Hill International Inc (HIL) 2012 Q4 法說會逐字稿

Greetings. Welcome to the Hill International reports fiscal 2012 fourth-quarter 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 is now my pleasure to introduce your host Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Mister Sullivan, you may 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 Security Litigation Reform Act of 1995. It is our intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information contained on this call, the matters set forth including but not limited to, any projections of revenues, earnings or other financial items, any statements concerning plans, strategies and objectives of future operations, and any statements regarding future economics conditions or performance are forward looking statements. These forward-looking statements are based 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 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 backlog. Additional factors that could cause actual results to differ materially from forward-looking statements are set for 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 would now like to turn the call over to David Richter. David, please go ahead.

Thank you, Devin. Good morning to everyone joining us today. Yesterday after the market closed, we announced our financial results for the fourth quarter and full year 2012. Despite record consulting fees for the quarter, we had a significant number of non-cash charges that resulted in us reporting our worst quarterly and full year net loss ever. Despite this, we believe that our record sales efforts last year have positioned our company for record revenue and a return to profitability in 2013.

On this morning's call, we will focus only on the fourth-quarter, not the full year. We will discuss comparisons both year over year, as well as quarter over quarter or sequentially. We will also discuss our company's performance, both with and without the impact of the non-cash charges I just mentioned.

Total revenue for the fourth quarter 2012 was $125.7 million, a 3% increase from the fourth quarter 2011. Consulting fee revenue, what we sometimes call CFR, for the fourth quarter was a record $110.8 million, an 11% increase from the prior years fourth quarter. Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the fourth quarter 2012 was $2.2 million, down 6% from the fourth quarter 2011. Operating loss for the fourth quarter was $300,000, an improvement from an operating loss of $1.3 million in the year earlier quarter. Our next loss in the fourth quarter was $22.5 million, or $0.58 per diluted share, compared to a net loss of $0.6 million in the fourth quarter 2011, or $0.02 per diluted share.

During the fourth quarter, total booked non-cash charges totaling $23.1 million adversely impacted our reported financial results. These charges included the following, $17.7 million as a result of a reserve on the entire valuation of our US deferred tax asset, $4 million as a result of a reserve taken in connection with contingent employment tax liability for certain of our foreign subsidiaries, $1 million in connection with the termination of operations of our subsidiary HillStone International, $200,000 as a result of a write off of an investment in a terminated Middle East real estate development joint venture, $200,000 as a result of a litigation settlement in connection with the terminated US real estate development joint venture. These non-cash charges are balance sheet adjustments and have no impact on the Company's cash position or liquidity. Excluding the impact of these charges, for the fourth quarter, Hill's EBITDA would have been $6.4 million, we would've had an operating profit of $4.1 million and our net loss would have been negative $1.7 million, or $0.04 per diluted share. This compares to our analyst consensus estimate of a $0.02 loss per share for the quarter.

Looking at our fourth-quarter performance sequentially, versus the third quarter, Hill's total revenue was up 5% and our consulting fees were up 7%. Hill's gross profit in the fourth quarter was $47.9 million, or 6% increase from the third quarter. That was despite a small drop of 30 basis points in our gross margin percentage to 43.3% in the fourth quarter from 43.6% in the third quarter. Our SG&A was higher this past quarter given our growth, and also from one of the non-cash charges discussed earlier for $4 million which impacted our SG&A expense.

As a result, our SG&A in the fourth quarter was 21% to $48.2 million from $40 million in the third quarter. As a percentage of consulting fees, our SG&A percentage went up by 490 basis points to $43.5 million from $38.6 -- I'm sorry, from 43.5% to 38.6%. Backing out the $4 million charge, our SG&A would've been $44.2 million for the quarter, or 39.9% as a percent of consulting fees. Our long-term goal for overnight expense is 35% and we think we will be much closer to that number in 2013.

Our EBITDA was down 72% from the third quarter to the fourth, going from $7.9 million in the third to $2.2 million in the fourth. Absent the $4 million non-cash charge, our EBITDA would've been $6.4 million, a decrease of only 19% sequentially. That would've given us an EBITDA margin of 5.8% in the fourth quarter, down 180 basis points from 7.6% in the third. Likewise, Hill's operating profit in the fourth quarter was also done 19%, except for the $4 million non-cash charge, to $4.1 million.

With the charge, it was down 106% from $5.1 million in the third to a negative $300,000 in the fourth quarter. Without the charge, we would've had an operating margin of 3.7% in the fourth quarter, down 120 basis point from 4.9% in the third quarter. Our net loss for the fourth quarter was a negative $22.5 million, or $0.58 per diluted share versus net earnings for the third quarter of $1.3 million, or $0.03 per share. Absent all non-cash charges, our net loss for the fourth quarter would've been $1.7 million, or only $0.04 per share, a $0.07 negative swing from the third quarter.

Now, looking at the fourth-quarter performance of our two operating segments separately. Total revenue at Hill's Project Management Group during the fourth quarter was $98.6 million, a 3% increase from the fourth quarter 2011. Consulting fee revenue for the fourth quarter Projects Group was a record $84.7 million, up 15% from the prior year's fourth quarter. Operating profit for the Projects Group for the fourth quarter was $4.6 million, a drop of 23% from the fourth quarter of 2011. Absent the $4 million non-cash charge which was felt entirely by the Projects Group, operating profit in the fourth quarter would've been $8.6 million, a 44% improvement from the fourth quarter of 2011.

Looking at sequential performance for Hill's Projects Group, total revenue was up 6% and CFR was up 10% in the fourth quarter versus the third quarter. The Projects Group saw likewise 10% increase in gross profit to $33.4 million, with gross margin on a percentage basis at 39.4%, seeing no change from the third quarter. SG&A expense for the Projects Group was $28.8 million, up 28% from the fourth quarter versus the third. Ignoring the impact of the $4 million non-cash charge, SG&A in the fourth quarter for Projects Group would've been $24.8 million, up 11% from the third quarter. This equates to 29.2% of consulting fees, a small 20 basis point increase from the third quarter.

Sequentially, operating profit for the Projects Group was down 42% quarter to quarter. Absent the impact of the $4 million non-cash charge, it would've been up 8%. As a percentage of consulting fees, this would've been 10.2%, a 20 basis point decrease from 10.4% in the third quarter. That is two quarters in a row of double-digit operating margin for the Projects Group and we expect that they will do even better in 2013.

For Hill's Construction Claims Group, total revenue during the goal was $27 million, a 2% increase from the fourth quarter 2011. Consulting fee revenue for the fourth quarter of the Claims Group was $26 million, a 1% increase from the prior year's fourth quarter. Operating profit for the Claims Group for the fourth quarter was $1.7 million, a 20% decline from the fourth quarter of the prior-year. The charges discussed earlier had no impact on the financial performance of the Claims Group in the fourth quarter 2012.

Looking at the Claims Group's performance sequentially, we saw a total revenue unchanged in consulting fees down 1% in the fourth quarter versus the third. The group also saw a 1% decline in its gross profit, but gross margin as a percent of CFR showed a slight improvement, up 10 basis points to 55.8% in the fourth quarter from 55.7% in the third. SG&A expense for the Claims Group was up 6% in the fourth quarter and as a percentage of consulting fees, it was up 340 basis points to 49.1% from 45.7%. This resulted in a 35% drop in operating profit for the Claims Group from the third quarter to the fourth. As a percentage of CFR, this was a decline also of 340 basis points, with operating margins for the Claims Group dropping to 6.6% in the fourth quarter from 10% in the third. We expect that the Claims Group will be performing much better than this during 2013.

Regarding our backlog, we achieved record backlog at the end of 2012, with Hill's total backlog increasing by 6% during the fourth quarter to a record $923 million. This backlog consists of $884 million in our Project Management Group and $39 million in our Construction Claims Group. 12 month backlog at year-end was also a record of $382 million, up 12% during the quarter. This is broken down into $343 million coming from our Project Management Group and $39 million from our Construction Claims Group. Company wide, Hill had net bookings during the fourth quarter of $161 million, a solid quarter for new sales and a strong end to what was in 2012, the best year in the history of our company for bringing in new work.

Some of the major new contracts announced by us over the past four months since our last earnings call include a $109 million contract to manage expansion of Oman's two largest airports; a $10 million contract to serve as project manager for the Anaheim Rapid Connection streetcar project in Southern California; a $10 million contract to provide staff augmentation services to a New York City school construction authority; a $10 million contract to be the construction manager for the $1.4 billion Rising Sun Taipei city development in Chongqing, China; a $4 million contract to provide design management and construction supervision services on water and wastewater infrastructure projects throughout Caras Severin County in Romania; a $5 million contract to provide on-call construction management and construction inspection services for district eight of CalTrans, California Department of Transportation; a $3 million contract to manage construction of the Dhofar beach resort in Oman; a $2 million contract to manage construction of the Secon Nile Towers in Cairo; a contract to act as program manager for a major renovation of the United Nations office complex in Geneva; a contract to manage the repair earthquake damage to the Washington Monument; a contract to manage expansion of the Suquamish Clearwater Casino Resort near Seattle; a contract to provide on-call CM services to the Columbus Regional Airport Authority; a contract to act as construction manager for the new Grand Hyatt Rio hotel in Brazil; a contract to provide construction consulting services to Freeport-McMoRan, a new client, and one of the largest mining companies in the world; and many, many others that we earned over the last four months. Based on these contracts, some of which were included in our 2012 year end backlog and some of which were won early in 2013, we estimate that Hill's consulting fee revenue for this year will be between $500 million and $520 million, which equals 20% to 25% growth in our consulting fees, from $418 million that we saw last year. This guidance is based on organic growth only and assumes no additional CFR from acquisitions, although we do expect that we will close one or more acquisitions this year.

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

Thank you. We will now be conducting the question and answer session.

(Operator Instructions)

Lee Jagoda, CJS.

Hello, good morning. Regarding the Oman project, were there any expenses incurred in Q4 ahead of the ramp-up of the project on January 1, and how much additional hiring was and will be done specifically for this project?

There was actually very little expense. Certainly no more than a rounding error in the fourth quarter. Our contract officially began on January 1. We were replacing a prior construction management joint venturer that had been terminated. So one of the benefits was we had to ramp up very quickly and we did because we picked up a lot of the existing employees working under the prior contract. In December we had literally almost no staff in Oman. Today I think the number is close to 220 people and we expect that at the top end, once we are fully staffed on the two projects, that we will have probably about 350 people working in Oman.

How does the 350 compare to your total billable headcount at the end of 2012?

In Oman? Nobody billable in Oman at the end of 2012.

I'm talking total company wide.

Total company wide. End of the year, I believe it was about 3,400 employees. We have 3,700 today.

So roughly 10%.

Yes.

Obviously, there is added expense when you talk about 20% to 25% revenue growth on a year-over-year basis, especially at a people business. How should we as outsiders think of your SG&A as a percentage of CFR in 2013?

Certainly our SG&A is going to increase given the growth. But as a percent, we expect it to come down. It was, like I said, 39.9% in the fourth quarter absent the charge. We expect that to be closer to 36% to 38% for the full year 2013. As I said, our long-term goals, we continue to grow to get that number closer to 35%.

Okay. One more and I will hop back in the queue. Does the $500 million and $520 million of revenue guidance include any anticipated work in Libya? And can you just remind us, if you were to get a partial or full payment from Libya, the requirements under your credit agreements or the debt pay down?

The projection does not include anything for Libya, although we do expect that we will be back to work in that country this year. We are expecting that we will get payment in part or in full during the course of this year. Libya is going through an approval process right now with their 2013 national budget. The total number, which I think was LYD66 billion, has been approved by the national congress and is now in committee to determine how that number gets broken down among the various agencies and departments of their government.

We think once that process is concluded, the government will fund the various agencies and once our client, ODAC, has money, we will start seeing cash coming in from that client and return to work on the projects we are involved in. They have announced and they have told us specifically that the University of Tripoli is one of their highest priority projects and that was the project we are managing. The largest project we had before the revolution.

Our plan is to bring back as much of that cash is can back to the United States. We have contractual requirements in connections with our new loan with Tennenbaum Capital Partners in our existing senior revolving credit line with Bank of America. Any money brought back, 50% will go down to pay the Tennenbaum term loan permanently and 50% will go down to pay down our revolving credit line which, of course, we can borrow back against.

Great. Thanks very much.

Thank you.

(Operator Instructions)

David Gold, Sidoti.

Hello, good morning. Couple things, first Dave, when you think about the guidance that you are giving for 2013, the $500 million to $520 million or so, sort of gel that with the backlog -- the 12 month backlog of $382 million or so. Historically you obviously have had some growth there over the peer backlog business that you have signed. But it seems aggressive, can you give a sense for what is out there, is it that you are bidding on a number of contracts or pretty close to announcing, or basically what gives you the confidence a little bit that you will see that growth?

It is a big increase from what has been a couple of years of single-digit growth. But we certainly see the market getting better, we had a fantastic year last year in new sales and brought in some really significant projects, most of which were in the Middle East. We expect that operation to have a fantastic year as well. But we have been talking for a long time about the best metric to predict our growth over the next year is a multiple of our 12 month backlog. The multiple that we have given is typically 1.3 to 1.4. If you do those numbers on $382 million, you come up with a range of $497 million to $535 million which I think what we did was tighten that number a little bit based upon our best estimate as of today where we see the full year working out.

So we don't think it is an aggressive number but it is one -- given the fact that a lot of people know that 1.3 to 1.4 multiple metric, we felt we should just communicate that to everyone. So the market investors, everyone has an indication of how we expect to perform this year. We think that is a -- I don't want to say conservative or aggressive, somewhere in between. We think it is a reasonable target for the year. I can also tell you that the work we brought in, in early 2013 also gives us confidence that, that is number we are going to hit.

Layering on that, that you're presumably seeing enough activity out there, RFPs are going out, presumably you are pretty confident that basically there is enough work out there that you can get there?

Absolutely.

And then, there is a comment in the release about next year expecting, or 2013 expecting profitability. When you think about it, you obviously made a number of changes and the fourth quarter was a little bit of a clean up so to speak. What will be the biggest factors going into that? Part of that, I would be curious, when you think about your 35% G&A target, is that purely a function of growing the top line or are there close cuts and further adjustments that you think you can make?

No, I think that the cost kind of we have done over the past few years has been, obviously, important to our bottom-line. I don't anticipate that we are going to be doing much of any cost cutting going forward. I think that given 20%-plus growth in consulting fees for this year, what we need to do is keep the growth of our SG&A in line and make sure that is a lot less than 20%. We can see a significant delta between those two as far as additional operating profit. We've got, obviously, a big interest hurdle as a result of the run-up in debt that we saw because of Libya and the new term loan that we have with Tennenbaum Capital Partners.

I think we are projecting a run rate of about $20 million to $22 million this year in interest expense and we, obviously, expect to make significantly more than that in operating profits so that we can show a profit for the year. We also see an increase in our utilization as we add a lot of billable people and very few unbillable people to our Company. I think what we are starting to see across the board, certainly our strongest markets right now are the Middle East and the US. We are seeing improving metrics out there in the marketplace everywhere. More projects moving forward, more sales across the board, our people are getting busier and we see that as a very good sign.

Got you. Got you. Perfect. Just one last, when we think about the construction claims business for 2013. Do you see sufficient drivers, basically, to get growth going there again and profitability or just expecting maybe that single-digit number?

As you know, the Claims Group is a very difficult one to project out long-term given the short-term nature of the work. Typical consulting practice goes up and down without a lot unpredictability or visibility. We are hoping that they are going to have a solid year, a record year in both consulting fees and operating profit. They have been earning, I think you used the expression return to profitability for the Claims Group. They have been profitable forever. They have been earning in the high single-digit millions which is roughly between 8% and 10% operating profit annually.

We expect that this year they are going to see a big improvement and a significant increase in their operating margin, which hopefully will take them into double-digit millions as far as operating profit, potentially even the low teens. But they are already the 800-pound gorilla of that industry and I don't know how much significant growth we are going to see out of that group organically. But, certainly I think high single-digits is reasonable. But clearly the driver of our growth this year is going to be in the Project Management Group. We're expecting essentially 90% of our growth, that we are projecting to come out of Project Management.

Got you. Got you. Just one last one on that, the construction on the Claim side. The upside of increased profitability that you expect, is a function of basically of better utilization, utilization management, doesn't sound like it is a function of a much bigger top line, so it is just working smarter?

The biggest driver of profitability in the Claims Group is making sure everyone is busy. That can be high utilization in an individual officer or just more work for that office. If you can get people busy that weren't busy, that revenue drops right to the bottom line. It is just pure profit. We have much more focus on making sure everybody, particularly in office or region is billable. It's, as I said, hard to predict what work is going to come in the door next week much less next quarter, but that is certainly their target and focus for 2013 and we expect they are going to have a record year.

Got you. That is helpful, thanks.

Thank you David.

Gerry Sweeney, Boenning & Scattergood.

Good morning, David. Good morning, John. You touched on this but I want to see if you can give me a little bit more detail. It's more, I will call it deleveraging from the operating side. Obviously, between your SG&A and corporate expense and your interest expense, it takes a large chunk out of your profitability. With these big projects in Oman and all of the other projects you listed, when does this start to hit the cash flow statement and when can we see a little bit more deleveraging, in particular on the interest line? Do you have any plans for that or can you give any granularity behind that?

I think to a large degree, the growth that we are seeing in the Middle East is going to prevent it from being a major generator of cash that we can repatriate to the US to pay down debt. What we do expect will happen is when we collect on Libya, as I said, which we expect in the next couple quarters, that money will be brought back to the US, in fact it contractually it has to be, as I said. Obviously it is tough to give a predictor for our interest expense on an annualized basis if nothing changes. But if that money comes in May versus November, obviously that has a big impact on how much interest we are going to pay over the course of a year.

Our goal obviously is to deleverage the balance sheet. It separates our financial performance or our financial position. Separate the income statement from the balance sheet. I think you're seeing a very strong improvement in the income statement and where we still have difficulty, and I think what is weighing on the stock, is the balance sheet. We clearly have deleveraging ourselves, deleveraging our balance sheet is our top priority. We think that Libya coming in is the first step in that. Long-term, obviously we have to put ourselves in a position to be able to borrow money at significantly less than what we're paying right now. We think over the course of this year, we are going to achieve that.

You also mentioned acquisitions. What areas are you looking at and to be honest with you, with a constrained balance sheet, why are you even looking at acquisitions?

We are responding to opportunities in the marketplace more than out there aggressively looking for acquisitions at this point. Both of the ones that we're looking at right now are relatively small. I think one has a high likelihood of success and one is relatively early in the process. We won't do a major acquisition until we are in a much better position either with our debt or our stock price.

Are they, these small ones you are looking at, what areas -- are they specific ones that would add a multiple benefit to the Company, meaning that you spend X but the benefit would be 2X to 3X, a new area and maybe a little understanding of what they would do?

I would say both acquisitions that we are looking at, without giving you too much detail, one is in the Claims Group, one will be in the Projects Group. Relatively small, meaning less than 50 employees. Both would be accretive to our earnings and both would add new geographic presence to both groups.

Okay. Very helpful. I appreciate it. Thank you.

(Operator Instructions)

[Nathan Cattrall, Private Investor].

Hello, gentlemen. Thank you for your time today. I just have a quick question. My understanding is, if I heard correctly, you said that the interest expense moving forward into 2013 looks to be $20 million to $22 million, is that correct?

On an annualized basis. What it is for the actual full year, we don't know yet. How quickly we can pay that debt down.

Is that similar to what we paid in 2012? The real question I have is I know there was a lot of restructuring costs that were attributed to 2012 in several different quarters when Hill was in technical default. I was just curious, how much -- what were the expenses for the technical default and the restructuring that were included in 2012 but won't be included in 2013?

This is John. Just to answer your question, I think we should just look at 2013 and that is based on our current debt structure, which really is the credit facility and also with the term loan with Tennenbaum Partners and our international debt. If you look at that debt and the interest rates on that debt, which is a combination of actual cash payments and also accretion on the term loan, that will aggregate to around $20 million to $22 million as interest charge, which around 44% of that interest charge is non-cash.

I don't think a discussion with respect to the 2012 is really relevant. It is really what we have in place at the end of the year and what interests are associated with our debt would be a better barometer.

Nathan, last year our interest expense was $18.2 million. I can tell you several million of that were one-time restructuring default charges, legal fees, accounting fees, things like that in connection with both the extension of the line earlier in the year and the restructuring at the end of the year.

Okay. That answers my question. You may have already answered this earlier in the call, I was a little late, but I see that the HillStone project obviously has been completely removed from the balance sheet. Is there any possibility of that project coming live again in the future? Are there still any talks at all or is that completely gone?

We removed it from the backlog, not the balance sheet.

That's what I meant.

Is it possible that it moves forward, yes. I think our client track is still having some conversations with the government, [and finding] a financial partner. Right now the likelihood of that happening was so low that we removed from our backlog and given the passage of time has been about, I would say about seven quarters since we signed that contract. Given the materiality of it, $1.5 billion, we thought it was prudent to take it out of backlog and given that it had never moved forward, to remove it from historical backlog as well.

Thank you very much.

Thank you. There are no further questions at this time. I will now turn the floor back to Management for closing comments.

Thank you very much. We have been pleased with our record sales in 2012 and believe this positions us for record revenues and return to profitability in 2013. John, I, and our entire Management team appreciate your continued interest in our Company and our stock, and we thank you all for participating in our call this morning.

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