Hill International Inc (HIL) 2009 Q4 法說會逐字稿

Good day everyone and welcome to the Hill International 2009 fourth quarter conference call. I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. I will now turn this conference over to Mr. Devin Sullivan of the Equity Group.

Thank you, Christy and thank you for joining us this morning. Our speakers on today's call will be David Richter, President and Chief Operating officer of Hill International and John Fanelli, the Company's Vice President and Chief Financial Officer. Before we get started, I'd like to remind everyone that statements made in today's call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And it's our intent that any such statements be protected by the Safe Harbor created thereby. Except for historial information, the matters set forth during this call including but not limited to any projections of earnings or other financial items, any statements concerning plans, strategies, and objectives for future operations, and any statements regarding future economic conditions or performance are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, and assumptions and are subject to certain risks and uncertainties. Although Hill believes that the expectations, estimates and assumptions reflected in forward looking statements are reasonable, actual results could differ materially from those projected or assumed in forward-looking statements. Important factors that could cause actual results performance or achievements or industry results to differ materially from estimates or projections contained in the forward-looking statements include modifications and termination of client contracts, control and operational issues pertaining to business activities conducted on Hill's behalf or pursuant to joint ventures with other parties, difficulties incurred in implementing acquisition strategies, the need to retain and recruit key technical and management personnel and unexpected adjustments and cancellations related to back log.

Additional factors that could cause actual results to differ materially from forward looking statements are set forth in the reports filed with the Securities and Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statements. Now, I'd like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead, David.

Thank you very much, Devin. And thank you to everyone else joining us this morning for our quarterly earnings conference call. Yesterday, we announced both our full year 2009 and fourth quarter financial results. On today's call we're going to primarily focus on the fourth quarter numbers. But during Q&A we can obviously answer other questions that anyone may have regarding the numbers for the full year.

We had strong performance in 2009, especially given the economic head winds we faced. We began to see these lessen quite a bit over the course of the year. And that was born out by our strong finish in our fourth quarter.

For the fourth quarter 2009, Hill's total revenues grew to $110.3 million, an increase of 5.4% from the fourth quarter 2008. Consulting fee revenue for the fourth quarter declined slightly to $93.6 million, a decrease of $1.6 million from the prior year's quarter. Operating profit for the fourth quarter nearly doubled to $7.5 million, an increase of 98.6% from the fourth quarter of 2008.

Our operating margin as a percentage of consulting fees doubled in the fourth quarter to 8.0% from 4.0% from a year ago. This was driven by a big decline in SG&A expense from 42.5% in the fourth quarter of 2008 to 36.7% in the fourth quarter of 2009. As a result of that lower overhead expense as well as a lower income tax rate, Hill's net earnings for the fourth quarter rose sharply to $4.6 million or $0.12 per diluted share based on 39.6 diluted shares outstanding. That was up 146.2% from $1.9 million or $0.05 per diluted share based on 40.7 million diluted shares outstanding in the fourth quarter of 2008. We also look at our financial performance sequentially, meaning verses the immediately prior quarter.

From the third quarter to the fourth quarter 2009, Hill's total's revenues were up 6.9%. Consults fees were up 8.0%. The fourth quarter was our best quarter of the year for both total revenues and consulting fees. We were very please to see a positive trend in our top line numbers as 2009 came to a close.

Our operating profit was down 8:2% and our net earnings were down 21.8% in the fourth quarter versus the third quarter despite the above increase in consulting fees. That was primarily the result of exceptionally strong profits out of our Iraq operation in the second and third quarters which were not repeated in the fourth quarter. Hill's total backlog at the end of 2009 increased to $620 million, up 3.9% from $597 million at the end of the third quarter. 12 month backlog at the end of 2009 increased $282 million up 2.2% from $276 million at the end of the third quarter. All in all from our perspective, a very solid quarter. And as I said earlier, a strong finish to the year.

Looking at the performance of our two operating segments separately, our project management group had total revenues for the fourth quarter of $86.4 million, an increase of 4.7% compared to the fourth quarter 2008. Consulting fees for the projects groups in the fourth quarter however were down to $70.2 million, a decrease of 4.9% from the prior year quarter. Operates profits for the project groups in the fourth quarter was $10.0 million, equivalent to 14.3% of consulting fees, a drop of 8.6% compared to the fourth quarter of 2008. In our construction claims group, total revenue for the fourth quarter increased to $23.9 million, an increase of 8.3% over the fourth quarter of 2008. Consulting fee revenue in the fourth quarter for claims group increased to $23.4 million, an increase of 9.7% over the year earlier quarter. And operating profits for claims group was $2.9 million in the fourth quarter, equivalent to, 12.6% of consulting fee revenue, a jump of 120.6% from the fourth quarter of 2008.

As we've discussed on prior conference calls, the claims group saw a very challenging and very difficult first half to last year with significant delays in new assignments impacting both it's revenues and profits for the first two quarters. We saw a significant turnaround beginning of June of last year, with new work beginning to be awarded and noticed that proceeds starting to come in on previously awarded work. The numbers in the second half of the year bore this out. In the second half of 2009, consulting fees from the claims group were $44.8 million, up a modest 5.9% from the first half but driving a strong 40.5% in operating profit for the same period to $4.8 million or 10.8% of consulting fees. With the fourth quarter being the claims group's best quarter of the year profit wise, we are expecting this positive trend will continue into 2010.

The entire year, we had cash flow from operations of $14.2 million Company-wide, a net cash flow of $10.5 million. We ended the year with $30.9 million in cash and cash equivalents. Most of the cash generated from operations in 2009 was due to improvement in our DSOs, our Days Sales Outstanding on our receivables and our aggressively collection efforts during the fourth quarter. With respect to our balance sheet we ended 2009 with a very strong balance sheet. Total assets of $291.5 million, including as I mentioned earlier, cash and cash equivalents of $30.9 million, but total debt of just $28.2 million. Our shareholders equity rose to a record $159.6 million.

Pursuant to the merger agreement between Hill and Arpeggio Acquisition Corporation from 2005, certain stock holders of the formally private Hill were entitled to receive up to additional 6.6 million shares of the combined Company's common stock contingent upon us attaining certain targets for earnings before interest and taxes or EBIT over a four year period. In 2009, Hill's EBIT was $25.8 million exceeding the 2009 earn out target of $24.9 million. As a result, the earn-out shares for 2009 have been earned and an additional one million shares of Hill's common stock, the last tranch will be issued shortly, although these shares will count as part of Hill's diluted share count beginning on January 1. Once those earn-out shares are issued, there will be approximately 40.3 million shares of our common stock issued and outstanding. There are no further contingent sharings that can be earned pursuant to the merger agreement.

At the end of the fourth quarter, we made two acquisitions. On December 15th, we bought Boyken International, a 40 person project management firm headquartered in Atlanta with additional offices in Orlando and Houston. Boyken significantly expands our resources and experience in the southeast United States and the Caribbean and gives us stronger capability in the health care, higher education and hotel market. On December 31st, we also acquired TRS consultants, a 40 person project management firm headquartered in San Ramon, California with several offices throughout Northern California. TRS gives a much stronger base in that state and adds significant capability to us in the transportation and infrastructure market, especially in highways and bridges. A very strong market in California. We expect the two acquisitions combined to add approximately $0.01 to our 2010 earnings per share.

Speaking of which, in 2010, our management employees are working hard to achieve even better financial performance this year for our Company and our shareholders. We continue to focus on growing our business through both additional acquisitions and our own organic business development efforts.

We going to continue to focus on minimizing our overhead costs with the goal being to continue to drive our operating profits and our operating margins higher. And we're going to continue striving to be the best project management and construction claims firm in the world. With that, our Chief Financial Officer, John Fanelli, and I are happy to take any questions that you may have.

Any questions? Operator?

(Operators Instructions) Please stand by for the first question. Your first question comes from the line of Arnold Ursaner of CJS Securities.

Good morning, David.

Good morning.

My first question relates to was there any revenue contribution from the revenue acquisitions in the quarter?

There have been a minor contribution from Boykin, which we acquired on the 15th. I would say, it's on the order of revenues of a $0.25 million dollars.

The proverbial rounding error. You've achieved the $12.6 million operating margin in claims group in the fourth quarter. You've previously have targeted an operating margin that could reach 15% given the cost controls you've put in place, the work you're looking at. Is your view that we could achieve that number in the upcoming year?

Yes, historically claims tends to run in the 10% to 15% range. We've been a little below that. Certaintly, last year in a quarter, we did a 4% operating profit. We've had at times exceeded 15%. I think 15% is achievable during 2010.

And you have enough inquiries and incoming work to give you that sense of confidence? Because that is one of your most leveragable businesses.

Yes we see a pretty active market in claims. Certainly the market from a year ago, we've seen is pretty much gone. The world has returned to normal. We have work coming in the door. And same thing is truein the project management side. There's plenty of work out there. We just have to continue to win more than our fair share of it.

Taking a step back, David, I think in the past when you were in a rapid growth phase, you added head count or SG&A in anticipation of growth. I think on of the changes that has occurred in your business model in the last year, is you've built the infrastructure and don't feel the need to get ahead of yourself. How should we think about the SG&A and the upcoming year as a percent of expected revenue?

We gave a target range last year to give some guidance of 36% to 38%. I think the number for the full year was about 36.7%. Is that right, John? That's sort of a range for 2010, we can give you guidance of about 35% to 37%.

You do hope to improve by a full hundred basis points.

Ideally, yes. And we are going to continue to be, I know we talked about last year, having taken out $10 million of overhead cost out of our business. But we're going to continue this year to be aggressive on minimizing the overhead cost. As we continue to grow, we want to do so profitably and with improved operating margins. And we certainly are not getting back to that build at any cost mode.

Thank you very much.

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

Yes. First, I want to ask about the corporate expense line which came down nicely in the second half of this year. Is that a new run rate that we can plan on? Or should we, is there room to take it down further or reason to think that would go back up over the next year?

This is John Fanelli. I believe it would remain the same. I don't think at this point, we are going to leverage at this time best we can. But I think the run rate in the fourth quarter is something you can use.

Yes, if you take a look at the press release, we got our corporate expense which is the component of SG&A down to 5.8% in the fourth quarter of 2009 versus 9.2% in the earlier quarter. We've been aggressive in keeping that down. And I think that's a run rate that will continue.

I believe last quarter your saw some project cancellations. Has that activity died down? Or do you feel better about the stability of your backlog after the last three or four months here? And if you could touch on from a risk perspective, the bad debt exposure in Dubai given the developments there since the last time we talked.

Let me talk about the projects first. I'm not aware of any major cancellations that we had in the fourth quarter. We are as comfortable now as we've been with our backlog. We don't anticipate anything being cancelled, but obviously some projects here and there sometimes do. We've been aggressive in focusing on receivables. Certainly, in the fourth quarter, we did. And we continue to do so. We've been aggressive in taking reserves for bad debt as necessary. I think, correct me if I'm wrong, John, I think we're pretty comfortable where our reserves are today. Our project management operations in Dubai are relatively small today compared to a year, year and a half ago. And I don't think we have any concerns regarding the ongoing work that we're doing there.

Okay. And then last question if I could. Within the claims segment, your revenue went up pretty significantly sequentially and your expenses or cost of services went down. Can your just help me reconcile those two moves?

Just that we've been aggressive in bringing the work in the door and keeping our costs down.

Have you been letting go of people in that business to drive that down? Or is it just a mix of worker? That's what I'm trying to understanding.

A mix of work is some of it. Also the cost cutting. In fact, we're constantly unfortunately having to let people go if there's not enough work sustain them and keep them efficiently utilized in any given period of time in that particular office. But no, we're not on any aggressive cost cutting or downsizing of the claims group. In fact, quite the opposite. We're anticipating a much better 2010.

Okay, thank you.

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

Good morning, guys.

Good morning, Richard.

David I wonder if you could just give the breakdown of backlog for total and 12 month between project management and claims. And then, it seems like the implied new order rate was a pretty decent number. If you could tell us which areas of strength in terms of new awards where you're seeing it?

Richard, the breakdown the back log at December 31, 2009, the project management group was $583 million, construction claims, $37 million, for a total of $620 million. The 12 month backlog for project management was $249 million and the claims business was $33 million for a total of $282 million.

Thanks.

Richard, we're seeing strength in our markets, primarily in the Middle East, North Africa, and the US. And then in the US, everyone the whole kind of commercial business in the US is well known it's not doing well.

Where are you seeing areas of strength? Is it institutional? Is it infrastructure?

Keep in mind, (inaudible) of the US is the hardest hit, which are commercial, retail and residential. We have almost no exposure to. About 85% of our business in the US is public sector. In the areas of transportation, infrastructure, water, schools, public buildings, things like that. The 15% that's private sector is typically for Fortune 500 companies, industrial companies, utilities, things like that. And those markets are holding up as well. That's why we're seeing strength in the US market now.

And then on the Stanley Baker, Hill, as he's winding down, how should we think about that going forward into next year?

Yes. We had strong second and third quarters of last year. We saw the equity and affiliates line significantly less profit coming out of that in the fourth quarter of 2009. Over the course of this year, the project is going to be winding down. And we expect it to be completed by the first, by the beginning of the fourth quarter of 2010.

Okay. Now are you guys actively building stuff in Afghanistan or are you going to let Iraq wind down?

Both. There's no continuation in Iraq as far as we're aware of at this time. Although we are chasing work other than for the Corps of Engineers in Iraq. We are pursuing work for the Corps in Afghanistan, but outside of the HBSH joint venture. And we're pursuing multiple other projects that we think if any of them come in could more than replace the work in Iraq over the last several years.

Okay. Thanks. I'll get back in queue.

Your next question comes from the line of Bill Sutherland of Benning Incorporated.

David and John, good morning.

Good morning, Bill.

Do you all see as you kind of see the year unfolding for Hill, I'm just kind of thinking about quarterly phasing. And if you could talk about how the businesses are progressing relative to the normal seasonal/other factors that drive the way the quarters progress.

Our business really isn't seasonal. But typically, the first quarter is our worst of the year. It tends to ramp up second and third quarters. And then the fourth quarter tends to be pretty even with the third quarter usually.

Okay

So I wouldn't anticipate 2010 to be any different than that.

Okay. Okay. Pricing I know is not really an issue for PM side. I'm just curious what you'd say on that front, particularly, for CM.

We haven't seen any real pricing changes. Maybe a little bit of downward pressure but only marginally so. The reality in both of our business is that our clients are not picking us or anybody else based primarily on price. Based on technical capability and our ability to either manage their project successfully and resolve their claims successfully. That is far more important to the client than picking somebody who is 10% cheaper than we are to save a little bit of money. We haven't seen in the worst of the last 18 months in this recession. Any real significant pricing pressure that's impacted our business.

David, remind me on the claims, do your guys have success fees that can move the needle in any given quarter?

We very rarely ever have an arrangement for success fee.

I just wanted to double check that. Clarification on what you just said about Stanley Baker Hill. The line down in Iraq, but you said you're pursuing work in Afghanistan away from the JV or with the JV.

Outside of the JV.

So SPH is not going to do anything once Iraq winds down. Is that what I'm taking away from that?

At the moment, it doesn't have any work other than the Iraq work. But, we may pursue work in the future or subsequent years, as SPH. I'm sure the corporate entity will survive for a while. John, quick, tax rate to use for 2010?

I would use between 15% and 20%.

Okay. And then last, would you, I guess rank order of your thoughts on the use of cash, David. Thanks.

Yes, our use of cash is going to be to pay down debt and focus on acquisitions. Not really much else we can do with the cash. We don't pay dividends.

So that's -- so the debt level you'd like to see, you'd like to work that down. I mean you're not in a situation I guess what I'm trying to ask as far as ratios where you're at a comfort level keep it where it is and maybe increase it to get deals done. You're trying.

Let me give you a better answer than the weak one I just gave you. We are focused on using our borrowing capacity and cash to continue to grow the business. We are at a level of debt that we're more than comfortable with. Is $28 million of total debt as of the end of the year. We have $100 million credit facility with our consortium of banks. And we see using that facility to continue to acquire the best firms that we can find at reasonable prices. We've seen a lot of firms out there lately for unreasonable prices that we haven't been willing to close on. But we're continue to search. We're in talks with several. We expect to be more aggressive on the acquisition front in 2010 than we were last year. And I think, $100 million probably is about the right number of as today with where the level of comfort is on debt. As we get bigger and stronger, that level may rise.

Sure. Okay, thanks.

Thanks, Bill.

Your next question comes from the line of Jeff Rositti with Montgomery Scott.

This is Jeff Rositti for Joe Forest. Is there any expected time frame on potential decision for work in Afghanistan?

No. We're not sure. There's a proposal in right now that is being considered. My guess is probably in the second quarter of 2010. It is not going to be as far as I know anywhere on the same order of magnitude as Iraq has been.

Okay, great. And any kind of guidance around the two recent acquisitions what they might add to the top line? You mentioned a penny to the bottom line.

Combine we expect revenues in 2010 from both of them in the range of $12 million to $15 million.

Okay. Thank you very much.

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

Good morning. In terms of the backlog exiting the quarter, how much of the growth relative to Q3 was from the acquisitions?

Most of it, about 90% of it.

Okay. And given some of the cutbacks you made just to eliminate excess capacity in cost of TRM and claims groups, just wondering how comfortable you are with the level of strength right now? And what you might need to do on the hiring side if we start to see a nice pickup in growth across both segments?

Typically, we'll hire, when you're talking about billable people, they're going to be revenue generating. We tend to make those hires after we get to work. (inaudible) A deep bench. What we've been focused on is doing more contingent offers, where we can use people's resumes and if we win the work bring them on board then, as opposed to before we get the work, which is more cost effective. We're using people on a part-time basis more and more. So we're not paying for them when they're not billable. I don't anticipate changing that. And just to follow-up on SPH.

As we assume that the work is winding up for what sort of revenue or income levels we should expect as a model for 2010. And then once all of that is gone this year, what's the rest of the contribution from the other JVs to that line?

I would probably start with the fourth quarter and model over the following three quarters. We expect it will be essentially zero in the fourth quarter.

Great. Thanks a lot.

(Operator Instructions) Your next question is a follow-up from the line of Arnie Ursaner of CJS Securities.

Arnie, go ahead. If you're talking, you're on mute. Within the SG&A line, were there expenses for failed deal that impacted that line.

No, there were not.

Okay, thank you.

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

Thank you, everybody. We appreciate your time this morning. We're very happy with how we did in the fourth quarter. We're glad 2009 is behind us, although we did from our perspective exceptionally well compared to our competition. For the year, we expect 2010 is going to be significantly better. And we're looking forward to delivering better performance for our shareholders this year. Thank you all very much. Talk to you in a few months.

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