Hill International Inc (HIL) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Hill International reports the third-quarter 2013 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Devin Sullivan, Vice President of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you and good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind everyone that certain statements made 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, matters as set forth here and including, but not limited to, any projections of revenues, earnings, or other financial items; any statements concerning plans, strategies, and objectives for future operations; statements regarding future economic conditions or performance, are forward-looking statements. 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 actual results, performance, and achievements or industry results could differ materially from estimates or projections contained in forward-looking statements are set forth in the risk factors section and elsewhere in the reports 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. Yesterday after the market closed, we announced our financial results for the third quarter of 2013. Those results show that our consulting fee revenue and our total backlog has climbed to new records. Our EBITDA and operating profits have remained strong, and our Company continues to be profitable. So, we had a great third quarter following up on a great first half.

Turning now to our results. Total revenue for the third quarter of 2013 was $147.2 million, an increase of 23% from the third quarter of 2012. Consulting fee revenue for the third quarter was a record $130.2 million, a 26% increase from last year's third quarter. This growth consists of 24% organic growth, plus 1% growth from our acquisition of Binnington Copeland & Associates in South Africa earlier this year.

Our geographic breakdown in the third quarter was as follows. The Middle East was our largest geographic market, at 43% of our consulting fees. That is up from 33% from the third quarter of last year. The US and Canada were 24% of our consulting fees in the third quarter, down from 29% for the third quarter of last year. Latin America was 9% in the third quarter, down from 11% a year ago. Europe was 14% of our consulting fees, down from 20% in the third quarter of last year. And Africa and Asia-Pacific were both at 5%, up from 4% each a year ago.

Every region except Europe grew in absolute dollar terms in the third quarter this year versus last year. Africa, which grew by 79%, was our fastest-growing region, due primarily to organic growth; but also as a result of the BCA acquisition. That was followed by the Middle East, which grew 66%; Asia-Pacific, which increased by 56%; US and Canada grew by 5%; Latin America was flat; and Europe shrank by 12% this quarter versus last year's third quarter.

Company-wide, our gross profit in the third quarter rose to $54.4 million, up 21% from the third quarter of last year. But our gross margin as a percentage of consulting fees was down by 180 basis points to 41.8% in the third quarter versus the same quarter last year. This drop was primarily caused by a shift in the mix of our business towards more project management work, which was 77% of our consulting fees this quarter, versus 75% in last year's third quarter; and also by a 190 basis point drop in gross margin for the PM group, as we saw a lot more of our work coming from the Middle East, which generally has slightly lower gross margin than our domestic PM business.

Our SG&A expenses in the third quarter were $46.2 million, up only 15% despite the 26% jump in consulting fees. This was a big decline on a percentage basis, with our SG&A margin down to 35.5%, a 310 basis point drop year-over-year. This was at the low end of our forecasted range of 35% to 30% SG&A margin for the year; so a fairly good quarter, regarding overhead cost control.

Given the leverage on our higher revenues, note EBITDA for the third quarter increased by 34% year-over-year to $10.6 million. EBITDA margin as a percentage of consulting fees was 8.1% in the third quarter, up 50 basis points from last year's third quarter. Our quarterly EBITDA over the first three quarters of this year has averaged nearly $11 million, which we think is a fantastic turnaround from 2012 when we achieved less than $16 million of EBITDA for the entire year.

Operating profit in the third quarter was $8.3 million, up 62% from last year's third quarter. Our operating margin in the third quarter was 6.3%, a 140 basis point improvement from last year.

Regarding our bottom line, we generated positive net earnings in the third quarter; the second quarter in a row our Company saw profitability. We had net earnings of $2.6 million, equivalent to $0.06 per diluted share, up 96% from a year ago.

Regarding cash flow, we had an outstanding quarter. Hill's operating cash flow during the third quarter was a positive $15.0 million, and total cash flow was a positive $4.8 million. This brought our operating cash flow for the year so far to a positive $8.9 million, and total cash flow to a positive $9.9 million. This is the best quarter for operating cash flow in our Company's history, and is a result of the full ramp-up on several major projects in the Middle East, as well as the decrease in our accounts receivable during the quarter.

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 $115.5 million, a 25% increase from the third quarter of last year. Consulting fee revenues for the third quarter at the projects group was a record $99.6 million, a 29% increase, and entirely the result of organic growth.

The breakdown of the project group's growth and consulting fees was 7% for the US, and 39% for our international group. The vast majority of the increased consulting fees for the international group came from the Middle East, where our consulting fees grew 81% in the third quarter from a year ago. The single biggest driver of this outstanding growth was our continuing work on the Oman airport's program, which started at the beginning of this year and added $14 million in consulting fees for the third quarter.

While we also grew our consulting fees in Qatar by $3.1 million versus a year ago; and Saudi Arabia by $1.3 million; and in Iraq by $1.3 million as well. Our growth this year in the Middle East has been spread throughout the region. We also saw a big increase in consulting fees of $1.6 million in Afghanistan, which is part of our Asia-Pacific region.

Projects group saw a 23% increase in gross profit to $37.3 million for the quarter, and gross margin on a percentage basis at 37.5%, dropping by 190 basis points from last year. Despite 29% growth in consulting fees, SG&A expenses at the projects group were up by just 16% year-over-year to $26.0 million. As a percentage of consulting fees, SG&A expenses were down significantly to 26.2%, a 280 basis point decrease from last year's third quarter.

Operating profit for the projects group for the third quarter was $11.3 million, a 41% increase from last year. Operating margin as a percent of consulting fees was 11.3%, a 90 basis point improvement from a year ago. Overall, another excellent quarter for our project management group.

For Hill's construction claims group, total revenue this quarter was a record $31.7 million, a 17% increase. Consulting fee revenue was a record $30.6 million, a 16% increase from last year's third quarter. The breakdown of the claims group's growth in consulting fees was, for the US, essentially flat; and internationally, up 21%. The biggest driver of growth for the international claims group was an increase of $1.6 million in the Asia-Pacific region, which was 52% growth in consulting fees for that region; as well as an additional $1.4 million from Africa, due entirely to the acquisition of BCA. Also $1.2 million from the Middle East, which saw 16% growth in that region in the third quarter versus last year.

The claims group saw its gross profit rise by 16% to $17.1 million, and saw a slight improvement in its gross margin as a percentage of consulting fees to 55.9%, up 20 basis points from last year. SG&A expenses for the claims group were up 10% to $13.1 million in the third quarter, but as a percentage of consulting fees, they were down 220 basis points to 43.5%. As a result, operating profit for the claims group for the third quarter was $3.8 million, a 44% increase from last year.

As a percentage of consulting fees, this was a 240 basis point improvement from last year, with operating margins in the claims group growing to 12.4% in the most recent quarter. With another strong quarter under their belts, the claims group appears headed for a record year for both operating profit and consulting fees.

In addition to the SG&A incurred by our two operating segments, we also incur SG&A expense in our corporate group. For the third quarter, our corporate SG&A expenses were $6.8 million, up 23% from year ago. But as a percentage of our consulting fees, it was only 5.3%, down slightly by 10 basis points from last year's third quarter. We're getting closer to our goal of having our corporate expenses under 5%.

Regarding backlog, our Company's total backlog at the end of the third quarter was a record $951 million, up 5% from $907 million in total backlog at the end of the second quarter of this year. This backlog consisted of $911 million in project management, and $40 million for our construction claims group. 12-month backlog at the end of the third quarter was $382 million, unchanged from the end of the second quarter. This was broken down into $341 million from our project management group, and $41 million for construction claims.

Hill had net bookings during the third quarter of $174 million, a great quarter for new sales; and a book-to-bill ratio of 134%, which again is a very strong percentage, especially for our industry.

Some of the major new contracts we announced over the last three months since our last earnings call include, by far the largest, a $265 million contract to our joint venture with The Louis Berger Group to manage three of the six new lines of the Riyadh Metro system in Saudi Arabia. Hill was a 45% partner in that joint venture.

A $33 million contract to a joint venture for project control services at Los Angeles International Airport, in which Hill is a 70% partner in that joint venture. A $29 million extension of our work managing the Jabal Omar development in Makkah, Saudi Arabia. A $23 million contract to act as construction manager for the Qatar National Museum in Doha. A $13 million extension of our work providing project management services for the new headquarters complex for the Abu Dhabi National Oil Company. An $8 million contract to provide construction and inspection services for renovations to the Ohio Turnpike. A contract to provide private management services for the new $150 million headquarters complex for QIMC in Doha. A contract we just announced this morning to provide PLA, or project labor agreement, services for the new multibillion-dollar Tappan Zee Hudson River Crossing in New York State, and quite a few other major wins soon to be announced.

Based on our performance in the third quarter and our current expectations for the fourth quarter, we are narrowing the range of guidance that we gave earlier this year. We now expect that Hill's consultancy revenue for 2013 will be between $515 million and $520 million, which equates to approximately 23% to 25% growth from the $418 million in consulting fees we saw in 2012. This compares to guidance we gave a quarter ago, which was for consulting fee revenue of between $510 million and $525 million. With 24% growth in consulting fees already booked for the first nine months, we are right on target, with three more months to go.

And, finally, we are very happy to announce that our accounts receivable related to work that we did with the Libyan government, pre-2011, were reduced by approximately $3.1 million over the past several months. This reduction consisted of a cash payment by ODAC, which was our client -- the Organisation for the Development of Administrative Centres in Libya -- of approximately LYD3 million, equivalent to $2.4 million, that was made directly to Hill; and a cash payment of approximately LYD800,000, or $700,000, that was made by ODAC to the Libyan tax authorities on our behalf.

At the end of our third quarter, our remaining outstanding accounts receivable related to the work in Libya decreased from approximately $60 million to approximately $57 million, or a reduction of about 5%. We're obviously very happy about receiving, finally, some cash from our receivables in Libya.

Unfortunately, at present, there's no agreement, understanding, or timetable for any further payments from ODAC; although we continue to have an active dialogue with our client regarding collecting the remainder of our receivables, and getting back to work on our existing contracts in Libya. We do believe that these payments were made in good faith, and are a positive indication that ODAC intends to satisfy their obligations to us in due course.

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

(Operator Instructions). Lee Jagoda, CJS Securities.

Hello, guys. Good morning. So with regards to the Libya, why do you think ODAC paid the amount that they did this quarter? And were you able to repatriate any of the cash? And could you just remind us, under the rules of your bank agreements and the agreement with Tennenbaum, what are the rules regarding debt paydown using those proceeds?

Well, first of all, we're very happy that ODAC has begun the payments process. Obviously there are still a lot of political impediments to ODAC having full funding from the national government. But they recognized that we've been owed a lot of money for a long period of time. And we think this is a good faith payment by those within ODAC that support us getting back to work, and getting paid in full. And this is what we were able to accomplish in the short term. We don't think this is anywhere near the end of the process. We think we're just getting started, and we hopefully will have more payments to report in the near future.

The money was paid entirely in Libyan dinars, which are not convertible into any foreign currencies, and remain in our Libyan bank account. And per the agreement that we have with our banks, because they are in dinars and haven't been repatriated to the US in the form of dollars, we don't have any paydown obligations with respect to our debt.

And just pardon my ignorance, but if they're not convertible into any other currencies, how can we convert them to $2.4 million?

We didn't convert them into $2.4 million. We're just giving you the exchange rate, the equivalent. The funds will stay in our Libyan bank account. And as we move forward with work in Libya, we'll have payment obligations and expense obligations in Libya that those funds will be used for. Typically, under our contracts, there was about an 80/20 breakdown of payments. 80% was paid in US dollars or some other foreign currency -- typically, in some cases, British pounds -- and about 20% were paid in Libyan dinars to cover our expenses locally.

Okay. And then how should we think about free cash flow seasonally in Q4?

[I hope] that we can really give any projections going forward on cash flow. We obviously had an excellent quarter in the third quarter. We were ramping up on a lot of major projects in the Middle East during the first half of the year. And we're now -- those projects are fully ramped up, and we're into on normal collection cycle. And I think you're going to start seeing a lot more of our EBITDA drop down into cash in our bank account, which we see as a very positive sign.

Okay, great. One more question, and I'll hop back in queue. Were there any large projects that ended in Q3, or expected to end in Q4?

No, there were none.

Okay, thanks very much.

Pete Enderlin, MAZ Partners.

Thank you, good morning. On the Libyan payment again, you had accrued some taxes on that business when you didn't previously, is that correct?

That's correct.

Yes, we had taxes that we had accrued that were owed to Libya.

So the -- this LYD800,000 payment that ODAC made directly to the government is just in recognition of that payable to them, basically.

It was in full recognition of the tax year 2009 (multiple speakers) paid up in our tax filings for 2008 in 2009.

Okay. So what's the typical rate that you pay on that business in Libya?

It's typically 19% of their net profit.

Yes. And it looks like your overall tax rate is sort of getting normalized now, finally. What can you tell us about the outlook for the tax rate in the fourth quarter?

Well, in the third quarter, as you can see, that we had a net tax credit. And that was due primarily to reversals of accruals that we had on the books for uncertain tax positions that, based on settlements of prior-year tax positions, we reversed those. And they related to foreign jurisdictions.

Going forward, as we've mentioned in previous quarters, we have US tax losses that, at this point, we cannot take the tax benefit. So right now, we're forecasting that our effective tax rate for the year, pending some tax planning alternatives and other opportunities, to be around 60%.

Yes. Okay. And then the incremental gross margins in the overall project management business for the quarter were about 35%. What would you say is the long-term opportunity for that number? Is that going to be about where it stays, or can you improve that? And of course, it depends on mix, and there are a lot of pluses and minuses on mix. But what's the big picture on that?

Well, I think you're going to continue to see the project management group expand faster than the construction claims group.

Right, I'm just speaking within PM itself, though.

I think you're going to continue to see -- despite the fact that the US is growing, you're going to see more of our business overseas, and we have slightly lower margins outside the US than we do domestically.

Yes.

So you're going to see that tick down incrementally, although certainly not by major leaps and bounds.

Okay.

Despite the fact that operating profit typically is higher on the international work, so that will benefit that lot.

Right. Yes. Now, your win rate was great, as you mentioned -- $174 million in the quarter. That's like a $700 million annualized rate. To what do you attribute that tremendous success -- again, taking sort of a high-level view? And how sustainable is that kind of a rate of new business?

Well, certainly, about half of that new work came from the Riyadh Metro project, which was just a tremendous win for us; a game-changer for what we're doing in Saudi Arabia. One of the biggest, highest-profile projects in the world, and we're very fortunate to be managing that project for our client.

And we've seen more of those types of projects, as you can see in the last 18 to 24 months; projects where we're getting consulting fees of $50 million to $100 million, and sometimes even more. And those projects, because of the staffing required, because of the low overhead involved, tend to be very, very profitable for us. And we see Riyadh Metro continue to drive our profitability upward in 2014.

Would you say that it's likely that a lot of these big projects will continue to be joint venture kinds of deals for you?

Some of the biggest have been. Certainly, when you're talking about these big projects, you've seen the biggest and best firms in the world compete for them. And when two firms team up, it makes them twice as strong. Typically, we're joint venturing in an effort to win the work, not necessarily perform the work. We can perform any project we get hired on. But you're taking on a competitor, and you are improving your chances of winning the project. Certainly, we would have rather had one-third of that contract by winning it, than get 100% of nothing by losing it.

But I think what you're seeing is a lot of big projects moving forward in the world -- last year, year and a half; far more so than you saw in the four years before that, during the recession. We see the economy getting better for us, the market is getting better. And I think what you've seen in the last couple of years is that Hill has broken through the ceiling, and is competing with the biggest firms in the world on these mega-projects, far more so than we did in the past. And that's contributing to our success at the top line and the bottom line.

Just one more, and that is -- does that mean that you think you're gaining share? Or is it more that the whole market is resurgent at this point?

I think both are true.

Yes.

I think the market is certainly getting better. We saw about five years of 6% growth in consulting fees on average. This year it was like -- sorry to repeat again and again -- we're looking at about 24% growth in consulting fees. I think that's a combination of more work out there to be won, and our greater success in winning it.

Okay, great. Thanks a lot.

(Operator Instructions). There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Well, thank you very much. I guess we did an excellent job explaining. It was an outstanding quarter for us. We were very pleased with how we performed in the third quarter, and throughout all of the three quarters so far in 2013. We look forward to improving on this performance as we finish out the year and head into 2014. And we thank you all for your continued interest in our Company and our stock, and participating in our call this morning. Take care.

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