Hill International Inc (HIL) 2011 Q2 法說會逐字稿

Greetings and welcome to the Hill International second 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, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan. You may now begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us today. Our speakers on this morning'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 our intent that any such statements be protected by the Safe Harbor created thereby.

Except for historical information, the matters set forth during today's 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 our current expectations, estimates and assumptions, and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements.

Important factors that could cause actual results, performance and achievements or industry results to differ materially from estimates or projections contained in forward-looking statements include modifications and termination of client contracts; control and operational issues pertaining to business activities that we may conduct on our own behalf or pursuant to joint ventures with other parties; difficulties we may incur in implementing our acquisition strategy; the need to retain and recruit key technical and management personnel; and unexpected adjustments and cancellations related to backlog.

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

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 for our quarterly earnings conference call this morning. Yesterday after the market closed we announced our financial results for the second quarter of 2011. While we incurred a small loss in the second quarter, we saw a dramatic improvement from the first quarter, coming from a loss of $0.15 to a loss of only $0.01 beating the street consensus on both revenues and profits.

But obviously losing less money is not our goal. We are working hard to return to profitability as much and as quickly as possible.

As we discuss our financial results in detail we will first go through the second quarter numbers compared to the second quarter of 2010. But we will go into much more detail on our numbers sequentially when compared to the first quarter of 2011 given the big upswing in our performance so far this year.

For the second quarter of 2011, Hill's total revenue grew to $126.9 million, a 17% increase from the second quarter of 2010. Consulting fee revenue for the second quarter rose to $103 million, up 12% from last year's quarter. This was due to a 9% organic decline, primarily from the end of our work in Iraq and Libya since last year, more than offset by 22% growth in CFR from acquisitions.

Hill's operating profit in the second quarter was $824,000, versus an operating profit of $4.6 million for the second quarter of 2010.

Our interest expense was up significantly since last year on higher borrowings. As a result we had a net loss for the second quarter of $497,000 or a loss of $0.01 per diluted share compared to net earnings of $2.9 million or $0.07 per diluted share last year.

Consensus estimate for our EPS in the second quarter was a loss of $0.03 a share so we beat the consensus by $0.02.

Looking at our overall performance sequentially, meaning versus the first quarter, Hill's total revenue was up 3% and our consulting fee revenue was up 9%. We saw a 12% increase in our gross profit company-wide with a 100 basis point improvement in our gross margin on a percentage basis from 41.3% to 42.3%.

As a result of improved utilization and our cost cutting efforts early in the second quarter, Hill was able to cut total SG&A expenses by 3% between the first and second quarters. But as a percentage of consulting fees, they were down significantly, dropping 540 basis points from 47.0% to 41.6%. This led to a dramatic turnaround in our operating profit going from an operating loss of $5.3 million in the first quarter to an operating profit of more than $800,000 in the second quarter.

As a percentage of consulting fee revenue, this equated to a 640 basis point improvement with operating margin going from negative 5.6% in the first quarter to a positive 0.8% in the second quarter.

We continued however to have a net loss for the second quarter of $500,000 or $0.01 per share, vastly improved from a net loss of $5.6 million or $0.15 per share in the first quarter. While a non-GAAP figure, Hill's EBITDA, earnings before interest, taxes, depreciation and amortization, also saw a major turnaround going from a negative $2.4 million in the first quarter to a positive $4.6 million in the second quarter.

Looking at the performance of our two operating segments separately, total revenue at Hill's Project Management Group during the second quarter of 2011 was $97.6 million, an increase of 13% from the second quarter of 2010. Consulting fee revenue for the second quarter of the Projects Group was $74.2 million, an increase of 6% from the second quarter of 2010.

That growth consisted of a 19% organic decline, primarily resulting from the end of our work in Iraq and Libya, more than offset by 24% growth from the three acquisitions made in this group since last year, specifically the acquisitions of dck, TCM and Engineering S.A.

Operating profit for the Projects Group for the second quarter was $4 million, a decrease of 56% from the second quarter of 2010. Looking at sequential performance, total revenue of Hill's Projects Group was essentially flat but its CFR, consulting fee revenue, was up 6% between the first quarter and the second quarter. The group also saw a 6% increase in its gross profit despite a slight 10 basis point decline in its gross margin on a percentage basis from 37.6% to 37.5%.

SG&A expense for the Projects Group grew slightly by 2% but as a percentage of consulting fees, it was down 130 basis points from 33.6% to 32.3%. So that figure is certainly trending in the right direction. This helped operating profit grow strongly by 46% quarter to quarter as a percentage of consulting fee revenue. This was a 150 basis point improvement with operating margin for the Projects Group going from 3.9% in the first quarter to 5.4% in the second quarter.

This is still well below the Projects Group's historical operating margin which has often been in the 15% to 20% range. So we know we have room for continued improvement in this operating group.

For our Construction Claims Group, total revenue during the second quarter was $29.4 million, an increase of 34% from the second quarter of 2010. Consulting fee revenue for the second quarter of the Claims Group was $28.7 million, an increase of 35% from last year's quarter. This growth consisted of organic growth of 22% and acquisition growth of 12% resulting from last year's acquisition of McLachlan Lister in Australia.

Operating profit for the Claims Group for the second quarter of 2011 was $3.7 million, an increase of 141% in the second quarter of 2010. Again, looking at sequential performance, total revenue of Hill's Claims Group was up 17% as consulting fee revenue was up 18% from the first quarter to the second quarter of this year. The Group saw an even more impressive 24% increase in its gross profit with gross margin as a percentage of consulting fees increasing 260 basis points from 52.0% to 54.6%.

As a result of much improved utilization within this group, combined with overhead cost cutting, SG&A expense at the Claims Group dropped a strong 11% from the first quarter to the second quarter but as the percentage of consulting fees has plummeted by 1,320 basis points from 55.0% to 41.8%, a much, much better number for that operating segment. This helped operating profit improve greatly quarter-to-quarter from an operating loss of $735,000 in the first quarter of this year to an operating profit of $3.7 million in the second quarter.

As a percentage of consulting fees, this was a 1,580 basis point improvement with operating margin for the claims group going from a negative 3.0% in the first quarter to a positive 12.8% in the second quarter. This is right in the middle of its normal historical range of 10% to 15%. The Claims Group has bounced right back from what was an abysmal first quarter to a very solid second quarter of this year.

Regarding backlog, it was a very strong quarter for Hill, the best by far in the Company's history. We tripled our backlog with huge contracts for both Hill and our subsidiary Hill Stone on a major housing development in Iraq which I will talk about in a little more detail shortly.

Hill's total backlog at the end of the second quarter jumped to a record $2.297 billion, up from $789 million at the end of the first quarter. 12-month backlog at the end of the second quarter rose to $445 million, up from $303 million at the end of the first quarter. Hill had net bookings for the quarter of $1.611 billion, the best sales quarter by far in the Company's history. That follows the first quarter this year which was the second best sales quarter ever for our Company in which we had $150 million in net bookings.

Even without the housing work in Iraq that came in as a result of HillStone, Hill's core business had $111 million of net bookings for the second quarter, what we consider a very strong sales quarter.

The new contracts announced by us over the past three months since the last earnings call include an $89 million contract to manage infrastructure development in the Comoros Islands, a $37 million contract we just announced yesterday to manage the construction of the King Abdullah Security Headquarters and various other security projects throughout Saudi Arabia. A $22 million contract to manage the Al-Manafie Towers development in Makkah, Saudi Arabia. Two contracts totaling $6 million to manage water and waste water projects in Romania. A $4 million contract to manage customs and water protection projects nationwide to the US General Services Administration. A $3 million contract to manage construction of a wind farm in Brazil. A contract to provide program management services to the Queensland Department of Transport in Australia. As I mentioned earlier, two contracts totaling $1.5 billion to manage and supply a major housing development in Iraq.

Regarding these last two contracts, we announced on June 2 that our 51% owned subsidiary, HillStone International, had received from TRAC Development Group, a South Korean developer, a $1.3 billion contract to supply the structural steel systems for 100,000 homes to be built in Southern Iraq. And in addition, Hill had received a $200 million contract to manage the construction of those homes.

Those are the number one and number two largest contracts that Hill has ever received in the history of our Company. Those two contracts are conditioned on TRAC receiving all necessary financing and governmental approvals for the housing development. We are actively involved in assisting TRAC with this process and we continue to believe that it is highly likely that TRAC will be able to obtain financing and approvals for this project.

We currently expect that financing and approvals will be in place sometime during the fourth quarter of this year and that revenues for Hill and HillStone will begin under the contracts in early 2012.

Moving from Iraq to Libya, we don't have any updates on the situation there other than what you can all read in the newspaper. We have demobilized almost all of our staff in Libya except for a small core team until the current political crisis has been resolved. We do expect that once there is resolve in that country that the country will quickly return to normal. At that point we believe that we will be in a position to remobilize our staff, get back to work on our projects, and collect our outstanding monies. At the moment we have outstanding accounts receivable from the Libyan government of about $59 million and our backlog includes about $55 million of work in that country that is currently on hold.

The situation in Libya has also created certain issues with respect to our senior credit facility as the lost earnings and uncollected accounts receivable have put us in technical default of several of the financial covenants contained in our senior credit agreement.

At the beginning of the third quarter, we entered into a forbearance agreement with our lenders regarding these technical defaults which extends until September 30 of this year. We believe that our relationship with our lenders is good and that they will be working with us as we get our company back to profitability.

In the short term however the situation has increased our cost of borrowing and made it unlikely that we will be able to do any stock repurchases or cash acquisitions until we have gotten out of default. And getting out of default on our credit agreement is our top priority.

About ten days ago Hill filed two shelf registration statements with the SEC. One was a cash shelf that would allow us to sell up to 20 million shares of Common Stock from time to time. And the other was an acquisition shelf that would allow us to issue up to 8 million shares of Common Stock from time to time in connection with any possible acquisition. Neither registration statement has yet been declared effective by the SEC and we do not at present have any plans to utilize either shelf in the near term. But given the current state of the lending markets we want to make sure that we have all options at our disposal to ensure the Company's liquidity and financial security.

With that, our CFO, John Fanelli, and I are happy to take your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is from the line of Arnie Ursaner with CJS Securities. Please state your question.

Hi, good morning. David, could you comment a little bit about the seasonality? You obviously showed tremendous improvement in construction claims. You had had an issue with a specific contract at the end of last quarter. Can you just kind of walk us through how the quarter progressed in Claims because it is obviously leveraged to better utilization?

Yes, Arnie. The major issue in the Claims Group was utilization. It was an imbalance in the workload and the workforce of that group as several major claims were put on hold or were settled during the quarter. In the first quarter the Claims Group averaged about 55% utilization which is terrible for that operation. And second quarter it averaged 65%, so it was a big turnaround and in-line with what we usually see in the Claims Group historically.

Obviously we went from an operating loss to a strong operating profit on strong revenue growth. And we see -- with the caveat that Claims is difficult to predict long-term and can be very erratic.

In the short-term we see the current situation continuing with the level of work that they have in hand. We think they will do very well in the third quarter.

Question for John. Normally when the banks ask you, or you work with the banks in a forbearance situation, typically they get a pound of flesh out of you and raise rates. Can you comment -- you did have a little bit of a jump in interest expense in the quarter but it is unclear if that reflects the change in terms you may have had with your banks. Can you freshen that up and give us your best guess of interest expense for the balance of the year?

Sure. Well the forbearance agreement did not become effective until June 30, so those interest expense in the second quarter were from the old agreement and the waiver agreement that we increased around a half a percentage point on all our borrowings. Our borrowings are broken down into two components. We have a base rate and we have a Eurodollar rate loans. Going forward they all but have to be into the base rate which will probably increase our percentages from around 4% to 5% to over 6%.

And based on that, Arnie, our interest expense for the balance of the year will run around, based on the current level of debt, around $1.5 million each quarter, or another $3 million for the second half of the year based on our current borrowings. Again, that could change based on any kind of cash collection or the situation in Libya.

Well, again, your rate was at -- you were at that level in Q2. So you are saying it would not have a -- I'm unclear on the math. If you went up a full percentage point, why would the $1.5 million you had in the quarter not go up a fair amount?

It will go up, but again, we are anticipating that the borrowings will be at a half a point higher or point higher based on the current borrowings. Now when those borrowings mature, they are all going to have to be into the base loan which will give us around a 6%, 6.25%. And it will range anywhere from $1.5 million to $1.6 million per quarter based on our projections.

We are also anticipating Arnie that the total debt will come down over the second half of the year. We had positive operating cash flow in the first half of $8 million. We are anticipating on some projects that we have in hand, some advanced payments coming that will be used to pay down debt significantly. And we expect to continue to be cash flow positive in the second half of the year. So while the interest rate is a little higher, the debt should be coming down.

And, again, we will manage our cash based on the first priority is to reduce our debt.

My final question relates to in the last quarter you had talked about $9 million of potential cost savings but were also likely to incur some costs in Q4 in ramping up the work related to HillStone. So can you just freshen up how much of the $9 million cost savings have already been taken and also highlight what you expect to be the incremental cost for HillStone in Q4 and perhaps even into Q1?

Yes, all of the $9 million in cost savings we talked about in the last phone call were implemented in March and April of this year. The increased cost that we may see would principally be within HillStone as it has costs in ramping up on the project in advance of revenues being generated on the project the way that contract is structured. That won't affect our overhead; it will simply affect HillStone's operating costs.

And can you quantify those?

That won't impact our cash flow because we are getting significant advances under that contract to more than offset the --

But it would affect your P&L, wouldn't it?

Yes. We do expect an impact in the fourth quarter as those costs are incurred, but revenue doesn't begin until early 2012.

Right. But can you quantify what those costs are expected to be?

No. We don't have the exact number for you now.

Okay. Thank you.

Thank you. Our next question is coming from the line of David Gold with Sidoti & Company. Please state your question.

Hi, good morning.

Good morning, David.

Good morning, David.

Just to follow up a touch on Arnie's question, I think some of what he was getting at would be helpful, is a sense for what G&A might look like in the second half of the year. And if the second quarter is a good run rate or if there is more room from there given the cost cuts.

Yes, I would expect the second quarter to be a fairly good run rate. We are going to be aggressive on managing our SG&A, ensuring that doesn't grow. We may have some cost cutting going forward, to our overhead costs. So I would use that number or slightly lower.

Okay, and then a couple of others. On HillStone, obviously you gave a little bit of an update there, but it would be helpful David, I think, if you sort of walked us through what the necessary steps are for the funding to come through. Is it as simple as just the right banks agreeing to put the funding in place or are there steps in between here and there?

There are quite a few steps. What HillStone is looking to do is have a senior lender in place with a revolving credit facility to fund the construction. But at the same time they are also looking for certain governmental guarantees from both Iraqi and US financial agencies to back up the senior credit facility. They are also getting a significant upfront payment expected from the National Investment Commission of Iraq on the order of about 25% of the costs of the projects. And as far as we know, and we are involved in the process, everything looks like it is moving forward to getting that done.

Got it. And so you still think potentially you can make an announcement in the fourth quarter?

Yes. We expect sometime in the fourth quarter this will all be in place, if not sooner.

Okay. And then just a simpler one, John, if you have the breakdown of the backlog for us?

Sure. The total backlog is around $2.297 billion, broken down as follows; project management, $952 million; construction claims, $45 million; and we broke out the HillStone International separately at $1.3 billion.

The number for project management includes the $200 million related to the HillStone contract.

And the 12-month backlog, the total backlog is $445 million, broken down between or among the project management of $300 million; construction claims, $41 million; and HillStone, $104 million.

Got you. Perfect. Thank you both.

Thank you, David.

Thank you. Our next question is from the line of Chase Jacobson with William Blair. Please state your question.

Hi, good morning.

Good morning, Chase.

Good morning, Chase.

Can you talk a little bit about the progression of the operating profit in the project management business in the second half of the year? I know there was some negative mix in there in the second quarter given the loss of the Libya contract. But, you know, while it has improved sequentially it is still well below the historic run rate for that business. So can you give us a sense of how you might be able to get that back up to the low double digits range, especially given the potential for costs associated with the Libya contract in the fourth quarter?

Yes. You know the PM Group between the first and second quarter improved quite a bit. We went from -- let me see if I can find the exact numbers. We went from an operating margin of 3.9% to 5.4%. $2.8 million, I think, was the number, to $4.0 million in operating profit. And that was despite the fact that we made money in Libya in the first quarter and lost money in Libya in the second quarter. So we had those headwinds.

We see a significant amount of work coming in in the project management segment, even absent the HillStone work in Iraq. As we get mobilized on those projects and get our people billing. These are projects in the Middle East, in Brazil, in the US, in Europe, really across the entire segment, we see the operating margins picking up significantly while we hold the level of SG&A to where it is currently. We may have some additional cost cuts throughout the Company, including the PM Group. But I think what is going to drive operating margins upward is new work coming in the door.

Okay. And just on the end markets specific to some of these major sporting events, are you seeing any direct work yet from Qatar World Cup or the World Cup or Olympics in Brazil? And then on the flip side of that, did you have any major contracts related to the London Olympics that may be nearly complete or are recently completed?

No. We did not have a major role in the London Olympics. We have a negligible PM operation in the UK. Almost all of our work over there is on the Claims side. And [fortunately] for that group the London Olympics were managed very well -- very few claims. So we did see some work in that regard.

We are chasing work in both Brazil and Qatar related to the two World Cups and the Olympics. And as soon as we know we have some work I am sure we will announce that. Both markets, even aside from those events, those are two of the hottest markets that we see in the world right now and we have some significant upside opportunity in both of those countries.

Engineering S.A. in particular in Brazil has done, from our perspective, very well since we acquired the company in February in winning new work and making money since the acquisition.

Okay. And then last question. Any targets for debt reduction for the remainder of 2011?

No, we don't have any specific targets that we have made public.

Okay, thanks.

Thank you. (Operator Instructions). Our next question is coming from the line of Michael French with Morgan Joseph. Please state your question.

Good morning, gentlemen.

Good morning, Michael.

On the TRAC contract in Iraq, assuming everything goes as planned and you get the approvals in 4Q, and you start the project in 1Q '12, do you have a sense of what the revenue ramp would look like? How quickly or how slowly will that get up to speed?

We think it will ramp up very quickly, probably within a quarter. It will ramp up to where we think the eventual revenue run rate will be.

And what do you think that will be approximately, on a quarterly basis?

Well, you have a $1.5 billion contract over three years. It's no more complicated than arithmetic.

All right, but so you think it will be an even $500 million a year?

Yes. Yes we do; ramping up pretty quickly, probably within between two and four months.

Okay. And on the shelf you filed, do you have a floor in mind as to where you would and where you wouldn't sell stock, either for cash or for acquisition purposes?

We really don't want to sell any stock in single digits. When the stock gets over maybe $100 I think we might want to sell some stock. I don't think that is going to happen this quarter; maybe in the fourth quarter. Obviously we don't want to sell any stock. My family is the biggest shareholders in the Company at close to 35%. We are very, very conscious of potential dilution and we put the shelves in place really just to have them if and when the stock is at a level where we think it makes sense to add some equity into the business with minimal dilution.

We also have to deal with a situation with our banks where while they are being very cooperative right now and we believe that we are going to work our way out of our problems on our own, we want to have the access to capital that being a public company allows you to have for exactly these kinds of times. If it is within our control it won't be anywhere near $5 a share, but as I said, sometimes it is not within your control.

Okay. So you don't have an absolute "will not sell it under $10" but it is your strong preference not to. Is that a good way to look at it?

That's probably exactly the right way to phrase it.

Okay, all right. Great. Thank you and good luck.

Thank you, Michael.

Thank you, Michael.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Great. Thank you everyone. We are looking forward to continued improvement in our business in the second half of this year and we appreciate your continued interest in both our Company and our stock. Thank you all for joining us this morning and we look forward to talking to you again in three months. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.