Hill International Inc (HIL) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Hill International first-quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Devin Sullivan of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you, Jackie. Good morning, everyone, and 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 begin, I would like to remind everyone that certain statements contained during this call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is Hill's intent that any such statements be protected by the Safe Harbor created thereby.

Except for historical information, the matters set forth herein including, but not limited to, any projections of earnings or other financial items, any statements concerning plans, strategies and objectives for future operations, and any statements regarding future economic conditions or performance are forward-looking statements. These forward-looking stigmas 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 (technical difficulty) in forward-looking statements include modifications and termination of client contracts; control and operational issues pertaining to business activities conducted on Hill's own behalf or pursuant to joint ventures with other parties; difficulties incurred in implementing the Company's acquisition strategy; a need to retain and recruit key technical and management personnel; and unexpected adjustments and cancellations related to backlog.

Additional factors that could cause actual results to differ materially from forward-looking statements are set forth in the reports filed with the Securities and Exchange Commission. Hill does not intend and undertakes no obligation to update any forward-looking statement.

Having said that, I would now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. Please go ahead, David.

Thank you, Devin, and good morning to everyone joining us this morning for our quarterly earnings conference call. Yesterday, we announced our financial results -- I'm sorry -- Friday after the market closed, we announced our financial results for the first quarter of 2011.

Needless to say, the first quarter was an extremely disappointing one for our Company as a perfect storm of issues negatively impacted our financial performance and led to the first money-losing quarter ever for Hill as a public company. This morning, we will discuss in detail the various reasons for this loss and what we have done and are doing to address these issues so that we can improve our performance as much and as quickly as possible.

For the first quarter of 2011, Hill's total revenue grew to $123 million, an 18% increase from the first quarter of 2010. Consulting fee revenue for the first quarter rose to $94.3 million, up 3% from last year's quarter. This was due to an 8% organic decline, offset by 11% growth from the four acquisitions we made since last year's first quarter.

Our gross margin was down slightly from a year ago, by 90 basis points, to 41.3% for the first quarter. But our SG&A as a percentage of consulting fee revenue was significantly higher in the first quarter at 47% versus 40.2% for the year-earlier quarter.

As a result, Hill had an operating loss for the first quarter of this year of $5.3 million versus an operating profit of $2.7 million for the first quarter in 2010. Our net loss for the first quarter was $5.6 million, or a loss of $0.15 per diluted share, based on 38.3 million diluted shares outstanding.

This result was driven by a variety of negative factors that impacted us in the first quarter, including a loss of high-margin, low-overhead work in Iraq since the first quarter of last year. Iraq contributed $2.3 million of operating profit to us in the first quarter of 2010, but 0% in the first quarter of this year, since the work wrapped up in the fourth quarter of last year.

We had a loss of high-margin, low-overhead work in Libya during the first quarter as a result of the civil unrest in that country. Our Libyan operations saw a decline in operating profit of $1.4 million versus what was made in the first quarter of 2010.

We had a major downturn during the first quarter in our International Construction Claims business, which saw that operation go from a $4.2 million operating profit in the first quarter of last year to a $400,000 operating loss in the first quarter of 2011. This is despite the addition of a high-margin operation in Australia which we acquired last year. The first-quarter 2010 number, however, included an unusual $2 million contingency fees that was not repeated in the first quarter this year.

Also, the first-quarter 2011 performance was impacted by the settlement of a major claim that was being worked on in our UK operation. The result of that settlement was that 12 billable professionals were put on the bench for several months during the first quarter, and we lost $1.4 million in anticipated revenue with just about no decrease in our labor costs related to that claim.

As we have said many times before, unfortunately, the performance of our Construction Claims business can be highly erratic and unpredictable, and when work in that group is slow, the unapplied portion of our labor costs gets shifted into SG&A, which drives up that number.

We had a significant increase in our overhead cost during the first quarter as a result of the four acquisitions that we made since the first quarter of 2010 -- the Construction Management division of dck, McLachlan Lister, TCM Group and Engineering S.A.

We increased our SG&A costs by $2.9 million during the first quarter as a result of adding the SG&A costs of those four companies to our own. We increased our amortization expense during the first quarter by $900,000 as a result of those four acquisitions. And we also incurred due diligence and closing costs during the first quarter in connection with our acquisition of Engineering S.A. in Brazil, which closed in February 2011, that amounted to $300,000.

While these costs are significant, at the same time, we added operations generating about $65 million of annual consulting fee revenue, while at the same time broadening our geographic footprint away from a reliance on the Middle East and North Africa to places that we see as key to our future growth, including California, Australia and Brazil.

We had significant one-time costs in connection with our real estate. We moved our London office and had significant costs related to that move, as well as briefly paying rent on both the old and the new space. We nearly doubled the size of our New York City office, and we also closed our office in Northern New Jersey. Combined, our real estate issues increased our SG&A costs in the first quarter by about $500,000 versus the year-earlier quarter.

As a result of salary increases that we gave on January 1, we had certain balance sheet adjustments, such as accrued vacation and other similar items, that increased our SG&A by $600,000 in the month of January.

We also continue to invest in our development businesses. The operating losses of these businesses are included in our corporate overhead costs for the first quarter and amounted to $600,000 in the quarter, an increase of $400,000 from the first quarter of 2010. While these businesses continue to cost us money in the aggregate, we expect that in the second half of this year they will see a significant improvement in their revenues and profitability.

Finally, in response to what was looking like a very bad quarter, we took corrective action early by cutting approximately $9 million of annual overhead expense. These cuts took place in both the first and second quarters of this year. While the cuts had almost no benefit to us in the first quarter, we did incur about $300,000 in severance costs in the first quarter. We expect a similar number in the second quarter as well.

Now let's take a look at the performance of our two operating segments separately. Total revenue at Hill's Project Management Group during the first quarter was $97.9 million, an increase of 24% from the first quarter of 2010. Consulting fee revenue at the Projects Group in the first quarter was $69.8 million, an increase of 4%. That growth consisted of a 6% organic decline, more than offset by 10% growth from the three acquisitions made in this Group since last year.

Operating profit for the Projects Group for the first quarter -- excuse me -- let me change that for a second. Higher gross margins in the Projects Group by 140 basis points was more than offset by a 380 basis point increase in its SG&A costs, resulting in a drop in operating profit of $2.8 million, a decrease of 46% from the prior year's quarter.

Operating margin for the Projects Group was cut nearly in half to only 3.9% in the first quarter from 7.6% in the year-earlier quarter. This is well below what this Group has earned historically, which has been in the 15% to 20% range for operating margin. So this is an area that needs to improve significantly for us.

As discussed earlier, the results in our Construction Claims Group were significantly worse. Total revenue in our Claims Group during the first quarter was $25.1 million, a decrease of 1% from the first quarter of 2010. Consulting fee revenue for the first quarter of the Claims Group was $24.4 million, also a decrease of 1% from last year's quarter. This negative growth consisted of an organic decline of more than 12%, offset by a nearly 12% growth in the acquisition last year of McLachlan Lister.

Gross margin in the Claims Group was down 680 basis points, and SG&A expenses skyrocketed from 41.7% of CFR to 55%. As a result, the Claims Group had an operating loss of $700,000 in the first quarter compared to an operating profit of $4.2 million for the first quarter of last year.

Operating margin for the Claims Group was a negative 3% compared to 17.2% in the first quarter of last year, which benefited from the $2 million contingency fee that I discussed earlier. Our historical range of operating margin for the Claims Group is 10% to 15%, so getting this crew back on track profitability-wise as quickly as possible is one of our biggest goals for the balance of this year.

Fortunately, we are already seeing major improvement in the Claims Group, with significant improvement in utilization each month so far this year from January through April.

Now let's move on to a discussion of backlog, which was certainly our best news that we announced in the quarter. Hill's total backlog at the end of the first quarter rose to a record $789 million, up from $675 million at the end of last year. 12-month backlog at the end of the first quarter was $303 million, up from $275 million at the end of the year.

Our increase in total backlog was driven in part by the acquisition of Engineering S.A., which added $58 million to our backlog. Aside from that acquisition, Hill had net bookings for the quarter of $150 million, the best sales quarter in our Company's history. That follows the fourth quarter of 2010, which was the second-best sales quarter ever for our Company, where we had approximately $146 million in net bookings.

We've publicly announced only a few new contracts in the two months since our last conference call, but these included a $3 million contract to manage higher education and healthcare facilities for the University of Texas, a $3 million contract to manage the Marsa Zayed development in Jordan, a $2 million contract to manage the Beirut Terraces Residential Tower in Lebanon, and a contract to provide PMO services to Chicago's Regional Transportation Authority.

We won numerous other contracts, including some very large contracts we have not yet publicly announced or expansions of existing work. The major increase in our backlog, with net bookings over the past two quarters of nearly $300 million, we believe positions us very well for the balance of this year and heading into next year.

Regarding the situation in Libya, we don't have any more information on the civil unrest there or when it is going to end than any of you do. We have demobilized almost all of our staff in Libya until the current crisis has stabilized. We do expect that once it is resolved, the country will quickly return to normal, as Egypt did during the first quarter, and we will be in a position to re-mobilize our staff and get back to work on our projects, most of which were in the higher education sector.

In the short term, however, we've lost a big source of revenue and profitability for our Project Management Group. Our work in Libya was averaging about $6 million per month in consulting fee revenue and was a high-margin, low-overhead operation. We currently have outstanding accounts receivable from the Libyan government of approximately $59 million, and our backlog includes about $55 million of work originating in that country.

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

(Operator Instructions) Arnie Ursaner, CJS Securities.

Good morning. My first question relates to the shortfall in the first quarter. Did that trip any covenant issues at all? And -- well, let's start with that first.

Yes, we have a bank line, Arnie, with Bank of America as the lead bank of a four-bank group. It is a total of $100 million. We had some financial covenants that we violated as a result of our borrowing at the end of the year. We've obtained waivers from the banks for those covenant defaults and we are currently in good standing.

Okay. Within that, usually there were typically costs or penalties, and also, they typically won't allow you to do share repurchases. Were either of those part of the waiver?

Yes, they both were.

Okay. And can you expand a little bit more on Engineering S.A.? Obviously, it is a very important part of your future growth. Give us a little more sense of -- did you give us the backlog for Engineering S.A. per se?

Yes, Arnie. The backlog that we received in February from the acquisition was $58 million. The Company is running at a revenue rate of about $50 million a year of consulting fee. The bottom-line impact will be negligible, however, to us in the short term because of the way the deal was structured.

We bought 60% of the company through our Spanish company, which we own 70% of. So we effectively received -- what's that math -- about 42% of the effective earnings of the business, but we had to write off the entire acquisition on our balance sheet, and we are taking amortization for 100% of the acquisition.

So right now, our amortization costs are completely offsetting the earnings of the business, which is profitable. So the net impact to us at the bottom line is essentially zero or even slightly negative for the short term.

Okay. My final question, if I can. In the Middle East, we are seeing -- we've seen very sharply rising energy prices, but we've also seen more political turmoil than in our lifetimes. When you weigh the two together, how are you thinking about -- how is Hill thinking about the Middle East as a growth engine for the Company going forward?

I think it is still going to continue to be a major part of our operation. Certainly, while we've seen oil go up in price dramatically in the last several months, I don't think we've received the benefit of it. Yet we have clients in countries where we operate where it is having a major impact on their cash flow and their desire to continue to invest in new infrastructure and new real estate.

We are seeing a lot of the growth, particularly in Saudi Arabia, which is a big beneficiary of that, as well as Abu Dhabi and [Qatar]. I think it is going to have a big impact on us going forward. I don't see oil going back to anywhere near where it was two years ago, when it got down to I think even under $40 a barrel. And we expect it to continue to stay high and that is going to have a big impact on us.

At the same time, we've continued to expand our Middle Eastern operations, which as you saw, included our first contracts in both Lebanon and Jordan and hopefully more work in those countries as well going forward.

Thank you very much.

(Operator Instructions) David Gold, Sidoti.

Good morning. Just wanted a little bit more clarity, if you can, on the issues in Claims Management on a couple of fronts. One, can you give some more color on how much of the overhead cuts were in that business? And two, when you might internally -- or when you might think that business might turn profitable again -- how soon.

You're talking about the Claims business, right?

Yes.

Okay. The cuts that we made were across the board in both Project Management and Construction Claims and our corporate overhead. John, do you have approximately how much of that -- there was a net of about $9 million in annual overhead savings from the cuts. Most of that occurred in our labor force, which is always our biggest expense item.

John, just a ballpark of the $9 million, how much was in Claims?

I'm trying to get it right now. I would say around $1.5 million.

About $1.5 million, David.

Okay. And, just saying part two of that is restoring profitability.

A big part of that is how much work that Group has, and that can fluctuate widely from not just quarter-to-quarter, but even month-to-month. And we track the utilization of that Group very closely.

We saw -- I mentioned before, we saw a significant increase in utilization. But just to give you guys the numbers -- this isn't something we normally report on -- but in the four months so far this year, January, our utilization in our Claims Group worldwide was about 54%. In February, it was 57%. In March, it was 61% and in April, it was 67%. So that is big steps in the right direction.

That's helpful. But also maybe then can you give a sense for at some point -- when it was profitable, maybe first quarter last year, where that utilization was running, just so we have a sense for how low that 54% is compared to where it should have been for us to see profitability?

Typically, it runs in the 65% to 70% range. So for April, it was certainly right in the middle of that range. And as you can imagine -- I know you cover other professional services businesses -- 54% is not real stellar, far from it. So we are happy to be taking it the right direction. It is a combination of the cuts we made plus new work coming in the door. And we think they will do much better the balance of the year.

Okay. Just one more. Since 67% is in that range of the 65% to 70% you target, can you say if the business was profitable in April?

Don't know yet.

Okay, but (multiple speakers).

Based solely upon that number, my guess would be yes.

Got it.

But we don't have April numbers yet and we won't talk about them even if we did.

Sure, sure. Okay. And then I guess, just one other thing. On Libya, the receivable there, any issues at this point or sort of what is the current thinking, both of you and, say, the accountants on that?

Our thinking is that when that country gets back to normal -- and our expectation is that is going to be Gaddafi leaving power, probably involuntarily -- that there will be a new leadership in that country, and that they are going to do everything they can to get back to normal as quickly as possible.

The work that we had, we expect will continue and will remobilize in that country, with possibly the same or different staff. We had about 220 people working in Libya. And the kinds of projects that we are doing over there in the higher education sector, expanding college and university campuses all across the country, I would imagine no matter who is in power that work is going to continue.

As far as the receivable itself, we expect that the government will pay us. We have the right under our contracts to interest, which we have not been accruing. So we expect upon payment, a potential significant bump there, if we are in a position to collect that.

We have certainly in the US, as well as several European countries, some significant foreign funds of the Libyan government that have been frozen. And we expect that in a worst-case scenario we would have access to that capital. So we really don't foresee a scenario where we don't collect on our receivable sooner or later.

On top of which you've got a country that's gone through several months -- possibly longer -- of major civil unrest, with a lot of military action. There could be some significant need to rebuild the facility and the infrastructure in that country, and we think we are very well-positioned to participate in that work as well.

Got you. Very good. Thanks.

Marshall Gordon, private investor.

I'd like to know how HillStone is fitting into your Company and what growth they show.

HillStone is a company that we participated in a founding last year. We own 51% of it. And it is a company that is focused on developing low-cost housing materials to primarily third-world countries that need to put a lot of housing in place for their people in low-cost yet quick way.

It's a company that we've only been involved in for about 10 months. It is an operation that is costing us, I would say, approximately $400,000 a quarter to fund. And it is at the point right now where we expect in the near-term -- near-term meaning this quarter or early third quarter -- that that business will start receiving some sales. Right now, to date, it has had no revenue, but it is chasing some very large opportunities and we expect that could be imminent.

If it is, that business is based on very large-volume sales, moving significant numbers of homes very quickly to countries that need housing for their people. And so we expect that if and when those sales come in, they are going to have a very material impact on our bottom line.

Thank you.

Bill Sutherland, Boenning & Scattergood.

Good morning. The reimbursable expenses in the PM Group, are they going to -- can you give us a little more color on why they are running at this level and what the outlook is for that?

Sure, Bill. The reimbursable expenses are up significantly because we've had some work begin lately in our New York City office on what we call CM/Build contracts, where the construction work passes through us, even though we are not at risk for the subcontractor's performance. New York City is pretty much the only region we have that uses that kind of contracting method.

And that number can vary widely from quarter to quarter, as you know, which is why we track all of our margins and growth percentages off of consultancy revenue.

So I mean, just -- those projects in New York are just continuing, but you don't have visibility, say, past this quarter?

I would expect if you are trying to model the balance of the year, you could use the first quarter as a rough estimate of what that number is going to be.

Okay. Is there a point in time where you reevaluate the backlog you are carrying for Libya? I assume, certainly, it is not going to -- you're not going to do anything until you get to the end of the quarter.

That's correct. We have, as I said, $55 million of backlog in our total backlog. We have zero of that in our 12-month backlog. And as time goes by, we will reevaluate the situation in Libya and decide whether what is happening there is going to impact us, either our receivables or our backlog, and we will make adjustments.

To date, we haven't seen anything that says when this is resolved we are not going to be back there, getting paid and getting back to work.

The -- EA's backlog of 58, is that primarily 12-month?

No, it is probably about -- that's probably a good number. It is probably about 50% to 60% of that is in the 12-month backlog.

Okay, and then last, given all the puts and takes in SG&A -- or the moving pieces I should say, can you give us a sense of kind of the mix of these factors in Q2? I realize that's a little bit more than you guys usually do in terms of description of anything that is not looking back, but (multiple speakers).

The biggest item that impacted us was obviously the loss in the Claims Group. And when that business is not busy and its people aren't billable, their direct labor costs get shifted to what we call unapplied labor, which is the category of costs for billable people when they are not billable. That is a component of our SG&A.

So when the Claims Group is slow, our SG&A spikes up. And as you can see from the utilization numbers, we see that business getting back to profitability very quickly. We also see some significant work coming in that business that could drive them even better going forward over the next couple months.

But, David, that was -- the Claims contributed how much to the SG&A buildup?

Let me see if I have that.

I mean, it was a $400,000 EBIT loss.

I have that number right here. In the Claims Group, their SG&A went from $10.3 million in the first quarter of 2010 to $13.4 million in the first quarter of 2011. So about a $3.2 million increase on flat consulting fee revenue. I think the biggest part of that was unapplied labor, driving that increase.

And the acquisition costs for MLL.

Plus the SG&A that we picked up from McLachlan Lister in Australia. That number was about what on a quarterly basis?

About $800,000.

That is about $800,000 a quarter, so that will obviously continue.

But the unapplied labor, we see that coming down significantly in the second and third quarters.

That's helpful. Anything else you want to call out that you can kind of put your fingers on?

Not anything, other than what I already reported on earlier in the call.

Okay, thank you both.

(technical difficulty), private investor.

Good morning, David. How are you?

Good morning.

I have three questions. First, what is your best guesstimate on assuming best-case scenario for Hill of the range of earnings-per-share contribution for the HillStone division that is (technical difficulty) some of these sales that (technical difficulty)?

You want to knock out all three questions first?

Okay. The second one would be what is the likelihood of resumption of the projects that were underway in Libya, whether or not Gaddafi stays in power or is removed and another regime comes into play?

And third, a clarification on the stock repurchase program -- are you in a position to buy back (technical difficulty)?

Understood. On HillStone, the bottom-line impact of that business being successful is dramatic and very, very material. We haven't given any estimates either in dollars or earnings per share. (technical difficulty) they are working on several major contracts right now that if they come to fruition could have a major (technical difficulty) impact on the bottom line.

Typically, they are talking about selling housing units that run in the $10,000 to $13,000 range, and they are talking about orders in the magnitudes of thousands or tens of thousands of units.

What we also see on that regard is very often they are talking about the client hiring Hill to do the project management on the housing as well, which can result in some big contracts for us. So depending on which orders come through -- and we hate to try to guess and predict what is going to happen -- but certainly by the end of the third quarter, we should see some results in HillStone in a material way.

Regarding Libya, frankly if Gaddafi stays in power, we are not sure what's going to happen. I think the best result for us and for the country would be that he gets knocked out of power as quickly as possible. With him in power, I frankly don't see any end to the current unrest, and I think the Western countries that are working with the rebels in the country are going to continue to pick up the pressure on him until something is forced to happen.

You saw how quickly Mubarak capitulated in Egypt, and I think while Gaddafi has got a lot more staying power, I just don't see -- and I don't think anybody here who is following the situation closely really sees a situation where he stays in power long term.

On the stock repurchases, we have -- now with the waivers that we received from our banks on the technical financial covenant (technical difficulty) agreement, a provision that says that we won't buy back stock until we are back in compliance on those (technical difficulty). So in the short term, we are not in a position to be buying back stock (technical difficulty) current prices (technical difficulty).

(technical difficulty)

Thank you, everybody, for your time today. We were disappointed in the first quarter, as I'm sure many of you were. We expect the balance of this year (technical difficulty) delivering much better news on our next earnings call in August. Thank you all for joining us. Take care.

Disconnect your lines at this time. Thank you all for your participation.