Hill International Inc (HIL) 2012 Q1 法說會逐字稿

Greetings and welcome to the Hill International first-quarter 2012 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 for the Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you, Robin, and good morning, everyone. 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'd 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 revenues, 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 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 the 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 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 our 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 statement.

With that said, I'd now like to turn the call over to David Richter, President and Chief Operating Officer of Hill International. David, please go ahead.

Thank you, Devin, and good morning to everyone joining us for our first-quarter 2012 earnings conference call. Yesterday, after the market closed, we announced disappointing results showing a loss for the first quarter. This morning we will go through our first-quarter performance, showing comparisons both year over year as well as quarter over quarter, or sequentially. Then we will discuss our response to that performance, which is a major cost-cutting effort so we can return to profitability as quickly as possible.

For the first quarter, Hill's total revenue was $115.8 million, a 6% decline from the first quarter of 2011. Consulting fee revenue, or CFR, for the first quarter was $99.2 million, a 5% increase from last year's first quarter. This increase in CFR was due to a 3% organic decline, primarily caused by the suspension of our work in Libya early last year, more than offset by an 8% increase primarily from our acquisition of Engineering S.A. in Brazil at about the same time last year.

Looking at our growth rate over the past year geographically, we saw a 2% increase in consulting fees in the US and Canada; a 231% increase, not surprisingly, in Latin America; a 1% decline in Europe; 10% growth in the Middle East; a 75% decline in North Africa, also not surprisingly; and 8% growth in Asia-Pacific.

Hill's earnings before interest, taxes, depreciation, and amortization, or EBITDA, in the first quarter was $0.4 million, a big turnaround from negative EBITDA of $2.4 million a year earlier.

Our operating loss in the first quarter was $2.7 million -- disappointing, but a big improvement compared to an operating loss of $5.7 million in the first quarter of 2011. Our net loss for the first quarter was $6.7 million, or a loss of $0.17 per diluted share, compared to a net loss of $5.6 million, or a loss of $0.15 per diluted share, for the first quarter of 2011.

Despite the improvement in EBITDA and operating profit, our net loss worsened from last year, primarily as a result of an increase in our net interest expense, which climbed from less than $1 million in last year's first quarter to more than $4.8 million in this year's first quarter. Of the $4.8 million, more than half or approximately $2.5 million was a one-time charge related to the recent two-year extension of our senior credit facility.

Looking at our first-quarter performance sequentially, meaning versus the fourth quarter of 2011, Hill's total revenue was down 6%, and our consulting fees were essentially flat. We've had a lot of success over the past year and a half in winning a significant amount of new work and keeping our backlog high. But this hasn't yet driven our CFR significantly higher.

The first quarter is traditionally our worst quarter of the year, but we also began the first quarter of this year with a terrible performance in January. But we saw month-by-month improvement in consulting fees as well as operating profit during both February and March, and we expect that to continue into the second quarter.

We've also seen a consistent improvement in our Company's utilization each and every month so far this year, from January through April. So we have high expectations for continued revenue growth over the remainder of 2012, based on new business development and utilization trends. And we're expecting 2012 to be a record year for our Company with respect to consulting fees.

While our consulting fees were essentially flat sequentially, our gross profit was down 10%, with a 430-basis-point decline in our gross margin on a percentage basis, from 45.4% to 41.1%. This is essentially due to the fact that in the fourth quarter our gross margin was unusually high as the result of several one-time adjustments.

This decline in gross margin, however, was somewhat offset by a big drop in our SG&A to $43.5 million in the first quarter from $46.4 million in the fourth quarter. As a percentage of consulting fees, SG&A was down by 280 basis points, from 46.6% to 43.8%. Our goal, however, is to get our SG&A as a percentage of consulting fees into the mid-30s, so we still have a ways to go on that front. More on that point later in the call.

As a result of the above, our EBITDA was down from $2.3 million in the fourth quarter to only $0.4 million in the first quarter. We more than doubled our operating loss from $1.3 million in the fourth to $2.7 million in the first quarter.

Our operating margin as a percent of CFR also more than doubled, from a negative 1.3% in the fourth quarter to a negative 2.8% in the first. And for EPS, we went from losing $0.02 in the fourth quarter to losing $0.17 in the first quarter. Certainly not a very strong start to the year, and not the direction that we want our Company's financial performance to be heading. We've made a significant amount of adjustments to our cost structure, but I'll get to that in a little more detail later in the call.

Now looking at the first-quarter performance of our two operating segments separately. Total revenue at Hill's Project Management Group during the first quarter was $89 million, a decrease of 9% from the first quarter of last year. Consulting fee revenue for the first quarter at the Projects Group, however, was up 5% from last year's first quarter, to $73.1 million.

The Projects Group saw a 6% organic decline, driven primarily by the suspension of our work in Libya, more than offset by 11% growth from the acquisition that we made last year in Brazil. Operating profits for the Projects Group for the fourth quarter was $3.6 million -- I'm sorry, for the first quarter was $3.6 million, an increase of 29% from the first quarter of 2011.

Looking at sequential performance, the total revenue of Hill's Projects Group was down 7%, and consulting fees were down only 1% from the fourth quarter to the first. The group, however, saw a 14% drop in gross profit, with a 550-basis-point decrease in gross margin on a percentage basis, from 41.7% in the fourth quarter to 36.2% in the first. This was offset somewhat by decreased SG&A expense for the Projects Group as a whole, which was down 7% and, as a percentage of CFR, was down 220 basis points, from 33.6% to 31.4%.

All this resulted in a 41% drop in operating profits for the Projects Group quarter to quarter. As a percentage of CFR, this was a 320-basis-point decline, with operating margin for the Projects Group going from 8.1% in the fourth quarter to just 4.9% in the first. This is well below the group's targeted operating margin, which is 15%, so we have lots of room for improvement in this operating segment.

For Hill's Construction Claims Group, total revenue during the first quarter of 2012 was $26.8 million, up 7% from the first quarter of last year. Consulting fee revenue for the first quarter for the Claims Group was $26.1 million, also a 7% increase from last year's first quarter. This growth was entirely organic. Operating profit for the Claims Group for the first quarter was $1.2 million, a big turnaround from an operating loss of $0.7 million in the first quarter of 2011.

Looking at sequential performance, the total revenue of Hill's Claims Group was up 1%, as consulting fees were essentially unchanged from the fourth quarter to the first. The group saw a slight 1% drop in its gross profit, with gross margin as a percent of consulting fees down by 100 basis points, going from 55.7% to 54.7% between the fourth and first quarters.

SG&A expense for the Claims Group was up 7%, primarily as a result of lower utilization in the Middle East and Australia. As a percentage of consulting fees, it was up 280 basis points, from 47.3% to 50.1%. The result is that operating profit for the Claims Group was down 46% from the fourth quarter to the first. As a percentage of consulting fees, this was a 390-basis-point decline, with operating margin for the Claims Group going from 8.4% in the fourth quarter to 4.5% in the first. This is also well below their targeted operating margin of 15%, so the Claims Group needs to improve their bottom line going forward as well.

Obviously, with both of our operating groups earning less than 5% in the first quarter, we've decided to take some pretty critical reaction regarding our overhead and SG&A expenses. Over the past several months, we have gone through a detailed review of our overhead cost structure, looking for ways to significantly decrease our SG&A expense across the entire Company.

As a result of that review, we have put in place a major cost-cutting plan involving both the Projects and Claims Groups, as well as our Corporate Group, that should lower our overhead costs by nearly $20 million annually. Of these cuts, about 20% were made in the first quarter, and about 80% either have been or will be made in the second quarter or early third quarter. This is the deepest cost-cutting plan we have ever put in place, but we think it is necessary in order to get Hill back to profitability as quickly as possible.

While historically we have rarely made any forecasts or projections, we believe that, as a result of these cost cuts and anticipated increases in our revenue, that Hill should achieve break-even EPS in the second quarter and be profitable by the third quarter of this year.

Regarding backlog, Hill's total backlog at the end of the first quarter dropped slightly by $3 million, to $2.292 billion from $2.295 billion at the beginning of the year. 12-month backlog at the end of the first quarter dropped by $12 million, to $321 million from $332 million at the beginning of the year. Not including one major project in the Middle East that was cancelled during the first quarter, Hill had net bookings in the first quarter of $112 million, a solid sales quarter.

Some of the major new contracts announced by us over the past two months since our last earnings call include -- four contracts totaling $20 million in fees to manage various projects in Iraq; a $10 million task order contract for the New York City Department of Design and Construction; a $10 million contract expansion to manage a new prison project in Pennsylvania; three contracts totaling $8 million in revenue to manage various projects in North Africa; two contracts totaling $2 million to manage transportation improvement projects in Southern California; a contract to provide program management services to the Sacramento Regional County Sanitation District on their $2 billion advanced wastewater program; and, just announced this morning, a $4 million contract to provide worldwide cost estimating services to the US Department of State.

We have some significant additional wins that we will be announcing shortly, and we're expecting to have record consulting fees in 2012, as I mentioned earlier. Combined with the cost-cutting efforts I discussed earlier in the call, we believe that the worst of this is behind us and that our business is headed in the right direction both revenue- and profit-wise for the balance of the year.

Regarding Libya, we believe we are very close to the successful return to the country and payment on our outstanding receivables. We have submitted a proposal at the request of the new Libyan government to return to work on the projects we were managing, and we've been in active discussions with the government to get paid the nearly $60 million that we're owed for past work performed on those projects.

At this stage, we believe that all that is left is for our client ODAC, which is Libya's Organization for the Development of Administrative Centers, to get its funding in place from the national government. We continue to expect that all of this will happen during the second quarter of 2012.

Jumping from Libya to Iraq, we do not have any substantive update on HillStone and the two contracts totaling $1.5 billion that we received in second quarter of last year to support a multibillion-dollar housing development in Iraq. Those contracts are still conditioned on our client, TRAC, receiving all necessary financing and governmental approvals for the development. We have been involved in assisting TRAC throughout this process, and we believe they continue to make progress, albeit slower than we anticipated last summer, in putting financing in place and getting this project launched.

We continue to expect revenue for Hill to begin in the fourth quarter of this year and for HillStone in early 2013. We continue to believe that it is more likely than not that TRAC will be able to obtain financing and approvals for this project to move forward in the near future.

Finally, as we announced in early March of this year, we recently executed a two-year extension of our current $100 million senior credit facility with our lending group, as a result of worse-than-expected earnings during the fourth quarter and the first quarter. However, we are once again in technical default of two of the financial covenants in our amended credit agreement.

We worked cooperatively with our lenders over the past five quarters since we first went to the default as a result of the situation in Libya, and we expect we will continue to do so. We've been working hard to make sure that we have sufficient liquidity to manage our Company and ensure its continued growth, and we expect the situation will improve considerably in the near future as a result of these efforts.

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

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Arnie Ursaner, CJS Securities.

Hi, this is Lee Jagoda for Arnie. How are you?

Good morning, Lee.

So what charges, if any, were incurred in Q1 for the cost cutting, and what charges do you anticipate taking in Q2 and Q3 for the rest of the plan?

Yes, this is John Fanelli. In the first quarter, relating to the terminations, the related severance was around $200,000, and for the cost cutting going forward, we'll estimate in around $700,000.

Okay, great. And then just turning to your interest expense, if you're in technical default on your new agreement, are you likely to incur fees in Q2 and Q3 going forward? And if so, about how much is that? And then the second question to that is, what's the current blended rate on your debt outstanding?

With respect to the costs going forward, we're not quite sure yet. Certainly we had a significant amount of added interest expense in the first quarter. I think the number was $2.5 million that we incurred in connection with the extension of the line. We're just beginning discussions with our banks over the new defaults, and we don't know what costs we're going to incur, but I think it's reasonable to assume that there'll be some.

And what's the blended rate on the current debt?

The blended rate, including the default rate of another 2%, is around 9.5%.

And we should expect that going forward?

That is just on the current credit facility in the US, not worldwide.

Okay, is there any incremental worldwide interest expense?

Yes, there is debt facilities in our overseas operations.

And what's outstanding there?

Pardon?

How much is outstanding on those?

Give me a minute and I'll give you the balance. Do you have another question? I'll look it up and I'll --

Yes, just one more quick one for you, David. Do you expect to have record consulting fee revenue, even without the benefit of Libya and any TRAC contract revenue on the Project Management side?

Yes, we do.

Okay. That's all I have.

Lee, the total bank debt is about -- between $7 million and $8 million, outside of the US.

Great.

David Gold, Sidoti & Company.

Hi, couple of questions for you. First, on G&A getting to the mid-30s, what does it take to get there? Obviously, the cost cuts will help a little bit, but is that more a function of seeing revenue growth, or can you get there on cost cuts alone?

No, I think we're going to get there from a combination of the two. The cost cuts, obviously, are significant. We're talking about $5 million a quarter essentially, once we fully make all of the cuts. We also see revenue driving forward. The first quarter is traditionally our worst quarter of the year; it certainly was last year. But I think if you look back a couple years, you'll see it generally is the weakest quarter.

Certainly we had a bad quarter in Australia. And they pretty much take January off. It's sort of our August. So it's a very slow period there. We have a lot of highway work in the north part of the US that typically slows down in the winter months, but we furlough a lot of the highway inspection staff. And typically things just kind of ramp up into the second and third quarters of the year.

So we expect not only higher revenue, but lower unapplied labor, meaning high utilization, as we get people busier, which comes right out of SG&A. That, combined with the cost cuts that we expect to make, I think is going to have a significant impact on our SG&A expense, and we should be down then to the mid-30s by the third quarter.

Okay. And then when you think about reverting to profitability for third quarter, if we assume -- basically, I guess the question is, does that assume debt or interest expense going down for the payment from Libya that you're expecting, or can you do it independent of that?

Well, we are expecting a paydown of debt, but I think the debt won't come in one big check; it's going to come over time anyway. But we think we can do that from operational performance alone, even without the payments from Libya.

Okay. And then you spoke about a contract that was cancelled during the quarter. Can you give a little bit of color on that?

It was simply one project in Saudi Arabia. We had $16 million in our backlog for the project. It hadn't gotten off the ground. And we had a bare minimal staff on the project, but the project isn't moving forward for some reasons, and we pulled it out of backlog. Absent that one project -- and we have no cancellations in our backlog so far in the second quarter. And really, any major cancellations are rare. But absent that, we sold $112 million worth of new work, relative to performing $99 million worth of work. So we view that as a very positive sales quarter.

Okay. And then just lastly, obviously, you're very confident in getting some dollars in from Libya. Is there anything happening there, anything sort of tangible or color that you can give us as a help with the confidence there?

Yes. There is a lot happening behind the scenes. The market won't recognize it until we have a check in hand. But we've been actively working with the government. They invited us to submit a proposal to return to work on our projects. We've submitted that proposal. It's been accepted. We've been negotiating a contract with ODAC.

We have had negotiations regarding payment terms on the outstanding receivables. ODAC, when they submitted their budget to the national government, included payment to us and to the other contractors on the projects, the higher education project that we were managing that they want to continue to work and move forward. That budget was approved with that funding in place.

And we're expecting that once ODAC has received their funding from the national government, which is expected shortly, that one of their priorities will be to pay us and get us back to work on those projects so they can start to make some tangible -- have some tangible success in getting those projects moving forward, getting people back on the ground, and getting hopefully students in classrooms before too long.

We are also chasing other work for the Libyan government that's out there, in addition to the projects that we had, and we think we're going to have a significant amount of success on those going forward as well. And once the government is operating relatively normally, that there'll be a significant amount of opportunities for us in Libya going forward.

Got you. That's perfect, thank you.

(Operator Instructions). Chase Jacobson, William Blair.

Just a follow-up on one of the earlier questions. Just want to make sure I'm clear. Somebody asked about being able to return to peak revenue in the Project Management business, and you said yes. I assume that was on an annual basis, correct?

I don't know what you mean by peak revenue, but we certainly --

Record, record revenue, sorry.

Higher revenue, higher consulting fees this year than last. We're $5 million ahead of the game already after the first quarter, and we expect revenue to pick up substantially in the next couple quarters.

Okay. I just wanted to be clear on that. In terms of the utilization rates, you mentioned that utilization improved January, February, March. Can you give us what the utilization rate was in the quarter, and is it fair to assume that January was the trough month in terms of utilization?

So I can give you the exact numbers month by month. In January, utilization cost in the entire Company was 71.6%. February, it was 72.0%. In March it was 72.9%. And in April, which we just got this morning, it was 73.9%. So it continues to head in the right direction. That not only improves our revenue, but also decreases our SG&A automatically, because unbillable time comes out of SG&A. So if we can get our people busier, that in and of itself will take care of a lot of our overhead costs.

Right. Okay. And then on Libya, can you remind us of what the process is when you do collect payments, if there's -- I know Hill's priority is paying down debt, but is there any other commitments that you have to pay down before you pay down debt?

In connection with the money we get out of Libya, we have certain obligations in country, subcontractors and agents and people costs. And we get a certain part of our payments in Libyan dinars, which are not yet convertible, although we expect over the next couple years they probably will become convertible. The money that we can get out of the country, we have no obligations other than in connection with our credit facility that half of the money that we receive from Libya has to be used for a permanent paydown of our line. We're anticipating that about 25% of the money we're owed is going to be paid up front, with the balance to be paid over a certain number of months over the balance of this year.

Okay. And lastly, just in terms of the markets, we've heard a number of the other engineering companies this quarter talk about stabilizing pricing in a lot of their markets, even here in North America. Just wondering if you could comment at all on the as-sold pricing that you're seeing in the work you're winning, maybe compared to the last six months or the last 12 months. Any color would be great. Thanks.

Yes, Chase, there really hasn't been much of a difference in pricing in the marketplace. We haven't seen that in our gross margins across the various operating segments. I would say that there certainly was, beginning in '08 and into '09, much more of a focus by our clients on the cost than there ever was before. That has lessened somewhat over the last couple years. And certainly -- maybe on the construction side, you're seeing contractors bidding low because that's much more of a price-based decision. In professional services, like Project Management and Claims Consulting, price is not the primary driver of who gets selected. So we have not seen any kind of a race to the bottom in pricing, and it hasn't reflected itself in the contracts that we're winning or the margins that we're seeing.

Okay, that's great. Thanks.

[Marc Braha], private investor.

Let's go to Libya first. Assuming that the results are to the best of your expectations, what do you think the contribution to the bottom line of the Company would be on a per-share basis?

That's some complicated arithmetic off the top of my head, but I could tell you it has a twofold benefit to us. One is, obviously, when we are paid the $60 million we're owed, our outstanding credit with our bank right now is about $78 million to $80 million. So we'll have the ability to pay down our debt significantly, and not only do we have less debt, but the way our interest rates are calculated, the less debt we have, the better interest rate we pay. We get out of the situation where we're paying default interest, etc., and fees and things like that. So once that happens, I think we have a very strong benefit to the interest expense line on our income statement, which in the first quarter was the biggest negative number to our overall EPS.

I think, secondly, you have a situation where we're getting back to work in Libya. We're paying right now for a certain level of overhead, both on the ground in Libya and in Egypt as part of our North Africa management team. That's been costing us money. We are talking about a roughly $28 million to $30 million contract right now to get back to work on those projects, and when we've gotten the go-ahead on that, I think that helps our bottom line significantly as well.

Do you feel all that is within the year, to your best guess?

We think it's going to happen before the end of the second quarter, although I think the payments will happen over the balance of the year.

You mentioned $20 million in cost savings over the course of the coming year on a quarterly basis. It sounded like you were implying that it would be even $5 million a quarter. Is that correct?

No. What I said was that we are in the process of and have already taken some significant cost-cutting measures. We expect those will benefit us $20 million annually. Of those, $4 million in cuts were already made in the first quarter, and we expect an additional $16 million in cuts over the second quarter and into the early third quarter. But obviously, the benefit of $20 million in annual cost savings is $5 million a quarter.

All right. Are those cost savings attributed to a decrease in interest rates, assuming that you're getting money from Libya, or is it strictly on salaries and general/administrative expenses?

The latter. It's strictly in our SG&A. Any benefit to our interest expense is in a different category lower on the income statement.

Okay. Hindsight is 20/20, but why has it waited to such a critical mass to find $20 million in optimization cost savings?

Well, we haven't waited. We had a bad first quarter last year, in fact worse than this year on an operational basis -- slightly less, though, on an EPS basis. But we responded to that with $9 million in cost cuts at the end of the first quarter and early second quarter of last year. We've been what we consider aggressive in trying to keep our costs low as we continue to grow. We had a certain number of -- a significant number of write-downs in the fourth quarter that hurt us.

And while we're anticipating revenue picking up in the first quarter, in January it did the opposite; it went down. It recovered significantly in February and March. We expect it will continue to in April based on the work that we see coming in and based on the utilization numbers. But we don't want to be in a position where we're losing money on an operating basis.

You had both the Projects and Claims groups in the first quarter only making 5%. We've given them their management targets that we expect them to be making 15% operationally. And you pull that 10% out of the entire operations of the Company, that's a significant difference. So until they get to that point, there's only so fast we can drive revenue. Our only alternative is to drive cost cuts to get back to profitability. And we're doing that. We did it in the first quarter, and we're doing it again now.

Okay. Do you care to comment on the rumblings going on about class actions that are currently being investigated against the Company?

There's no rumblings. There's one press release from one law firm that seems to be out fishing for potential plaintiffs. I don't know what kind of an investigation that is, other than an investigation into plaintiffs. It's certainly not an investigation into anything that we've done. So we don't think it's going anywhere, and if it does, we have insurance coverage, D&O insurance that protects us. So we're not concerned about it in the slightest.

So you don't think that would have any sort of a material effect on the Company's bottom line?

No, we don't.

Okay, that's good to know. Thank you.

Thank you, Marc.

Arnie Ursaner, CJS Securities.

Hi, David, just a few more to follow up. You gave us the utilization by month. Can you give us the number of billable consultants by month as well?

No, we don't have that information. I know some of our competitors do, but we don't track that or report it.

Okay, and then just one more question. I just want to be clear. When you do get paid from Libya, will you be able to repatriate that money to be able to pay down your debt that's outstanding?

Yes.

We think we'll be able to repatriate a significant amount of it, on the order of about two-thirds.

Two-thirds of it. And what, if any, tax implications are you looking at when you do that?

None.

Okay.

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

Thank you, everyone. We are working hard to make sure that our performance improves significantly and quickly over the balance of 2012, and we appreciate your continued interest in our Company and our stock. Thank you all for joining us this morning.

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