Hill International Inc (HIL) 2012 Q3 法說會逐字稿

Greetings and welcome to the Hill International third quarter 2012 financial results conference call. At this time, all participants are in a listen-only mode. A 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, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you, Claudia. 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 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 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 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 of our forward-looking statements.

Important factors that could cause our 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 third quarter earnings conference call. Yesterday after the market closed, we announced another quarter of improved financial performance, with Hill achieving earnings per share of $0.03, our first profitable quarter in a year.

On this morning's call, as usual, we will go through our third quarter performance in detail, showing comparisons both year-over-year as well as quarter-over-quarter, or sequentially. For the third quarter of 2012, Hill's total revenue was $119.9 million, a 7% decline from the third quarter of 2011. This decline was driven solely by a drop in reimbursable expenses as our consulting fee revenue, or CFR, for the third quarter rose 1% to $103.6 million.

EBITDA or earnings before interest, taxes, depreciation and amortization, for the third quarter was $7.9 million, up 26% from the third quarter of 2011. Operating profit for the third quarter was $5.1 million, a 170% increase from last year's third quarter. Net earnings in the third quarter were $1.3 million, or $0.03 per diluted share, as I said earlier, up 99% from net earnings of $0.7 million or $0.02 per diluted share in the third quarter of last year.

Looking at our third-quarter performance sequentially, versus the second quarter of 2012, Hill's total revenue and CFR were both essentially unchanged. Despite flat CFR, Hill's gross profit in the third quarter was $45.1 million, a 2% increase from the second quarter. That was driven by a 110 basis point improvement in our gross margin as a percent of consulting fees to 43.6% in the third quarter from 42.5% in the second quarter.

Our SG&A continued to drop this past quarter with our overhead expense going down to $40 million in the third quarter, from $41.1 million in the second quarter. As a percentage of consulting fees, our SG&A dropped by a solid 90 basis points to 38.6% from 39.5%.

As the result of our gross profit being up and our SG&A being down, our EBITDA continued to climb, up 47% to $7.9 million in the third quarter from $5.4 million in the second. This is the most EBITDA we have earned since before the Libyan Revolution began in the first quarter of 2011, a time when we were adding significantly to our earnings from major work in that country. Hill's higher EBITDA drove a 59% increase in our operating profit sequentially to $5.1 million in the third quarter from $3.2 million in the second. Our operating margin as a percent of consulting fees improved considerably, up 180 basis points to 4.9% in the third quarter from 3.1% in the second. And we were able to post a net profit for the first time this year with earnings of $0.03 per share in the third quarter versus a net loss of $0.01 a share in the second.

Now, looking at the third-quarter performance of our two operating segments separately. Total revenue at Hill's Project Management Group during the third quarter was $92.8 million, a 5% decrease from the third quarter of 2011. Consulting fee revenue for the third quarter of the Projects Group, however, was up 6% from last year's third quarter to $77.2 million. Operating profits for the Projects Group in the third quarter was $8 million, an increase of 57% from the third quarter of last year.

Looking at that performance sequentially, total revenue at Hill's Projects Group was up 1%, but CFR was unchanged in the third quarter versus the second. The Group saw a 4% increase in gross profit to $30.4 million with a 140 basis point increase in gross margin on a percentage basis to 39.4% in the third quarter from 38.0% in the second.

SG&A expense of the Projects Group was up 1% and as a percentage of CFR, it was up 10 basis points from 28.9% to 29%. This resulted in a 13% increase of operating profit for the Projects Group, quarter-to-quarter. As a percentage of consulting fees, this was a 120 basis point improvement, with operating margin for the Projects Group improving to 10.4% in the third quarter from 9.2% in the second. We think we can do even better than this as the Group's targeted operating margin is 15%, and with a lot of large new projects currently ramping up, we expect even better profitability from the Projects Group going forward.

For Hill's Construction Claims Group, total revenue during the third quarter was $27.1 million, a 12% decline from the third quarter of 2011. Consulting fee revenue for the third quarter for the Claims Group was $26.4 million, a 10% decline from last year's third quarter. And operating profit for the Claims Group was $2.6 million, a 40% drop versus what was a record profitable quarter in the third quarter of 2011 for the group.

Looking at the performance sequentially, total revenue and CFR Hill's Claims Group were each down 2% in the third quarter versus the second. The Group saw a 1% decline in its gross profit, however, with gross margin as a percentage of consulting fees up slightly by 20 basis points, going to 55.7% in the third quarter from 55.5% in the second.

SG&A expense for the Claims Group was down 3% and as a percentage of CFR, it was down 40 basis points from 45.7% to 46.1%. This resulted in a 5% decline in operating profit for the Claims Group from the second quarter to the third. As a percent of consulting fees, this was an increase of 60 basis points with operating margin in the Claims Group going from 9.4% in the second quarter to 10% in the third. This is also well below their targeted operating margin of 15%. The Claims Group has room for continuing improvement going forward as well.

Regarding our Company's backlog, we achieved record backlog at the end of the third quarter. Hill's total backlog at September 30 increased by 1% during the quarter to a record $2.373 billion. 12-month backlog at September 30 was $351 million, up 2% during the quarter. Hill had net bookings during the third quarter of $117 million, a solid quarter for new sales.

Some of the major new contracts announced by us over the past three months, since our last earnings call, include a $59 million contract to manage construction of the Green Line for the new Doha Metro System in Qatar, a $42 million subcontract with AECOM to manage construction of the new multibillion midfield terminal at Abu Dhabi International Airport. Two contracts totaling $34 million to manage the construction of two medical cities and 10 other hospitals throughout Saudi Arabia, a $22 million contract awarded to our joint venture with URS to manage construction of the US Department of States and their Foreign Affairs Security Training Center in Virginia, a $15 million contract to provide facilities program management services for the New Jersey Turnpike Authority, four contracts totaling $14 million to provide construction inspection services for Caltrans, the California DOT, to their District 7, a $9 million contract to manage two major developments in India, one high rise residential, one high rise commercial, a $3 million contract to manage construction of a research laboratory in Brazil and three contracts totaling $3 million to provide construction engineering and inspection services to the Florida DOT.

With respect to our financing, on October 18th we announced that we had completed a two-step restructuring of our debt. First, we raised $75 million in cash in the form of a second lien term loan from a group of funds managed by Tennenbaum Capital Partners. The loan has a term of four years and we will be booking an effective 20% interest rate for that loan. Half of that interest expense will be payable quarterly in cash over the course of the loan and half will be payable at the back end when the loan is due.

In addition, unlike many similar loans, our loan from Tennenbaum has no equity component whatsoever, no stock, no warrants, nothing. So there was no dilution at all to our stockholders as a result of this transaction. Second, we used the net proceeds of that loan, $71.5 million, to restructure our senior revolving credit facility with the lending group led by Bank of America. As a result of that restructuring, the maximum limit of our revolver was reduced from $100 million down to $65 million. We paid down the outstanding borrowings under that line from about $82 million down to about $14 million. We increased our letter of credit sublimit under that facility from $35 million to $45 million. We extended the term of the facility for an additional year to March 31, 2015. We were able to negotiate substantially better financial covenants under the loan, and most importantly, we were able to get our Company out of default, which we have been in for the past five months.

Even more importantly, as a result of this restructuring we went from a situation where we were effectively maxed out on our borrowing capacity yet still growing, to a situation where we now have more than $35 million in availability under the revolver, plush cash in hand of another $15 million or about $55 million in total available cash. We think now we have sufficient capital to continue growing our business around the world.

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

(Operator instructions) Our first question comes from the line of Chase Jacobson with William Blair. Please state your question.

First off, can you give us the split on the backlogs between the segments?

Sure, Chase. Total backlog, I'll go first, on the [PM] business it's $1.33 million. For the Claims business, $40 million, and for HillStone, $1.3 billion for a total of $2.373 billion.

Let me add one comment that of the number for the PM Group, $200 million of that relates to the tracked project in Iraq.

And the 12 month breakdown, the PM, $302 million, the Claims Group, $39 million, and HillStone, $10 million, for a total of $351 million.

Thank you for that. So on this new debt, I think David you said that you're out of default and you can continue your growth. Does that mean that -- so now you can go back to doing acquisitions or share repurchases without having to get approval from the bank? Is that correct?

No, that's not correct. We have certain restrictions on what we can do. We have certain transactions that we can do of a certain size and certain deals above that size require bank approval, subject to certain levels of debt. So the less debt we have, the more that we can do. One of our top priorities going forward is now that we have this in place is to deleverage ourselves. And there's no question we have too much debt on our balance sheet. We continue to expect in the near future that Libya will resolve itself. We've seen a lot of positive developments there since the last call.

Just to give you a summary of what that is, I think on almost the same day we had the last call, the National Congress of Libya met for the first time. They had appointed a Prime Minister who put up two recommended cabinets, both of whom were rejected and then he was rejected. They took a vote of no confidence. In early October, a new Prime Minister was appointed. His recommended cabinet received the approval of the National Congress and my understanding is they're going to be sworn, both the Prime Minister and the new cabinet in about a little less than two weeks from now.

Once they take office, our expectations is that the machinery of the National Government of Libya is going to start moving forward again and that means they're going to start funding the different agencies and ministries, and at that point we expect that we're going to get some resolution on the money that we're owed.

Okay, well that answered one of my questions. The other thing that I would just ask, I guess for John, obviously the interest expense was up quite a bit as you were working on this -- on the new debt and the amendment to the existing credit facility. Can you just give us any color on how we should think about the interest expense going forward for modeling purposes?

Yes, on quarterly basis, total interest, that includes both Cash A and also any accretion on the term loan would be around $5 million, $5.5 million per quarter. So the range on an annualized basis anywhere from $20 million to $22 million, of which around half of that is paid in cash and half non-cash.

Okay, and just one more if I could. As it relates to HillStone, last quarter you talked about potentially reevaluating that if there was no progress in the track by the end of the year. Can you just give us an update on that?

We're at exactly the same point. We haven't made any progress in the last three months on track moving forward. HillStone has some other opportunities it's working on and we're going to take it quarter by quarter from here on out.

(Operator Instructions) Our next question is coming from the line of David Gold with Sidoti and Company. Please state your question.

A couple of things. First, just following up there on HillStone, if we went back some months, I'm thinking that we might see something by year end. Presumably, as you said, it sounds like there's $10 million in the backlog. From other projects that you're working on, is there anything there that might start by year end? Or was that largely related to Iraq when you were thinking that?

The $10 million that's in our 12-month backlog was related to track and the project in Iraq. I think it's highly unlikely anything is going to happen before year end.

And then on the claims business, give us a sense for what has to happen there to both get it back to growth and get the margins going. I know you've taken a lot of cost out of the business broadly, but A, are there more costs to take out, and B, is it purely the economy or the environment? Or are there things that you can do that are sort of business specific to drive things?

The claims business is like any typical pure consulting business that operates under short-term contracts with very little predictability. From quarter-to-quarter, it's going to bounce all over the board a little bit. It took a little dip from the second quarter, but they've been able to maintain their profitability. It looks like they're going to have a good year overall if they continue on this pace for the fourth quarter, but it can be up or down a little bit quarter-to-quarter and that's not surprising.

They, like the project group, like the rest of the Company have been very aggressive in the last six months in focusing on their overhead cost, their SG&A, focusing on professional utilization and working hard to get that up. I could tell you that's improved throughout the year and in September, I think the claims group had their second best utilization month of the year. The project group had their best utilization month of the year. So we think that's trending in the right direction. (Inaudible) in the third quarter achieved 10% operating margin, which we saw is very positive. A year ago, they did almost 15%. So we know they can get it back there and we're working hard to make sure that that happens.

Can you give a sense for -- with September having strong utilization or high utilization trended throughout the quarter?

You mean the three months of the third quarter?

Yes.

It was -- in the projects group, it was -- September was the best month. July was the second best and not surprisingly, August was the worst. And even before I look, I can pretty much tell you the same thing is going to be true in the Claims Group, which it is. August is typically one of our worst months of the year. You've got vacations and holidays in the Western World and you've got Ramadan in the Middle East. So all those things usually slow down our revenue and our utilization in that month.

And then just one last, obviously the last few months you've been quite successful at taking cost out. Is there more to be done at this point or is it more a function of revenue growth?

I think going forward we're going to keep a very close eye on our cost, particularly our overhead cost, and do everything we can as our revenue continues to ramp to keep those costs in line or cut them further, so we can maximize our EBITDA and our operating profit.

Our next question comes from the line of Gerry Sweeney with Boenning and Scattergood. Please state your question.

Most of my questions were just answered in the previous analyst right there, but quick question. You did mention that August was generally the worst month or one of the worst months for utilization. How does December stack up generally?

December is the other bad month of the year.

As bad as August, or worse?

Usually as bad. No better, no worse. But those are obviously the months where you have a lot of holidays, you have a lot of vacation time.

Understood. And with your goal of 15% operating margins in, we'll say, project management, obviously you're trending in the right direction. You're talking about building revenue utilization. What are -- can you give a little bit more specifics on some of the next steps to sort of get the next hurdle in terms of major jumping in margins? Or will it be a gradual increase? Is there anything specific targeted, something a little bit more granular?

It's really just a combination of two things, getting -- there have been a lot of press releases over the last six months announcing a lot of work, some very big projects and very big contracts. And you don't put 50 people on a job on day one as soon as you have a new signed contract. There's a mobilization process. We've got to continue ramping up the projects that we've won, getting staff on board, and on those projects as billable. We've got to continue to win work elsewhere and continue to do the same thing.

I think as our revenue continues to ramp up and we continue to keep a sharp eye on the bottom line and not let our overhead costs grow, and we keep a very close eye on utilization and making sure that our people look busy, I think you'll see the operating profit continue to trend upward.

And this is just the first three quarters of this year. In Claims, operating profit -- operating margin, I'm sorry, went from 4.5 in the first quarter to 9.4, to 10.0 in the third. And project management went from 4.9, to 9.2, to 10.4. So they're heading strongly in the right direction and I think the things that we're doing today and are going to do over the next couple of quarters are only going to make those numbers better.

As you get closer to that goal, each incremental gain generally becomes a little bit more difficult is what I was sort of leading towards. Have you set any specific goals as to when you want to hit those goals or target timeframes, or anything like that?

As soon as possible.

Our next question is coming from the line of Arnie Ursaner with CJS Securities. Please ask your question.

First for John, can you give us your expectation or thoughts on tax rate for the balance of this year and next year?

Well, I'll start with next year. It should be within the 15% to 20% range, the effective tax rate. And for this quarter, it will probably be in the 15% range.

And what costs are you actually incurring for Track and can you be very specific about what's holding back an award on this?

With respect to Track specifically, we're not incurring any cost. Track is a developer that's trying to put together, as we've talked about many times before, financing, and approvals, and construction teams, and everything else for the Iraqi Government to give them the final go ahead to move forward. HillStone and Hill are incurring no additional costs specifically in connection with Track. We're on a wait and hold mode.

The housing business other costs have been relatively de minimis. They're running about $400,000 a quarter and like I said, over the next couple of quarters, we're going to see some positive developments from that business or we're not. In either case, those costs go away.

And you are taking obviously aggressive steps to reduce your SG&A as a percent of sales, but the absolute dollars involved, $40 million, are still pretty high. And the Richter family obviously are the larger shareholders. Can you remind us perhaps or help us understand how much of the SG&A is directly related to your family and what drives executive bonuses? What is the factor that will cause those levels to be whatever they are for the current year.

I'm not really sure I understand the point of the question, Arnie, but --

The point of the question is your SG&A dollars are still incredibly high. Some portion of that is obviously driven by bonuses for performance for the Richter family and others. I'm just trying to understand how we as outside shareholders should think about it.

I'm not sure I understand why you're saying obviously it's driven by bonuses because we -- my father and I got no bonus last year. We're expecting no bonus this year. But in any event, the costs related to my father and myself, that's in our proxy statement. You know what those are. They're not out of line with the size company we're running. We have some relatives working in the company and they're all doing a good job.

Of the $160 million, you're talking about probably 2%of that that's related to my family. $160 million is down from last year despite the fact that we're growing the consulting fees of the business. And while we're cutting costs and have cut costs so far this year, close to $20 million worth, in large parts of the Company, we continue to grow and their overhead is increasing, despite other parts of the Company having to cut. Certainly, we continue to grow in the Middle East and our two hottest markets right now for new work are the Middle East and the United States. And so we're ramping up in those places and adding staff, billable staff. Europe continues to be a very difficult place for us to do business. There's not a lot of new construction happening throughout Europe. That's probably our most challenging market. And where we're able to cut costs, we have and we'll continue to be focused on doing that.

Our next question is coming from the line of Jeffrey Devers with Everclear Capital. Please state your question.

Over the last year or so, there's been purchases of stock by the Company. The total looks to be about $20 million to $25 million, which is obviously reducing the equity base. At the same time, you're increasing your debt structure. I was wondering if there are any plans to issue some equity to sure up the financial structure of the Company?

There certainly are not at these prices. We bought -- and those purchases have not been recent. They went from about 2008 to about 2010. We bought about, I think the number was about six million shares of stock, which dropped our outstanding share count by about 15%. We paid about $25 million in cash for that. We have availability under our new facility to do a certain level of stock repurchases, but as of now, we haven't made a decision whether to pull the trigger on that or not.

I'm sorry, you said you might be thinking about buying more stock rather than issuing stock? I'm sorry?

What I said was we have an availability under our current facility to buy back a certain amount of stock. We have made no determination to do that, and as I said at the beginning of my answer, we are not looking at selling new shares at these prices, which last time I looked was about $3.25 a share.

(Operator Instructions) Our next question is coming from the line of Mark Braha, a Private Investor. Please ask your question.

In light of the recent tropical storm/super storm Hurricane Sandy, has it affected the Company in any way both in the availability or are you able to conduct operations as normal? Have you been affected by the storm is the first part of my question. The second part of my question, do you recognize this as an opportunity to take on new work and are you in a position to do that?

The answer to that question is yes and yes, like most double edged swords. Yes in that we were impacted by the storm. We have a significant number of offices in the Northeast, most of whom escaped with very little impact. Our New York City operation, however, was shut down almost for an entire week as were a lot of the projects we were working on. So we'll see an impact to our Northeast region, a significant one. There's 13 weeks in a quarter and when you can't do business for one of those 13 weeks it has an impact to that operation's bottom line.

On the up side, we have had a significant amount of involvement in the past of getting work from natural disasters. We saw a significant amount of work that came out of Hurricane Katrina in the Gulf Region, where we were doing a significant amount of estimating work, a group working for FEMA. And we're looking at opportunities right now to do similar work for FEMA and other potential clients in the New York, New Jersey area.

So do you see it as a net positive?

I certainly hope it will be, yes. I think it's kind of early to make any kind of judgment about how much work we're going to see over how long a period of time, but certainly they are going to need help from firms like Hill to recover from the storm in both states.

And in light of the election, do you see continuing with the Obama registration as a net plus or negative, or neither impact on the firm or its contracts?

You're asking for our corporate position or my personal position?

No, we won't get into personal. Let's go corporate.

Well, certainly to the extent that the government is going to spend more money and they're going to spend it in areas of infrastructure that's been the hottest market for us in the United States, transportation, especially rail, highways, bridges, airports, water infrastructure, environmental cleanup, things like that. But like most firms, we're to some degree a boat that can go up or down on a rising or lowering tide. So I think how the overall economy does in the US is going to really drive how we do more so than any specific spending plan.

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

Thank you, everybody. We've been pleased with our improved financial performance over the course of the year, our return to profitability in the third quarter, and our management team is working hard to continue to improve that performance in the fourth quarter and heading into 2013. We all appreciate your continued interest in our Company and our stock, and I thank you all for joining us this morning.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.