Hill International Inc (HIL) 2012 Q2 法說會逐字稿

Greetings and welcome to the Hill International Reports Second Quarter 2012 Financial Results. 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's now my pleasure to introduce your host, Mr. Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

Thank you very much. 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'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 statement to be protected by the Safe Harbor created thereby. Except for historical information contained in this call, the matter set forth herein including, but not limited to, any projections of revenues, earnings or other financial items, any statements concerning our plans, strategies and objectives, 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 of our 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 our forward-looking statements include modifications and termination of client contracts, control and operational issues pertaining to business activity 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 we have filed with the Securities and Exchange Commission. We do not intend and undertake no obligation to update any forward-looking statements.

With that said, I'd now like to turn the call over to David Richter. David, please go ahead.

Thank you, Devin, and good morning to everyone joining us today for our second quarter 2012 earnings conference call. Yesterday after the market close, we announced vastly improved financial results, which included record consulting fee revenue for the second quarter and also that we lost $0.01 per share, well above analysts' consensus estimate of a $0.05 loss and very close to our publicly announced goal of breaking even in the second quarter after a record quarterly loss of $0.17 in the first quarter of this year.

On this morning's call, as usual, we will go through our second-quarter performance, showing comparisons both year-over-year as well as quarter-over-quarter, or sequentially. The second quarter of 2012, Hill's total revenue was $119.4 million, a 6% decrease from the second quarter of 2011. This decline was driven solely by a drop in reimbursable expenses as our consulting fee revenue for the second quarter rose to a record $104.1 million, a 1% increase from the second quarter of last year. This increase in consulting fees was entirely the result of organic growth.

EBITDA or earnings before interest, taxes, depreciation and amortization, for the second quarter of 2012 was $5.4 million, up 18% from the second quarter of 2011. Operating profit for the second quarter of this year was $3.2 million, a big increase of 288% from the second quarter of last year. Despite this improvement in profitability and our goal of breakeven earnings per share, we showed a small net loss in the second quarter of $300,000, or $0.01 per diluted share. This was an improvement from a net loss of $500,000, also $0.01 per diluted share in the year earlier quarter. This was primarily the result of a big increase in our net interest expense, which more than doubled from $1.5 million during last year's second quarter to $3.2 million during this year's second quarter.

Looking at our second-quarter performance sequentially, meaning versus the first quarter of 2012, Hill's total revenue was up 3% and our consulting fees were up 5%. This sequential increase in our consulting fees was driven by major new sales driving our backlog up significantly, which I will discuss in more detail shortly.

On that 5% increase in consulting fees, Hill's gross profit of $44.3 million in the second quarter was up 9% versus the first quarter on a 140 basis point improvement in our gross profit margin from 41.1% to 42.5%. We also saw a big improvement in our SG&A this past quarter with our overhead expense going down from $43.5 million in the first quarter to $41.1 million in the second quarter. As a percentage of consulting fees, our SG&A dropped by 430 basis points from 43.8% to 39.5%.

As the result of the above, our EBITDA was up nearly 15 fold from $400,000 in the first quarter to $5.4 million in the second quarter, and we turned our first quarter operating loss of $2.7 million into a second quarter operating profit of $3.2 million. Our operating margin as a percent of consulting fees improved likewise going from a negative 2.8% in the first quarter to a positive 3.1% in the second quarter. And we drastically improved our earnings per share going from a net loss, as I said earlier, of $0.17 in the first quarter to a net loss of only $0.01 in the second quarter.

Obviously, our goal is not simply lose less money, but to return to profitability as quickly as we can. As I mentioned in my last earnings call, in response to our financial performance in the fourth quarter and first quarter of this year, we went through a detailed review of Hill's overhead cost structure looking for ways to significantly decrease our SG&A expense across the entire Company.

As a result of that review, we put in place a major cost-cutting plan involving the Projects Group, the Claims Group, and our Corporate Group in an effort to eliminate $20 million in annual overhead costs. Through the end of the second quarter, we implemented more than 75% of these cuts. This was the deepest cost-cutting plan we have ever put in place across the Company, but we think it was necessary in order to get Hill back to profitability as quickly as possible, and we saw in the second quarter the immediate impact of this plan to our bottom line. We continue to believe that as a result of these cost cuts and continued increases in our revenue, Hill should be profitable in the third quarter.

Now, looking at the second-quarter performance of our two operating segments separately, total revenue at Hill's Project Management Group during the second quarter was $91.9 million, a 6% decrease from the second quarter of 2011.

Consulting fee revenue for the second quarter of the Projects Group, however, was up 4% from last year's second quarter to $77.2 million. Operating profits for the Projects Group for the second quarter was $7.1 million, a 76% increase from the second quarter of last year.

Looking at sequential performance, the total revenue of Hill's Projects Group was up 3% and consulting fees were up 6% during the second quarter versus the first quarter of this year. The Group saw an 11% increase in gross profit to $29.4 million with a strong 180 basis point increase in gross margin on a percentage basis from 36.2% in the first quarter to 38.0% in the second quarter.

SG&A expense of the Projects Group was down 3% and as a percentage of CFR, it was down 250 basis points from 31.4% to 28.9%. This resulted in a near doubling of operating profit for the Projects Group, up 99% quarter to quarter. As a percentage of CFR, this was a 430 basis point improvement, but operating margin for the Projects Group improving from 4.9% in the first quarter to 9.2% in the second quarter.

We think we can do even better than this as the Group's targeted operating margin is 15% and with a lot of new work ramping up in the second half of this year, we expect even better profitability in the Projects Group going forward.

For Hill's Construction Claims Group, total revenue during the second quarter was $27.5 million, a 6% decline from the second quarter of 2011. Consulting fee revenue for the second quarter for the Claims Group was 26.9%, also a 6% decline from last year's second quarter.

Operating profit for the Claims Group for the second quarter was $2.5 million, a 31% drop versus the second quarter of 2011. Looking at the Claims Group's performance sequentially, total revenue and consulting fees for the Group were each up 3% from the first quarter to the second. The Group saw a 5% increase in its gross profit with gross margin as a percentage of consulting fees up by 80 basis points, going from 54.7% to 55.5% between the first and second quarters.

SG&A expense for the Claims Group was down 5%, primarily as a result of improved utilization across the Group. As a percentage of CFR, it was down 400 basis points from 50.1% to 46.1%, a big improvement. This resulted in operating profit for the Claims Group being up 114% between the first and second quarters. As a percentage of consulting fees, this was an increase of 490 basis points. Net operating margin for the Claims Group going from 4.5% in the first quarter to 9.4% in the second quarter. This was also well below their targeted operating margin of 15%, so the Claims Group also has room for continued improvement over the balance of the year.

Regarding our backlog, Hill's total backlog at June 30 increased during the quarter to a record $2.36 billion, up 3% versus our total backlog at March 31 of this year. 12-month backlog at June 30 was $344 million, up 7% during the quarter. Hill had net bookings during the second quarter of $172 million, a fantastic quarter for new sales for our Company.

Some of the major new contracts announced by us over the past three months, since our last earnings call, include a $21 million amendment to our Tri-Venture's contract to manage the extension of the No. 7 Subway Line in New York City, an $18 million contract to manage a 9-mile reconstruction of the Pennsylvania Turnpike near Pittsburgh, a $16 million contract to serve as program manager for the Los Angeles Metro's entire capital construction program, a $10 million contract extending our role as program manager of the Philadelphia International Airport, a $6 million contract to manage construction of the Forum Al Djazair, mixed-use development in Algeria, a $6 million contract to provide project management oversight services for the expansion of King Abdulaziz International Airport in Saudi Arabia, a $5 million contract to manage the construction of two new hospitals in Abu Dhabi, a $4 million contract to manage the construction of 10 new schools also in Abu Dhabi, a $3 million contract to manage construction of the Al Risafa Soccer Stadium in Iraq, and a $2 million contract to serve as construction manager for the Porto Arabia Towers in Qatar.

We also have some major additional wins that we will be announcing shortly to help contribute to our record backlog at the end of second quarter, and we remain confident that these big wins will help us end this year with record consulting fees.

Regarding Libya, we believe that with the elections coming up in early July that the provisional Libyan government would want to show tangible results in moving their economy forward, and this would result in Hill and other foreign contractors who have been doing business in Libya pre-revolution, getting paid and getting back to work. That obviously has not happened. But elections were held in Libya on July 7, and by all accounts, the elections went well.

The new National Congress will be holding their first meeting tomorrow on August 8 and once they have elected a new Prime Minister and he has appointed a new cabinet, we believe that they will be working on getting the country back to normal as quickly as possible. We hope that means that we will begin to see payments and new work most likely during the fourth quarter, but at this point, we have very little visibility on timing of these matters.

We do know that we have not seen any evidence whatsoever that we will not be paid in due course. So at this point, we continue simply to wait and see.

Moving from Libya to Iraq, we have no update on TRAC Development Group and the two contracts totaling $1.5 billion that we received in the second quarter of 2011 to support their multi-billion dollar housing development in Iraq. Those contracts are still commissioned on our [client track] receiving all necessary financing and governmental approvals so that development to move forward.

We have been told by TRAC that their current timetable is to finalize all of their requirements and begin work on the development in the fourth quarter of this year. If that happens, then we would expect revenue for Hill to begin by the end of the fourth quarter and for HillStone to begin in early 2013.

Finally, we would like to give you an update on our banking situation. On our last earnings call, we advised that we were in technical default of several in the financial covenants in our recently amended credit agreement with our senior lending group. We currently remain in default to that credit agreement but we are in active negotiations with our lenders to restructure our senior credit facility, and we expect to have a resolution of this situation before the end of the third quarter. We are continuing to make resolution of our credit and liquidity issues our top priority and we are confident that they will be resolved successfully very soon.

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

Operator, do we have any questions?

We'll now be conducting a question-and-answer session. (Operator Instructions) Arnie Ursaner, CJS Securities.

Hi, David. This is actually Lee Jagoda for Arnie.

Good morning, Lee.

So if I look at the Iraq contract, how much of the TRAC housing contract is currently in your 12-month backlog?

I believe $10 million worth.

And that $10 million is related to just HillStone or partly Project Management and partly HillStone?

I believe it's simply Hill.

The Project Management [piece]?

Correct.

So then you removed $25 million since -- between this quarter and last quarter?

No, I think it stayed the same. I think that was adjusted at the beginning of the year, at the end of the fourth quarter of last year.

Okay, very good. And then, do you happen to have your cash flow from operations and CapEx in the quarter?

Yes, we do.

John?

What would you like to know? The CapEx was -- for the quarter was around $800,000 and for six months, it was around $1.02 million.

And cash flow from operations in Q2?

It was a negative $4.4 million, primarily due to receivables, partially offset by our -- stretch on our receivables and accruals.

Our total cash flow for the quarter was up about $1.7 million.

Okay, great. And then just one more question and I will hop back into queue. Is there anything in your backlog related to Libya currently?

Yes, we have about $40 million included in our total backlog for work in Libya. We have nothing in our 12-month backlog.

Great. Thanks very much.

Chase Jacobson, William Blair.

Hi, good morning.

Good morning, Chase.

Good morning, Chase.

I just have two questions here. I think, at least from our standpoint, on the equity side, the most important events here are going to be the collection or potential collection from Libya and financing for the Iraq, modularized housing project. And I think it's fair to say that you can characterize both of those as wait and see right now. At what point or is there any point that you have to stop waiting and take some other type of action, whether it's a write-down or just put your resources [and post it on] somewhere else, any color on that?

Regarding HillStone first, I think it's safe to say that if we don't have any kind of movement on the TRAC project by the end of the year and that business has seen no other sales between now and then then we have to re-evaluate at the end of the year whether that business is 2013.

On Libya, we don't have any expectation that we're not going to be bated. It's a question of timing. We have not had to write down or write off any of the receivables. We've seen evidence that they have made promises regarding payment to other foreign contractors in the immediate future. We had one of our competitors tell us it was also doing work in Libya, back when the revolution began. How long they expect before they got paid, they said two years. And -- while we thought it was going to be a lot quicker than that, it turns out [they were] probably closer to the accurate time frame.

You have a new Congress essentially taking office tomorrow. They have to appoint a new Prime Minister, a new Cabinet. They have to begin to prioritize spending. They are coming out of Ramadan at the end of this month. So, certainly, not much is going to happen until September. So we're anticipating in the fourth quarter to have a lot more visibility into what's happening there.

Our issue is less, as far as taking action, how we treat it on our books because we believe we're going to get paid. The question is that at what point do we pursue some other kind of remedy besides waiting, whether that's a legal remedy or a political remedy. We owed the money. There's a government there that has the resources to pay it. In fact, we had just gone through a review process and the Libyan government said we [wrote] every penny that we invoiced. So we still think there's no issue regarding collection. It's just a question of when and how.

Okay, that's very helpful. Thank you. And in terms of the cost cutting or the cost savings program that you implemented earlier this year, can you just give us, and I'm sorry if I missed it, how far along that is? I think maybe 75% completed. Is that correct?

Yes. It was a $20 million target. We've implemented 75% of those cuts through the end of the second quarter and the balance we've made in the third and fourth quarters of this year.

Okay. And then lastly just could you give the organic revenue growth for the segments and for the consolidated?

Yes, both segments were entirely organic. We haven't done an acquisition since the first quarter of 2011.

Okay. And any currency impact in there?

No currency impact.

Okay. Thank you very much.

David Gold, Sidoti & Co.

Hi, good morning.

Good morning, David.

Good morning, David.

A couple of things. First on the backlog, you give the traditional breakdown that you do by business, but then also can you speak to essentially where that's coming from by way of end markets, the increased backlog?

Okay, I'll give you the backlog. The total backlog for the Project Management Group was [$1.021 billion]; the claims management, $39 million; and HillStone, $1.3 billion.

Yes, included in the Project Management was $200 million related to the TRAC project.

Correct. For a total of [$2.360 billion]. For the 12-month backlog, Project Management was $295 million; Claims business, $39 million; HillStone, $10 million for a total of $344 million.

Gotcha, gotcha. And so can you speak a little bit as to the increase sequentially, what demand drivers or what segments you're seeing that from?

The main drivers of the increase in backlog are the Middle East and the United States.

Perfect. And any particular end markets?

Primarily transportation. Transportation continues to be the hottest market that we see out there. So we have some major new wins in highways, in rail, and in airports.

Gotcha. Gotcha. Okay. And then also I was curious, there have been some articles of late coming across on some projects that look to be potentially pretty large, one of them railroad in Qatar and some hospital cities in Saudi Arabia and I think the same article had you listed as the front-runner for about 10 hospitals there. I noticed -- I don't think they were in your comments. And so curious, if you can speak a little bit on that, perhaps you've not just finalized yet, but if you can give us some color as to all of them sound like they could be pretty big?

There were some recent articles in MEED Magazine that talked about some wins. We haven't finalized the contracts yet. We think we're very close. But the project in Qatar is $60 million of backlog and that's a component of our June 30 backlog number. We have one in connection with AECOM, a major oversight contract on the Abu Dhabi International Airport to manage their new midfield terminal. That's an $85 million contract that we are splitting 51%, 49% with AECOM. So we have about $42 million or so, that is not yet in our backlog but we expect that to be finalized in the next couple of days.

And then we won two medical cities in Saudi Arabia, very large hospitals with related infrastructure, housing and other facilities, for about a $16 million contract. I can talk about those. They have all been disclosed in MEED, but we haven't yet formally announced them. And the Saudi hospitals, are they in our backlog or not yet?

[They are in there].

They were included in the June 30 backlog. So between those three, we have -- roughly what's that -- about $120 million of backlog on three major awards, and we think we have more to come over the balance of this year. So some very promising news on the business development front. And as I said, we think we're going to be driving ourselves to record consulting fees for the balance of the year.

Okay. Gotcha. And with that on the Saudi's (inaudible), you'd been listed as a front-runner for 10 hospitals behind that, can you give some color on that too?

Yes. We are currently in contract negotiations with that client. We hope to have that resolved in the next couple of weeks.

Perfect. Thank you, both.

(Operator Instructions) Gerard Sweeney, Boenning.

Good morning, guys. Question on some of your comments you made. You talked about the second half really ramping up on the Project Management side and very confident on the profitability. Is this a function of just building backlog or are you also seeing some better margins in that business and just a little bit color on that front?

No, the margins really don't change quarter to quarter or even year to year. The margins have been very consistent even through the last four years of certainly, economic challenges. You don't see in our business, on either side of our house, price-driven selection. It has been always and continues to be based on technical capability of the best firm that's able to help our clients resolve their problems. So the margins really don't change the gross margin line. We've seen some significant improvement in operating margins. We've essentially had two businesses, making 9% in the second quarter and are capable of making a lot more than that, as much as 15% or higher.

We have a corporate overhead that ran 6%, so we made 3% on an operational basis. If we can get those two groups making 15% and corporate down to maybe 5%, we're making 10% operating margins. We think we can bring that kind of profitability to the bottom line as we continue to grow the business and focus on controlling our costs.

Okay. Speaking of controlling your costs, I mean, obviously it's been a little bit up and down over the last several quarters. Some of it's been outside your control, for example, Libya. But any controls you're putting in place maybe to manage some of the -- most of it, the growth or the efficiencies in line with your revenue, I mean, revenue continues to pick up, but sometimes the expense has outpaced it and you lost some of the profitability?

Well, that didn't -- clearly didn't happen to us in the second quarter, but the opposite.

No, I understand. But looking forward, as you continue out, so you don't have the same problem arise in the future.

Well, the growth takes care of itself. As we build critical mass in some of our operations and add people, those operations become a lot more profitable, and we're seeing that across the board. Certainly, in the Middle East, in the US and Brazil where we're seeing a lot of new sales. We expect that to be able to drive increased operating efficiencies.

Okay, thanks. That's all I have.

Thank you.

[Mark Ralph], private investor.

Hello, David. How are you?

Hi, good morning, Mark.

Okay. You answered most of my concerns, but the one thing that seems to stick out there is the, maybe you can elaborate on it, is the high cost of money, debt service relative to the bank -- relative to the defaults. Is there any light at the end of the tunnel on that. Can you elaborate on that a little bit, because it seems to be heating up a great chunk of the profitability?

Yes, certainly, the default situation we found ourselves in has led to a lot of increased costs. We have higher interest rate that we are paying because of the defaults -- default charges on top of that. We're paying for certain professional fees that our banks are incurring, and we are looking right now at a long-term resolution of that situation that we think over time will bring those costs down and down significantly. We're also looking at a situation that will improve our liquidity. We're essentially tapped out on the existing line, and we're looking at certain options [that are going to] free up availability for us so we can continue to grow our business.

Is this considered more in a short term or is this more of a long-term outlook?

A long-term solution.

But I'm saying is this -- are these options, are they closer rather than further away or is it just we are waiting?

Yes, I am sorry, as I said before, we're actively engaged in negotiations with our current bank, and we expect a resolution in the next 30 days.

Okay. And are you looking favorably at that, are you optimistic about it?

We are extremely optimistic.

Great. Thank you.

Thank you, Mark.

(Operator Instructions) There are no further questions at this time. I'd like to hand the floor back over to Mr. Richter for closing comments.

Thank you. And thank you, everyone. We've been pleased with our quick turnaround from the first quarter to the second quarter of this year. We expect continued improvement over the balance of 2012. We appreciate your continued interest on our Company and our stock, and thank you all for joining us this morning.

Ladies and gentleman, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.