Hill International Inc (HIL) 2014 Q1 法說會逐字稿

Greetings and welcome to the Hill International reports first quarter 2014 financial results.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, you may now begin.

Thank you Shay. Good morning everyone thank you for joining us today. Our speakers for today will be David Richter, President and Chief Operating Officer of Hill international and John Fanelli the Company's Chief Financial Officer.

Before we begin, I'd 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, the matters 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 economics, conditions, or performance are forward-looking statements.

These forward-looking statement are based on our 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, are set forth in the risk factors section and elsewhere 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 statement.

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 all of you joining us today.

Yesterday after the close of the market we announced our financial results for the first quarter of 2014. Our strong top line growth from 2013 has continued into this year with Hill having generated record consulting fees for the sixth quarter in a row. Our bottom line, however, continues to be a challenge with Hill achieving essentially a breakeven quarter with respect to net earnings.

This is primarily the result of our high interest expense. Lowering the amount and the cost of our debt continues to be our top priority and we will have more to say on this topic later in the call.

But first let's take a look at the details of our first quarter financial performance. Total revenue for the first quarter of 2014 was a record $150 million, a 10% increase from the first quarter of 2013. Consulting fee revenue for the first quarter was a record $137.2 million, a 12% increase from last year's first quarter.

This growth in consulting fees consisted of 10% organic growth plus 2% growth as a result of our acquisitions of BCA, a South African claims firm and Collaborative Partners, a New England project management firm over the past year.

Our geographic breakdown of first quarter was as follows, the Middle East was our largest geographic market at 46% of our consulting fees, that was up from 41% from the first quarter of last year. The US and Canada were 21% of our consulting fees in the first quarter, down from 24% last year. Latin America was 8%, down from 11% last year. Europe was 15% of our consulting fees, down from 16% a year ago. Africa was at 5%, up from 3% a year earlier and Asia Pacific was also at 5%, up from 4% a year ago.

Africa which grew by 56% was our fastest growing region due to strong organic growth as well as the acquisition of Binnington Copeland. That was followed by Asia Pacific, which grew its consulting fees by 42%.

The Middle East grew by 24%, Europe saw growth of 4% during the first quarter, the first in a long time that we have seen organic growth in this part of the world. The US and Canada were essentially flat in the first quarter versus a year of grow and Latin America was down 21% in the first quarter.

Company wide, our gross profit in the first quarter rose to $58.7 million, up 18% from the first quarter of last year. Our gross margin as a percentage of consulting fees, improved by 200 basis points to 42.7% in the first quarter. This increase was a result of improving gross margins in both of our two operating segments.

Our SG&A expenses in the first quarter were $52.7 million, up 24% from a year earlier. With SG&A growing faster than consulting fees in the first quarter, the result was an increase in our SG&A margin to 38.4%, a 380 basis point rise year-over-year.

This was primarily the result of lower than normal utilization of our billable professionals during the quarter, as we ramped up staffing in several regions in anticipation of further growth during the year. We expect that our SG&A margin will be lower than the first quarter for the remainder of the year.

Hill's EBITDA for the first quarter was $8.2 million, down 14% from last year's first quarter. EBITDA margin as a percentage of consulting fees was 6.0% in the first quarter, down 180 basis points from a year earlier. Operating profit in the first quarter was $6.0 million, down 19% from last year. And our operating margin in the first quarter was 4.4%, down 160 basis points from the first quarter of 2013.

Regarding our bottom line, we had a small net profit in the first quarter of $53,000, which equates to $0.00 per diluted share. Although this was an improvement from a net loss in the year ago quarter of $380,000, or $0.01 per diluted share loss.

Now looking at the first quarter performance of our two operating segments separately. Total revenue at our project management group during the first quarter was $113.2 million, a 5% increase from the first quarter of last year. Consulting fee revenue for the first quarter at the projects group was a record $101.8 million, a 7% increase from a year earlier.

This growth was comprised of 6% organic growth and 1% growth from our acquisitions of Collaborative Partners at the end of last year. The geographic breakdown of the project groups growth in consulting fees was a negative 3% in the US and a positive 11% internationally.

The projects group saw a 12% increase in its gross profit to $39.0 million for the quarter. With gross margin on a percentage basis at 38.4%, up by 180 basis points versus last year. SG&A expenses at the projects group, however were up 26% in the first quarter to $28.1 million. As a percentage of consulting fees, SG&A expenses were up 410 basis points year-over-year to 27.6% for the projects group.

As a result, operating profit during the first quarter was $10.9 million for the group, a decline of 11% from the first quarter of last year. Operating margin as a percentage of consulting fees was 10.8%, a 220 basis point decline versus a year ago.

For our construction claims group, total revenue during the first quarter was a record $36.8 million, a 29% increase from the first quarter of last year. Consulting fees for the claims group were a record $35.5 million, also a 29% increase. Breakdown of the claims group growth in consulting fees was 24% organically and 4% from the acquisition of Binnington Copeland.

Geographically, the group was up 18% for the US and Canada and up 32% internationally. Claims group saw its gross profit margin rise by 30% to $19.6 million and saw an improvement in its gross margin as a percentage of consulting fees to 55.3%, up 40 basis points from last year.

SG&A expenses for the claims group were up 34% to $17.0 million in the first quarter. And as a percentage of consulting fees they were up by 190 basis points to 48.0%.

First quarter offering profit for the claims group was $2.6 million a 7% increase from the first quarter of last year. As a percentage of consulting fees this was a 150 basis point decline from the year earlier quarter, with operating margin for the claims group dropping to 7.4% in the first quarter of this year.

Claims had a great quarter for growth, but continues to be challenged as does the project group by rising overhead expenses. This will be a major focus for both groups during the remainder of 2014.

In addition to the SG&A incurred by our two operating segments, we also incur SG&A in our corporate group. For the first quarter, our corporate SG&A expenses were $7.6 million up just 2% from the year earlier quarter. As a percentage of consulting fees, it was a 5.5% down 50 basis points from last year's first quarter. This is getting much closer to our goal of having our corporate expenses be under 5% of consulting fees.

Regarding our backlog, our Company's total backlog at the end of the first quarter was $978 million, down 5% from the end of last year. This backlog consisted of $934 million from our projects group and $44 million from our claims group. Twelve-month backlog at the end of the first quarter was a record $400 million up 2% during the quarter. This was broken down into $356 million from our projects group and $44 million from our claims group.

Hill had net bookings during the first quarter of $88 million which included three major backlog reductions totaling $18 million. Absent these three adjustments, Hill achieved net bookings of $106 million during the quarter or a book-to-bill ratio of 77%. Obviously a weak sales quarter for the Company, but one we don't expect will be repeated during the balance of the year.

During our last earnings call we gave guidance for 2014 consulting fees. Based on the consulting fees we achieved during the first quarter, current market conditions, and the backlog amounts we discussed earlier, we reaffirm that our 2014 consulting fees will be between $575 million and $600 million for the year. This equates to approximately 12% to 17% growth in consulting fees for this year versus last year.

As we've discussed on our last earnings call, given our much improved operating performance over the past year and the beginning of the collection of our overdue receivables from Libya, we believe we are now in position to be up to restructure our balance sheet in order to significantly lower our interest expense.

As mentioned before we retain financial advisor Houlihan Lokey last year to help us with this process and we believe we are well along the path to a successful debt restructuring.

We are in advanced negotiations at the moment with a major international commercial bank, to provide us with senior debt financing that will allow us to replace both our Bank of America revolving credit line and our term loan with Tannenbaum Capital Partners.

The effective of this restructuring means that we should be able to lower our interest expense, which has been running at an annual rate of about $22 million to $23 million, by approximately 2/3.

We still have a lot of work to do to get this new financing in place and there's certainly no assurances that the current deal we are negotiating will close or they will close in the same terms we are currently discussing. But this we are confident with how the negotiations are progressing. If we are able to close the transaction, we expect it will occur and be announced before our next earnings call.

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

(Operator Instructions) Lee Jagoda, CJS Securities.

Looking at the SG&A, is the rising overhead just a function of adding headcount ahead of growth or is there something else in the number that you could potentially adjust in the next couple of quarters?

Is a combination of that as well as some pockets of the Company just had a slow quarter. February in particular was a very slow month for us.

Primarily that occurred in Middle East claims and US project management. But most other areas of the Company are ramping up and some delays -- unanticipated delays between when we hired the people and we expected work to start had a significant impact on our unapplied labor for the quarter.

That being said, utilization approved month by month. In fact in both groups January was the worst month for utilization and March was the best. So we have expectations that the March performance will continue into the second quarter.

And then just focusing on claims revenue, it was much stronger than our estimate and growing nicely year-over-year. To the extent that the increase in SG&A was just simply adding headcount there, ahead of the growth, can you provide an expectation for claims revenue as we move into Q2 and Q3?

As you know claims is a more difficult side of our Company to project long-term with any kind of accuracy. But the feeling within the claims group management right now is that it's going to be a very positive year for us. And the growth that we've seen is going to continue.

And then just one question on the refinancing. To the extent you're in advanced negotiations with this international bank, why should it take up to the time of your next quarter's call to get something done on that?

I agree with you completely, but unfortunately when you're dealing with bankers and lawyers, things tend to drag out. We're talking about a facility big enough to take out both Bank of America and Tannenbaum. And that takes time to negotiate, takes time to document and it takes time to implement.

Our expectation is that we're probably talking about July at some point. Just given what we need to do between now and closing. We have a draft limit letter from the bank. We're currently reviewing it and expect to get back to them with comments in a few days. And we're progressing as quickly as we can.

Chase Jacobson, William Blair.

Another question on the SG&A. You mentioned that it should come down as a percentage of sales throughout the year. How about on an absolute basis? And is 35% to 36% of CFR still the target for the year?

Yes, think is going to come down as a percent, we don't expect it to come down on an absolute basis. And yes, that is still our target for the full year.

In your previous answer about that, you mentioned that some projects were starting a little bit slower than you had originally thought. It's something that we've heard a crossed a lot of the E&C companies in our coverage.

Is that something that you're seeing like a trend that you're seeing throughout your business and are you worried about that continuing throughout the year where things just moved slower where customers are awarding the work, but then not releasing it on schedule?

No, we're not worry about it, because we think it's going to continue. I think it's more the new normal. Certainly before the recession projects began and ramped up very quickly.

We saw huge a slowdown in 2008 and 2009. It has gotten better, but certainly on all projects between when we get hired and when they actually give us the go-ahead to start work there can be a lag. And we're anticipating that now.

Last one, John, can you just give any detail on the movement in receivables in the quarter and anything on Libya worth noting?

On the receivables our DSO improved, when you exclude the Libya receivable, improved to 89 days versus 85 a year ago. And improved even from --

You mean 95 a year ago.

95 a year ago and 91 at the end of 2013. So we're seeing some improvement in our DSOs. With respect to Libya --

I'm happy to take that one, John. We saw a little bit of a slowdown because there was a change in the Prime Minister in Libya, which had an impact on the bureaucracy moving forward.

Ali Zeidan is out. There's a new prime minister that was just sworn in, I believe Sunday, earlier this week. And we're expecting the progress we achieve is now going to continue and move forward.

We're hopeful that before the next earnings call we have another check in our hands significantly bigger than the ones that we've received to date. But as always, we have very little ability to predict exactly when funds are going to be transferred to us.

We're hopeful it is going to be very shortly, we're also hopeful that we can begin to put in place the contracts that we've negotiated with the government and begin to get back to work.

Gerry Sweeney, Boenning Scattergood.

Just a quick follow up on the SG&A side. You mentioned that you are starting to see a lag between being awarded the work and the start of that work.

Are you saying that was partly responsible for some of that up -- ramp up in staff? And then the work didn't begin as quickly so you had a little bit of excess staff on hand and you're going to anticipate this going forward?

That was primarily the case in the Middle East claims group and the US project management group, yes.

Then, just taking a look at forward growth. Obviously you had multiple quarters of large projects, your 12-month backlog's at a record and the all-time backlog took a little tick downward. But as you look out to the future, the Middle East has been great, I think, David, I have spoken to you about where the next opportunities of growth are. Maybe can you update us as to what you're looking at? I think previously you were looking in the US, but give us some details of some of the opportunities you see in the US, especially after you've reworked your credit agreement.

Yes, you're specifically talking about organic growth?

Yes. Or -- organic or acquisition to the matter of fact.

I'm happy to answer both. We certainly expect to continue to see strong organic growth in the Middle East.

Some of the growth has been stronger on a percentage basis in Africa and Asia Pacific, just because they're working off of much smaller denominators. But those regions have become key contributors to our growth and to our earnings. Asia Pacific in particular had a very strong turnaround and we're seeing a lot of growth and improved profitability there.

In the US as I said it was flat in the first quarter versus a year ago but we have expectations that over the balance of this year it's going to begin to ramp up. They've had some key wins that we're in the process of getting signed and getting staffs on. And we've had some delays, not just in getting the work not just in starting the work, but also in announcing it.

We have a lot of big wins to announce. Anyone tracking the press releases since the last call hasn't seen many of them. So we've certainly had a lot more wins than we've announced to date and those will be getting out shortly. On the acquisitions side, our focus is, continues to be primarily on the US market and secondarily, on the European market.

Europe, a little bit, how do I say this? You've sort of downplayed Europe in the past. Obviously you got a little bit of growth there for the first time, what are you looking at in Europe and I mean have you changed your mind on that market?

No, I think Europe continues to struggle. But there are a lot of firms there and the opportunities to acquire firms, on a relatively cheap basis, there because of that market continue to be significant. So we're taking a look. I can't you that we're going to acquire any firms in Europe, but we're certainly looking at some.

So some of the acquisitions would not only be a geographic expansion, but potentially also expertise expansion?

Yes, correct.

Pete Enderlin, MAZ Partners.

David looking at the question of headcount and SG&A expenses and so on, let's take a little broader view of that on the project management business. Your revenues from 2009 to 2013 increased 42% and the number of professionals increased 85%.

Does that indicate that there is a lack of operating leverage? Obviously you have financial leverage, but does it mean that every time you add business you have to add a commensurate number of people, and therefore you really don't have operating leverage?

Yes, that's it Pete, I don't necessarily agree with the numbers you just threw out --

I though I got them right out of your annual report.

There may be a differential in what dates you're using?

For 2013 versus 2009.

We didn't grow by 40% and add 80% new staff. Those numbers typically run in tangent. In fact the staffing usually is a little lower than the actual growth in dollars in our consulting fee revenue.

But no, we think there's a significant leverage in continued growth. For right now one of the things that we're focused on is the size of our offices. Our offices carry a certain level of overhead. And if we can grow the offices, keeping in mind that project management is primarily a field service, it doesn't require a lot of overhead growth to add new projects in a particular region.

I think we can get a lot more profitability out of the individual offices and the individual regions. We're also seeing leverage in our corporate costs, as those continue to drop year-over-year. And we can manage a much bigger business at the same time adding very little corporate expense.

Now obviously it wasn't a great quarter for wins, contract wins. But is there anything you can take away from not winning the big Oman rail contract, which on the last call you mentioned if you had gotten it, it would have been your largest contract ever. I mean is it because of a lack of expertise in a certain area, or is it just that there were so many people competing for the same business, it was a tough win?

It certainly would've been a nice project to win, we did not win it. It tells you -- I think the lesson learned is we have a lot of great competition. And they have great people in their companies as well, and you don't win everything you chase.

I think our average in project management's about 20% to 25%, wins, so you're go to lose 75% to 80% of the projects you chase, unfortunately. It's just a matter of which ones you win and which ones you don't.

On the refinancing, would that likely involve any strategic changes, or are we basically just talking about changing terms with an existing structure?

No, it wouldn't involve any strategic change in the business at all. I think what's driving it is that we had significantly better operating performance last year. So when you look at this on a trailing 12-month trailing basis, we had $41 million of EBITDA last year following up on $16 million of EBITDA in 2012, which is a vastly different enterprise to go out to the markets and seek debt financing.

That combined with our growth last year and the beginning of our collection of the Libyan receivables, means that you're looking at lending money to Hill the way Tennenbaum was 20 months ago, it's a much different situation today. And we're able to get I think, because it's reflected in the deal that we're currently negotiating, much closer to market rates for commercial loans than what we were facing 20 months ago, which was going to hedge funds and paying a much steeper price.

I said that we should be able to open and close the deal that's going on the table, knock our interest expense down by 2/3, go from $22 million to $23 million a year, down to probably $7 million or $8 million a year in interest cost.

And that's a significant savings. It's going to drop right to our bottom. Because that's not a number that has to be tax effective because we don't pay taxes in the US. So that call it $14 million to $15 million right to the bottom line is probably $0.35 a share. Going forward that will be able to add to our EPS.

Now you've made small acquisitions for stock, when the stock was $3 or $4 a share. And that was, obviously, because you had to at the time under the terms of the existing agreement. When that new agreement and the new financing is in place, which way would you lean in terms of acquisitions as far as cash versus stock goes?

We've done a couple acquisitions recently that were done for stock, because first of all we had to under our bank agreement, but also we would have probably anyway just to conserve our cash given our balance sheet as it currently exists. Going forward if we have the cash to do deals and not have to dilute our shareholders, then that would be our preference.

What kind of potential do you see for expanding in China and Australia, which are obviously significant markets and you have small stakes there now?

I think both locations for us have really now where to go but up. We have a presence in China for both project management and claims. We have a claims operation in Australia. We see both of them expanding this year and continuing to grow.

Obviously China is a much, much bigger market for potential growth and we have a very small base to grow from. The opportunities for us as a Company long-term are terrific.

Walter Schenker, MAZ Partners.

I was going to beat SG&A, I withdraw my question.

Mark [Brahaus], a private investor.

You touched on Libya a little bit; I'd like to go back to the Middle East in general. With the unrest that's in the Middle East are there any other projects that are in jeopardy, or are we holding back, or is anything being held up that because of the political unrest?

Yes, a comment I hear constantly about the political unrest, is --there's actually very little of that, Certainly in the markets where we do business. And the largest markets that we're in are Saudi Arabia, the UAE, Qatar, Oman, and Iraq and they're all highly stable. We don't have any projects that are being impacted by anything that we're seeing.

Obviously, Libya in getting back to normal, is going through a lot of challenges and is having some instances there as they try to rebuild their country. But we're expecting that in the short term future as we continue to collect on our receivable, that we're going to have new contracts to go back to work there and that we will and that will be a profitable operation for us.

It will become more stable over time, not less stable. The only the country I really hear anything about is Syria. That has certainly slowed down, but we have no operations in Syria at all.

On Libya, at the last meeting, I think you said there was $6 million that was collected. Has that increased since the last meeting?

Since last call, we haven't collected any cash out of Libya. We had collected about $9.9 million to date, and we're expecting, given the current conversations that are happening between us and our client, that the next payment we will receive, hopefully in the very near future, will be for more than that.

Is the financing that's in place, the potential financing is that contingent upon Libyan collections?

No, it's not.

Do you have any comment as to the recent increase, significant increase in trading volume on Hill stock on the stock -- on the market?

Our guess has been that once we began to collect the money from Libya, which we announced in the fall and then again earlier this year, in a significant way. Given the financial turnaround in our performance last year, that the biggest negative, the two biggest negatives about our stock -- maybe the only two negatives about our stock, have been the Libyan receivable and our extensive debt.

And that the market now expects us to be able to resolve both of those problems in the near future. It's our plan to resolve both of those in the near future. So with those going with think the stock price which was from our perspective very undervalued, has obviously been on a good run.

Over the last 12-months, based on yesterday's close, over the last 12-months the stock is up 133%. And just from the beginning of this year it's up almost 60%, which we think is very positive. The market obviously didn't like our earnings so far today, but we expect the balance of this year is going to be a lot stronger.

If you take look at how we did in March versus the prior two months, just to break down the numbers a little bit, we essentially lost $0.$0.05 a share in January and February and made $0.05 a share just in March, to breakeven for the quarter. So we're trending in the right direction. A lot of the utilization has already improved itself. We're expecting the same in April. And if we can continue March's performance through the balance of the second quarter and the balance of the year, then we're were going to have a great rest of 2014.

Do you -- has there been a significant increase institutional interest in the Company?

There certainly has been, yes. We've seen more interest by investors and potential stockholders. I'm going to be speaking at three conferences over the next 30 days. And I'll have a much better sense of interest and activity and attendance once we appear at those three conferences.

(Operator Instructions) Lee Jagoda, CJS Securities.

Just a couple more for me. So the losses that you occurred in January and February, were they a function of timing of revenue or costs or both?

They were primarily a function of low utilization in those months. I have the numbers, I didn't give them. I may as well give you and everybody else on the call the benefit of the numbers.

In our claims group, utilization in January, February, and March respectively was 58%, 59%, and 64%. So a very strong upward trend there. In our project management group, it was it 82%, 83% and 85% for the three months of the quarter. Already good numbers in PM, but obviously trending upward in a big way.

If I could ask for a little more color, could you give us utilization in those three months a year ago and then the headcount in each of those months?

I can't give you headcount, but I can give utilization if you give me one second. In projects a year ago it was 83%, 85% and 86%, in January, February, and March. In claims it was 59%, 64% and 65%. Similar trends last year.

John, just a question on interest expense in the quarter it was lower by about $500,000 despite higher debt levels. Is there anything you can add there?

Yes, our interest rates with the revolver is based on a grid. And we had continuous improvement, and that grid is based on our consolidated leverage. And it continuously improved in each of the quarter and at the end of the year was at its lowest. So we had the benefit in the first quarter.

How should that trend Q2, Q3 and Q4 of this year?

Our agreement, the last amendment which was a -- well, the third amendment with the banking group had a clause in there that if we did not get the banking group out by March 31, 2014 there would be an additional 2%. So it's going to go up.

We're now the last year of our revolving credit agreement. It expires March 31 of next year.

And then David, one more for you and I'm all done. Just the $18 million of backlog adjustment, can you provide a little color on what exactly that was?

It was -- no projects being canceled, just adjustments in the backlog on three projects that were overestimated in our prior backlog report.

And that was on the project management side?

They all three were in the US project management group, yes.

Michael Conti, Sidoti & Company.

I just have a few questions. On the project management side, how much of the Oman project contribute to that?

Contribute to revenue or operating profit or what?

Yes, CFR.

Do have that number John?

No, I don't. I think it's around $3 million of $4 million per month.

It was probably about $10 million. About 9% or 10% of our consulting fees for the PM group in the quarter.

Just regarding the Riyadh Metro project. Can you breakout how much revenue you guys brought in for this quarter, and how much is left on that contract?

I'm looking at John and he's looking at me. I don't think either one of us -- I think there is approximately $80 million, $81 million left on that project, but I don't have the specifics on the run rate.

The Riyahd Metro is one of those projects that is ramping up slower than we had anticipated. We're not by any means anywhere near what that project is going to generate once it goes to construction and it's fully staffed up.

I just wanted to clarify. So you expect SG&A to increase in absolute dollar value from this quarter? Did I get that right?

Stay the same or slightly increase, but as a percent of consulting fees, continue to drop.

At this time we have no further questions. I would like to turn the call back over to Mr. Richter for closing comments.

Great, thank you very much. We were very pleased with our Company's growth in the first quarter of this year. But we know where our focus needs to be going forward, which is on the cost side.

We're going to be focused on getting our SG&A costs down and even more importantly our interest expense down. And we look forward to reporting positive news on both fronts during our next earnings call, which will be in early August.

Thank you all for your continuing interest in our Company and participating on our call this morning.

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