middle East and North Africa. We intend to headquarter the company in Abu Dhabi and we’re in the process of looking at multiple opportunities. McCann Hill is really a way for us to sort of dip our toe into the development business in a way that doesn’t risk our company’s capital but gives us tremendous upside and very little downside.

We’ve just announced this week a joint venture called Hill Jianke Project Management, Ltd. Shanghai Jianke Project Management Company, Ltd. is our partner, we own 60% and they will own 40%. It is an effort to enter in a big way the Chinese construction market and we will work together to build a project management business in the Shanghai region which is the only region that we’re going to be focusing on. We’ll have opportunities to develop Hill business outside of that area on our own. We will own 100% of the operation but it was a good way to get our foot in the door to what is just an absolutely huge and fast growing market. Shanghai Jianke is a publicly owned company not like Hill but owned by the Chinese government. They have about 1,800 people focused on the construction sector but primarily doing what we consider sort of lower level work involved in inspection, material testing and construction oversight. In each of us we found an ideal partner to really take a project management business from the ground up and built it into something we think is going to be very significant in a very short period of time.

Getting onto some other financial issues as we note in our press release the company exceeded by about $4 million our EBITDA target for the year which resulted in earn out payment to the shareholders of the formerly private Hill International, 2.3 million shares will be issued by the company sometime probably in the next couple of weeks and that will increase in our share count beginning January 1 of 2008. We began trading on the New York Stock Exchange as I’m sure all you know on February 22nd and we think that combined with what we expect to be in June our addition to the [Russell 2000] is going to continue our becoming a lot better known among the investment community and we’re looking forward to that as well.

In summary we’re very excited about how we performed in 2007. We think that 2007 is going to be an even better year and we’re looking forward to achieving that. So with that John Fanelli, our CFO, and I are happy to take any questions anybody has.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Tim Mchugh with William Blair.

Tim Mchugh – William Blair & Company, L.L.C.

Just wanted to start off by asking about in the quarter you had some investments there ahead of growth. As we look at some of the joint ventures you launched recently as well as some of the growth reflected in your backlog do you anticipate the need for more upfront investments as we look out to kind of the first half of 08 here?

David L. Richter

No, Tim, I don’t think so. We’ve added a significant depth to our management team in 2007 at the very senior levels. I don’t see any major new hires. We also brought on a CIO last year in an effort to really ramp up the quality and breadth of our IT infrastructure. We’ve become a lot more global. Knowles acquisition was a big part of that but so was organic growth into North Africa and Asia and we were behind the curve. We were still very much had the system in place for a 500 person company and we’re closing in on 2,000 and we’re going to need to make some IT investment and that will continue but I think the hiring at the senior management level has pretty much ended.

Tim Mchugh – William Blair & Company, L.L.C.

And then if not hiring though any additional offices or I guess recruiting costs that you would expect to spike up? Anything in that regard?

David L. Richter

No, we have recruiting costs regularly as we look to hire key operating people. I don’t expect any change in that. We are looking at organically opening an office in Tokyo in the next month or two. We’ll have another announcement on that relatively soon, we’re in the process of hiring someone to run that office, it’ll be a claims office. Our focus finance will be relatively small, two people at first. Other than that I don’t see us opening any new offices organically. We continue to look to grow by acquisition. With Gerens not only a real strong firm in Spain but probably the best way that we saw strategically to enter the Latin American market. They have a very small presence there now but I think together we can do a lot of things there. I don’t know what’s going to happen south of the border in the next couple quarters or couple years but we see a lot of opportunity down there for us.

Tim Mchugh – William Blair & Company, L.L.C.

And then on Iraq you mentioned work there, can you give us an update on how that’s trending? I think you said before in February of each year you’re getting a new task order for that work, what does that imply?

David L. Richter

Yeah, we got a significant increase in our work about a year ago that increased our staff from about 10 to over 50 people full time in Baghdad. We’ve seen a continuation of that work for 2008. We’ve recently entered into some new task orders, we see our staff remaining essentially the same size of the balance of this year and in 2009 we just don’t know yet. We’ve got a Presidential election that could change things but you’ve got an ongoing need for us to continue to rebuild the country and that’s a client over there where people change every 90 days or so and it constantly influx. We’ve been one of the few constants there and I think that as we continue to satisfy each new rotating in new management team we continue to see our work grow while other firms have seen their work decline. I’m confident for the future there and don’t see any major drop off certainly this year.

Tim Mchugh – William Blair & Company, L.L.C.

And then lastly you obviously had very strong growth in the backlog at the end of the year, as you look at your new development pipeline did you run through a lot of the opportunities or do you see a lot of room for continued growth in that backlog even if it maybe decelerates a little from the rate you saw in the fourth quarter?

David L. Richter

We really don’t track percentage growth in the backlog. We’re looking at the total number and how it relates to our revenue and I think the backlog is certainly the healthiest it’s ever been. A lot of the big projects that we’re winning overseas in the Middle East and North Africa particularly are very long term in nature and the backlog that we booked doesn’t even fully reflect I think what the potential of that work is and the client relationships that we’re building over there. So we’re more confident with the work that we won in the third and fourth quarters as I said was very strong for us. We’re seeing continued strength in our sales and business development efforts so far in 2008 and we think this is going to be an even better year than 2007.

Operator

Our next question will come from the line of David Gold with Sidoti.

David Gold – Sidoti & Company

David, can you break down the backlog for me between the two businesses? I don’t think you did that.

David L. Richter

We did it in our 10-K. John, if you have those numbers in front of you.

John Fanelli, III

Yes, I do.

David L. Richter

He’s a better page flipper.

John Fanelli, III

The backlog for our project management group rose to $382 million at the end of the year from $349 million in September and $211 million at December of last year and the total backlog on the claims was $34 million at year end up from $31 million at September 30, 07 but down slightly from the year ago. The 12 month backlog at the project management group rose to $172 million at year end from $156 million at the end of the third quarter of 07 and $103 million at December 06. The 12 month backlog at construction claims rose by $1 million to $24 million at the end of 07 from September of 07 but was down from $26 million at December of 06.

David L. Richter

David, we’ve seen some real strength in our claims business as we’ve integrated Knowles, as I think we’ve taken advantage of the resources that we have and I think what is a growing reputation in that area. We’ve been able to get some real significant growth much more than we’ve been projecting. As you know we’ve talked about long term targets for growth of about 20% of PM, about 10% of claims and we grew significantly more than that. I think the number, John, correct me if I’m wrong, was 16% fourth quarter and an operating margin that went from 6.1 to 13.8%. We’ve been able to bring a lot more profitability out of Knowles, historically what was Knowles and get that operation back up to what our traditional operating margins were for our claims go do about 15%. That number is where the claims group is heading in the short term.

David Gold – Sidoti & Company

That brings me to sort of my second question, when we look at claims presumably I mean it sounds like you attribute some of the sort of success there more to say Knowles than to I mean let’s call it market share gain say rather than strength in the overall business or are we seeing the overall sort of bucket of claims with the whole pie growing? Are things extremely busy there or –

David L. Richter

It’s almost impossible to define the whole pie in the construction claims market. It’s too small to really get anybody to put together a list or to track the size of the industry. Our best guess is it’s about $1 billion a year market.

David Gold – Sidoti & Company

I mean more along the lines of are the phones these days ringing off the hook for you guys are a lot busier than you’ve seen it sort of the industry or the environment or is it more Hill is doing a better job of catching work?

David L. Richter

I’ve never actually seen a phone ring off the hook, I know it’s a metaphor, but we’re seeing a lot of opportunity. We just won for us what was a huge claims assignment on a nuclear power plant in Europe that’s about $7 million in fees. We beat Navigant, we were the two finalists and they’re our principal competitor in that market and so we were very happy about that and we see a lot of opportunity going forward. We don’t see anything that’s going to turn the tide in that regard. When we look at what are sort of the under performers in the business overall there are really only two that we see, one is in the claims group, one is in PM. Our Asia Pacific operation isn’t making the kind of money that we want it to. It’s in fact losing money as is the European project management operation. We have a strong focus on the two of those, we have had some management changeover in the Asia Pacific region which is one we inherited from Knowles and we see that getting much, much stronger and certainly being profitable in 2008 and the same thing in Europe. I think that’s a size issue, put a big management team in place there and have spent a lot of resources and we have a strong acquisition focus on Europe as well as the US and we think with size if we get a lot of leverage out of that and then we’ll get that operation profitable as well.

David Gold – Sidoti & Company

And then just lastly on the acquisition front presumably maybe it’s getting a little easier on the price side this year and that sort of allude to, have your goals changed any or do they sort of remain the same?

David L. Richter

No, our goals are exactly the same. We’re focused on the project management business for acquisition growth, focused on organic growth for the claims group. So I would think it’s fair to say 100% of the firms we’re talking to right now are project management firms. We’re focused in both the US and in Europe. We’re seeing probably more firms out there available for sale at good prices than we’ve ever seen before and I think the pace that we’re on, two acquisitions in the first quarter we expect to continue possibly for the balance of the year.

Operator

Our next question will come from the line of Arnie Ursaner with CJS Securities.

Arnold Ursaner – CJS Securities

I want to focus a little bit more on the SG&A line and a couple of items related to that. You mentioned obviously you’re building for future growth. Can you give us a feel for either the number of senior people that you’ve added or the cost of the senior people that you added in Q4 and give us a run rate SG&A level entering Q1 assuming you are accruing bonuses appropriately? Can you give us a run rate SG&A level entering Q1?

John Fanelli, III

In total in our SG&A which includes the corporate and obviously the SG&A relating to our operations we’re seeing that that percentage of our consulting fee revenue will be trending downward as the year progresses so it’s going to be difficult in the first quarter to see if that trend will fall but over time it will based on the growth factor in our revenue but we also have to factor in the following, David mentioned the JVs that we’re not involved in. There’s going to be some initial costs relating to those JVs and future acquisitions. So there’s a lot of factors in this mix of the SG&A but as David mentioned a lot of the senior positions have been filled, there may be some lower level positions as we grow that may have to be filled in, but overall we see it to be trending downward to a 36 to 38% overall.

Arnold Ursaner – CJS Securities

You’re talking about total SG&A as a percent of revenue?

John Fanelli, III

The percentage of consulting fee revenue.

David L. Richter

Arnie, to address the first part of your question the hires we’re talking about took place mainly in the second and third quarters. I don’t think we made a major senior management hire in the fourth quarter.

Arnold Ursaner – CJS Securities

But I don’t think you’ve answered or attempted to really answer the question of what the run rate level of SG&A is going into Q1 or in the current quarter. Because there’s some specific things that one would follow post that, but –

John Fanelli, III

The run rate should be based on the fourth quarter run rate of $24 million of SG&A and with the $1 million worth of let’s call them unusuals, so I wouldn’t anticipate that number deviating significantly from that 23 number.

Arnold Ursaner – CJS Securities

So the starting point for run rate SG&A in Q1 is likely to be $23 million?

John Fanelli, III

I would say that’s fair. David, do you agree?

David L. Richter

Yeah, I mean obviously we’re continuing to grow and you’ll see some growth in the SG&A of the operations themselves. On the bonuses, we did some discretionary bonuses at the end of the year because we didn’t have really a senior management bonus plan in place. I think that’s going to change in the first quarter of 08 and we’ll be able to account for it throughout the course of the year so we don’t have this hit we took in the fourth quarter. But if you pull that $1 million out, out of a $5 million operating cost it’s a 20% increase. If you did the 20% increase on the 8.5% operating margin you’re at 10.2. So we continue to see what I call marginal increases in our operating performance, we expect that to continue as we grow. We expect the SG&A to continue to come down but as John said once you throw an acquisition in the mix every company is going to be different and I think we’re going to be skewing the numbers up and down here and there and as I just said to David we see a lot of acquisitions coming in the next couple months.

Arnold Ursaner – CJS Securities

Going back to the $23 million –

John Fanelli, III

Arnie, just one more comment on the $23 million, that number probably will go up just on the fact that the company does its increases in the salaries at the end of the year so that’ll be a factor in that $23 million and also the way we do our audit fees we recognize that as incurred and obviously we had a year end during the first quarter so that’s going to be a factor as well. So that $23 million will probably go up based on those two factors I just mentioned.

Arnold Ursaner – CJS Securities

Sure. That’s where I was going to go next. Remind me again, when you had consolidated Knowles, KJM my recollection was that you had incurred some fairly substantial duplicate costs which were going to end in Q3 and you were going to reduce headcount as you integrated their systems. Can you quantify the benefit you got from that in Q4?

David L. Richter

John, are you going to answer?

John Fanelli, III

I think because of the increase in the operating profit in the, let’s call it the Knowles business in the UK that’s dramatically increased, I think the integration has worked. I think our senior management that’s running the UK operation we integrated both Knowles and our UK operations just from an accounting and reporting position so we got some leverage there and I think there has been some increase/decreases in the costs in the SG&A area. Maybe not just specifically headcount but I think there’s other operating costs that we leveraged.

David L. Richter

Also Arnie, on the KJM business the costs we took out in the third quarter were principally their entire finance department which is about, John, five people on about 100 in business?

John Fanelli, III

Yes.

David L. Richter

So we picked up some significant savings there. We also in the early part of the first quarter of 08, Karen [Mask] who was the founder of that business and was chafing under now having a corporate parent, she left the business and we thought it was a good time for both of her children who were managers in the business to depart as well. We were less than impressed with their ability to run the business without her. We made a management change there and I think we haven’t put in – we have temporary managers running those two offices, Seattle and Dallas, but I think with a management changeover they’re going to do significantly better than they were doing under Mask family ownership and we talked to a lot of clients who see a change and a lot of them we believed were happy to see a change. We think we’re going to be able to take that business to a new level.

Arnold Ursaner – CJS Securities

What was the IT investment spend in Q4 and what do you think it will be in 08?

John Fanelli, III

In 2008 we anticipate around $4 million in just the computer equipment and software and probably another $2 million just equipment due to the acquisitions with Shreeves and Gerens. So it will be in total around $6 million. I don’t have the specific fourth quarter capital but in terms of the full year our investment in PPE and equipment reached approximately $3 million for the year. We’ll probably double that in 2008.

David L. Richter

I thought we go from $3 to $4 million on the sort of Court Hill business and then $2 million on the acquisitions.

Arnold Ursaner – CJS Securities

And then just to be clear, your 36 to 38% SG&A guidance as a percent of consulting fees embeds the wage increases you’re building in, the new headcount you’re building for the JVs and $6 million of expense are embedded in the 36 to 38% guidance?

David L. Richter

Yes.

Arnold Ursaner – CJS Securities

Okay, because I want to follow up on this a little more, David, structurally as it relates to your business. You’ve always said that gross margin is not where you expect to get the leverage in your business but much more so in leveraging the SG&A and yet the operating margin mix versus our estimate this quarter was entirely related to the G&A line. Should we assume that you’ve changed your view and clearly want to continue to spend ahead of growth and are we likely to see again discretionary SG&A expenditures continue to be something that may, I don’t want to say gets out of hand because I think you’re doing to the right thing to run the business, but you clearly seem to be spending a lot more here with much less leverage.

David L. Richter

No, I wouldn’t say that’s the case. I think the leverage is still there. We’ve increased our corporate spending quite a bit in the last two years, some of that’s related to growth, some of that’s related to being a public company. But if you look at the top line and I think obviously everybody’s job on this call whether a professional analyst or not is to look to through the holes in the Swiss cheese. But we’re seeing some unprecedented growth for our industry, unprecedented growth for Hill. It takes money for that to happen and it takes money after it happens to be able to manage the business to make sure that it continues and we’re going to continue to try to maximize the business for the long term not manage it quarter to quarter. That may be unique amongst other companies but I think we have the ability and discretion to do that and while we’re not going to ignore the bottom line I think that for us continuing to improve the quality of the company and the quality of the people that work here, the geographic reach of the business, our ability to sell new work to continue the growth that we’ve seen, that’s going to continue. I think what you will see because we’ve heard it from you guys is that SG&A is, we’re in focus and I think that we will take a renewed look from now through the end of the second quarter at things that may have gotten a little out of control. Not the easiest for us to see the corporate spending and I think we’re going to delve a little deeper into the operations themselves and make sure that we’re not spending more than we need to be and make sure, we’re certainly getting leverage, we may not be getting as much as you expected as fast as you expected but we don’t think there’s any issue with the model and we’re going to continue to try and maximize our long term growth and we think that’s what’s going to maximize our long term shareholder value.

Arnold Ursaner – CJS Securities

Two more very quick questions for John, tax rate guidance for the upcoming year? I know you mentioned the tax benefit in Q1 but for an annualized number what should we think on tax rate? And what should we be thinking here for fully diluted share count?

John Fanelli, III

On the tax rate, our effective tax rate that we were using is anywhere between 14 to 16% which includes that tax benefit in the first quarter.

Arnold Ursaner – CJS Securities

And fully diluted share count?

John Fanelli, III

It will be around 41 million.

Operator

(Operator Instructions) Our next question will come from the line of Kevin Liu with B. Riley & Company.

Kevin Liu - B. Riley & Company, Inc.

The first question, you guys have talked in the past about getting more into the energy side of the business, I just wondered if you could provide us with an update on your progress on getting some more oil and gas work, also on any sort of progress you might be making in the joint venture that you guys announced.

David L. Richter

That was the one joint venture I did announce because it happened in the fourth quarter but we entered into a joint venture arrangement with the Egyptian Ministry of Petroleum for two of their operating companies and we are going to be building a project management based in Egypt to manage oil and gas projects principally for their behalf but also the ability to chase other clients and as you can imagine with a government bureaucracy that effort is taking a little longer than we expected it to get off the ground. We think the impact it’s going to have on us in 2008 is minimal, that the costs will be relatively minor as well as we ramp that up slowly but by 2009 we could be seeing some significant work and some significant profitability out of that joint venture. We also got at the end of 2007 for us what was a major and long pursued contract with the Kuwait National Petroleum Company, about a $20 million contract for us on what’s going to be the largest refinery in the Middle East, their Al-Zour refinery as well as some retrofit of some other older refineries and they are a major potential client for us. We have gotten a lot of work, there hasn’t been any press releases because it’s been done in the claims group sort of behind the scenes, but we’ve done a lot of work on the [Kashigan] deals in [Kazitstan] helping their government manage the essentially $135 billion construction program developing those fields and we think that’s going to be a long term client for us. The effort to open a Tokyo office is really driven by some of the work that we’ve done over there on the claims side, principally for some big contractors that are involved in oil and gas construction in the Asia Pacific region and we want to get closer to our clients and make sure they continue to use us. Most of the work that we’ve done historically is on the claims side but we think we can leverage that, both experienced relationships and the individual people’s experience into a lot of work on the PM side and that market is just so huge and right now still is a very small piece of what we do.

Kevin Liu - B. Riley & Company, Inc.

And then in terms of the construction claims group, I know during 07 you guys mentioned that you were able to kind of raise prices there I guess in the neighborhood of 10%, what should we expect for 2008? Are you going to be able to raise prices nearly as much and also kind of what your expectations at this point are for maybe utilization rates versus 07?

David L. Richter

We increased on average our claims fee schedules by about 8% on January 1st and the group’s average salary increase was 5% so we see some increased leverage there.

Kevin Liu - B. Riley & Company, Inc.

And then as we look at the new acquisitions for Shreeves and Gerens I know you talked about kind of the annual revenues that they’ve delivered, what type of backlog do you see for them right now?

David L. Richter

Gerens has about, I always pronounce it the Spanish way because that’s the way they pronounce it, Gerens has about $40 million in backlog that was not included in the $416 million for year end and Shreeves had about $3 or $4 million of backlog so if you add that in we’re talking about $460 million of backlog all together and we see that as very strong. The Spanish market is holding up very well, they’re continuing to see a lot of new work and a lot of optimism for work what Gerens can do for us.

Kevin Liu - B. Riley & Company, Inc.

And then I guess just lastly, kind of more generally, there’s obviously a lot of much higher wage and material costs throughout the world, just curious of that’s causing any sort of I guess difficulties in terms of your project management capabilities and if there’s been any sort of impact relative to your relationships with the project owners that you’re working with?

David L. Richter

No, not really. Obviously wherever there’s a very strong construction market labor is going to be in very high demand and salaries are going to be heading North. Really the two biggest places where we seeing that happening are [inaudible] and Las Vegas but Las Vegas is still strong not in the housing market but in the stuff that we chase, the hotels, casinos, infrastructure, schools and a lot of other areas. I’ve seen a lot of articles, they’re very pessimistic about the construction sector but it’s really because of what I think is a horrible residential market which we’re not in and I think a peaking and starting to head down commercial office market in the US which is an extremely small percent of what we do, less than 1%. Everywhere else we’re seeing nothing but strong growth, you got oil at $108 a barrel so everything that’s happening in the Middle East is not anywhere to being a bubble. We see that continuing for the long term and obviously in that kind of a market we’ve got multi-billion dollar projects being announced every day, you’re going to have some upward pressure on salaries but our clients acknowledge and understand the business we’re in and when our costs go up their costs have to go too.

Kevin Liu - B. Riley & Company, Inc.

And actually one more question in terms of the European PM business that you mentioned was a little below your expectations, I’m just curious given the constructure there do you see opportunities that take anything out of that business or is this really a business that you just have to grow in order to get better leverage?

David L. Richter

No, I think it’s a business we have to continue to look to grow. One of the downsides of where we started which was the Balkans is that it seemed like every time we went into a contract it was a new country so we weren’t getting a lot of synergy or economies of scale from growing it and it’s still pretty diverse across that region. We’re doing work in Romania, Serbia, Croatia, Latvia, Macedonia, Turkey. We’re doing work now in Greece so I think as it continues to grow we’ll see a lot of leverage out of that and our expectation is a return to profitability.

Operator

Our next question will come from the line of Chris Bemen with Morgan Joseph.

Chris Bemen – Morgan Joseph

I was wondering if maybe you could just talk a little bit more in terms of the profitability and pricing of the revenue that you’ve already booked and how does that compare to what you have in your backlog and new business that you’re booking in terms of the potential probability in any pricing issues if any?

David L. Richter

Our pricing really doesn’t change quarter to quarter and year to year. Our industry both projects and claims is highly competitive, we haven’t seen real shifts in pricing either way so our pricing therefore, you would see it in our gross margin, is relatively consistent over time. Certainly the overseas markets are a little more competitive on pricing than the US markets and we’re seeing more growth over there so that’s been a light, I mean really a margin downward pressure on our gross margin, the claims business as we integrated Knowles and that picks up its profitability and we’ve had a little bit of ability in claims to push our pricing higher. That sort of offset that, so it’s been relatively consistent. The new work we’re winning if anything because it’s bigger and longer term work tends to be a little more profitable but you’re really not talking about any significant changes in that regard.

Operator

Our next question will come from the line of Bill Sutherland with Boenning & Scattergood.

William Sutherland – Boenning & Scattergood, Inc.

David, could you speak to maybe target profitability in the project management group given all the changes in the mix since the last year or two?

David L. Richter

We’ve been running at a fairly consistent 20% operating margin. We took a little dip in the fourth quarter to 18% but we see that being at least 20% going forward and we’re hoping in the long term we can start to tick that up a little bit, 21%, 22%. But I don’t think you’re going to see long term much higher than that. I really don’t see any downward pressure on our margins.

William Sutherland – Boenning & Scattergood, Inc.

And a prior question about your US business, I know you have almost no office, you have zero residential, how do you characterize your commercial in the US and about how much of the total is commercial?

David L. Richter

When you’re looking at the US project management business it’s really predominantly public sector work probably 75 to 80%. I think with KJM it’s probably even is more so in that regard. Maybe on utility clients but we aren’t doing any commercial work whatsoever and the private sector work that we’re doing is not principally for developers, it’s typically for Fortune 500 type of clients, industrial clients. We’re doing a significant amount of work for Merck, for Sunoco, for utilities and it’s not a lot of work for developers. And literally all that pops into my mind that we’re doing in the US is two commercial projects one of which is the Comcast Center in your hometown which is finishing up early this year. A sort of suburban corporate business park in New Jersey and I really don’t think there’s any major projects other than those two. We’re chasing some big projects in the US but if it’s 1 or 2% of our business in the US I’d be surprised.

William Sutherland – Boenning & Scattergood, Inc.

You may have given this out or John did, I got on a few minutes late, what was the corporate expense number in Q4?

David L. Richter

John, do you have that? It was in the press release.

John Fanelli, III

Yeah, I have it. The corporate expense piece?

David L. Richter

Yeah, I have $4.8 million.

John Fanelli, III

$4.8 million.

William Sutherland – Boenning & Scattergood, Inc.

And then last David, I’ve been reading about some of the immense plans going on in Abu-Dhabi as far as development have you guys been sort of positioned there yet or have you been active there?

David L. Richter

Yeah, you know everyone’s focused on Dubai when they ask questions or when they think we’re talking about the Middle East it’s all in Dubai, it’s really isn’t for us. We’ve made a real strong effort to be growing outside of there. Our big push as you know in the last six to 12 months we’re into Saudi Arabia and to North Africa and we see Abu-Dhabi even though I think we’ve got a fairly strong presence there now in some really major programs, continue to grow and surpassing the kind of construction spending that Dubai has had in the last five to seven years. And I mean surpassing it by a wide margin. There’s a tremendous amount of wealth in Abu-Dhabi much more so than in Dubai. The kind of success and fame that Dubai has brought upon itself with the construction program and they’re going to be playing catch up. We’ve got a major presence in Abu-Dhabi and we think they’re finally going to grow.

William Sutherland – Boenning & Scattergood, Inc.

And actually one last one, in the China joint venture how quickly do you think you guys could see activity there?

David L. Richter

My guess is we could see work in as little as six months. We’re going to spend about a month just getting the company up and running in our office space with our partner and we’re going to have some management move over there and begin the process of selling work and it wouldn’t surprise me if we didn’t have one of our projects within six months. Don’t expect though the joint venture to have limited impact on us in 08.

Operator

Our next question will come from the line of Michael Chapman with Enrossi Capital.

Michael Chapman – Enrossi Capital

Parts of this question have been addressed earlier but perhaps it would be helpful to kind of review the various joint ventures, how much is expense is going to go into each in the short run prior to projects being acquired and what your expectations are on the timing for each in terms of project acquisition.

David L. Richter

In Egypt we expect to be putting in no more than $500,000 this year into the joint venture and that’ll principally be covering startup costs and overhead expense until the company gets up and running and profitable. For the McCann Hill joint venture we think that number is closer to $1 million, maybe $1.5 million and that company I think is probably going to be the fastest to get to profitability because we’ve got a private partner that is as aggressive as us if not more so in getting this business up and running and off the ground. The Chinese joint venture I think is going to be very limited amount of expense. There’s no capital contribution whatsoever but we need obviously to fund whatever the overhead expense is until that business is profitable. I think that’s going to be relatively minor and given the partner that we have I think up and running the fastest of the bunch. We’re also talking about another potential joint venture for a client in North Africa, a private developer setting up essentially something very similar to the Egyptian Ministry. I’m not sure where. We have the opportunity to have sort of a locked in client, somebody for whom we do all of their project management work, they become a partner so they get a dedicated workforce focused on them and half the profits back for a service they were giving away, it’s a very synergistic relationship and we’re looking to do more of it and we think that might get off the ground in the second quarter. So these things are real big opportunities for us. They generally have a little bit of a startup cost but believe me that’s going to be more than offset by the profits that we are able to bring back from these efforts.

Michael Chapman – Enrossi Capital

And in each case are they JVs fully consolidated with minority interest backed out?

David L. Richter

Yes. That was important to us in each case even when we owned 50% we have either majority control on the Board or we have the right to name the CEO which gives us operational control and therefore the ability to consolidate their financials.

Michael Chapman – Enrossi Capital

And the various overhead and startup expenses prior to project revenue, would they be classified in the SG&A counts?

David L. Richter

That’s correct.

Michael Chapman – Enrossi Capital

And in your earlier guidance of $36 to $38 as well?

Curt

Yes.

Michael Chapman – Enrossi Capital

As far as revenue coming to the various JVs could you review that, your expectations on timing?

David L. Richter

Pretty much the same for all of them which is the middle of 2008. The Egyptian one was the first one to get off the ground and probably the slowest one to get going but I think by the third quarter I would expect that we’d have revenue out of all three of them.

Operator

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

David L. Richter

Thank you everybody. We appreciate your time this morning. For those of you that are so inclined if you’re tired of listening to my voice and actually want to see what I look like, I’m having the pleasure of being on Neil Cavuto’s show on Fox Business Channel tonight between 6 and 7. Just dial in. Other than that thank you very much. We’re very happy and excited about the performance we had last year, the growth that we’re seeing and the opportunities that are being presented to us both for new work, for new clients, for acquisitions. We think we’re going to have a fantastic 2008 and happy year along with us. Thank you very much.

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 Q4 2007 Earnings Call Transcript
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