Hill International Inc (HIL) 2014 Q2 法說會逐字稿

Greetings and welcome to the Hill International second-quarter 2014 financial results conference call. (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, Devin. You may begin.

Thank you, Kevin. 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, Senior Vice President and 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 plans, strategies and objectives for future operations and statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements 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 the 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 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 would 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 earnings conference call. Yesterday, after the market closed, we announced our financial results for the second quarter of 2014, which were exactly in line with the preliminary results that we announced last Monday, June 28. Our strong top-line growth has continued with Hill having now generated record consulting fees for the seventh quarter in a row, so let's jump right into the numbers.

Total revenue for the second quarter of 2014 was a record $159.6 million, an 8% increase from the second quarter of 2013. Consulting fee revenue for the second quarter was a record $144.5 million, a 13% increase from last year's second quarter. This growth in consulting fees consisted of 11% organic growth plus 2% growth as a result of our acquisitions last year of Binnington Copeland and Collaborative Partners. Our gross profit in the second quarter rose to $61.3 million, up 15% from the second quarter of last year. Our gross margin as a percentage of consulting fees improved by 110 basis points to 42.4% in the second quarter versus last year.

Our SG&A expenses in the second quarter were $52.6 million, up 22% from a year ago when Hill saw the benefit of a $2.6 million reversal of an earlier reserve that lowered SG&A for the second quarter of last year. Our SG&A margin rose to 36.4%, a 270 basis point rise year over year, but absent the year-earlier reversal, our SG&A margin would have been only 70 basis points higher rather than 270.

Hill's EBITDA for the second quarter was $10.6 million, down 11% from last year's second quarter. EBITDA margin as a percentage of consulting fees was 7.3% in the second quarter, down 200 basis points from last year. Absent the year-earlier reversal, our EBITDA margin would have been unchanged this year from last year.

Operating profit in the second quarter was $8.7 million, down 12% from last year's second quarter. Our operating margin in the second quarter was 6.0%, down 170 basis points from last year's second quarter. Again, absent the year-earlier reversal, our operating margin would have been up 40 basis points from last year instead of down 170. Looking at our bottom line, we had net earnings in the second quarter of $1.5 million, or $0.04 per diluted share, which was up 111% from last year's second quarter.

Now looking at the second-quarter performance of our two operating segments separately, total revenue at Hill's project management group during the second quarter was a record $122.0 million, a 4% increase from last year. Consulting fee revenue for the second quarter was a record $108.5 million, a 10% increase from a year ago. This growth was comprised of 8% organic growth and 2% growth from our acquisition of Collaborative Partners at the end of last year. The projects group saw a 13% increase in gross profit to $41.2 million for the quarter with gross margin on a percentage basis at 38.0%, up 120 basis points from last year.

SG&A expenses in the projects group were up 21% in the second quarter to $28.0 million. Absent the year-earlier reversal, SG&A expenses would have been up by only 9%. As a percentage of CFR, SG&A margin was 25.8%, up 250 basis points year over year and again, absent the year-earlier reversal, SG&A margin would have been down 10 basis points from last year.

Operating profit for the projects group during the second quarter was $13.2 million, a slight decline of 1% from last year. Operating margin as a percentage of CFR was 12.2%, a 130 basis point drop from a year ago. Although absent the year-earlier reversal, it would have been improved by 140 basis points. This 12.2% operating margin is getting much closer to the project group's target of 15%, but there is still room for significant improvement there.

For our construction claims group, total revenue during the second quarter was a record $37.6 million, a 22% increase from the second quarter of last year. Consulting fees for the claims group was a record $36.0 million, also a strong 22% increase from last year. The breakdown of the claims group's growth in CFR was 19% organically and 3% from their acquisition last year of Binnington Copeland. The claims group saw its gross profit rise by 20% to $20.0 million, but saw a slight drop in its gross margin as a percentage of consulting fees to 55.7%, down 90 basis points from last year's second quarter.

SG&A expenses for the claims group were up 28% to $17.0 million in the second quarter and as a percentage of consulting fees, they were up by 200 basis points to 47.2%. Second-quarter operating profit for the claims group was $3.1 million, a 10% decline from last year. As a percent of consulting fees, this was a 300 basis point decline from the year-earlier quarter with operating margin for the claims group dropping to 8.5% in the second quarter of this year.

Claims had a great quarter for growth, but operating margin is obviously headed in the wrong direction. At 8.5% operating margin for the second quarter, the claims group has a long way to go to get back to its target of 15%, but this will be our focus going forward in the balance of this year.

In addition to the SG&A incurred by our two operating segments, we also incurred SG&A in our corporate group. For the second quarter, our corporate SG&A expenses were $7.6 million, up 11% from a year earlier. As a percent of consulting fees, this was 5.3%, down 10 basis points from last year's second quarter and this is getting much closer to our goal of having our corporate expenses under 5% of consulting fees.

Regarding our backlog, our Company's total backlog at the end of the second quarter was $972 million, down less than 1% from the end of the first quarter of this year. This backlog consisted of $923 million in our project management group and $49 million in our construction claims group. Twelve-month backlog at the end of the second quarter was a record $404 million, up about 1% during the quarter. This was broken down into $355 million in our project management group and $49 million in our construction claims group.

Hill had net bookings during the second quarter of $139 million or a book-to-bill ratio of 96%, a good sales quarter and significantly better than the first quarter of this year when our book-to-bill ratio was only 77%. Some of the major new contracts that we have announced over the last three months since our last earnings call include a $10 million contract to act as project manager for the Mall of Qatar, an $8 million contract to provide task order PM services to the Los Angeles Community College District, an $8 million one-year extension of our contract as program manager for the $1.9 billion Gold Line Foothill extension in Southern California, a $7 million contract to manage the rail expansion program for Denver's Regional Transportation District, two contracts totaling $6 million to provide project management services at San Francisco International Airport, a $4 million contract to manage construction of the $1.1 billion Bidbid Sur Highway in Oman, a $3 million contract to manage construction of the Boulevard Mall in Qatar, a $2 million contract to manage the construction of seven windfarms throughout Brazil, a $2 million contract to act as project manager for the new Langham Palm Jumeirah Hotel in Dubai, a $2 million contract to oversee the renovation of Terminal 2 at Cairo International Airport, a $2 million task order contract from the District of Columbia public library, a contract to provide delivery assurance services for the $8 billion Sydney Northwest rail link project, the largest infrastructure project right now in Australia and a contract to manage construction of the new St. Regis Hotel in Astana, Kazakhstan. And we are expecting even bigger wins in the second half of this year.

During our last call, we gave guidance for 2014 consulting fees of between $575 million and $600 million for the year. This equates to approximately 12% to 17% growth for the year. Based on the consulting fees we've achieved so far through the first half, current market conditions and the backlog I discussed earlier, we reaffirm but narrow our prior consulting fee guidance. We now estimate that our consulting fees for 2014 will be between $580 million and $590 million, which is equivalent to approximately 13% to 15% growth in our consulting fees for the year.

Yesterday, we closed on a follow-on public offering of Hill's common stock that was led by underwriter, KeyBanc Capital Markets. We sold a total of approximately 9.5 million shares at a price of $4.25 per share receiving gross cash proceeds of approximately $40.6 million. This equity offering was a condition precedent to our ability to refinance our existing senior debt on attractive terms and pricing and we are very happy that we were able to get the offering done successfully over the past two weeks.

As we announced last week when we began the equity offering, we have received a commitment from Societe Generale to provide us with new senior debt financing in the amount of $165 million that will allow us to replace both our Bank of America revolver and our term loan from Tennenbaum Capital Partners. The new financing includes a $45 million revolver paying about 5% interest, down from the 8% we are paying under our current Bank of America revolver and a $120 million term loan paying about 8%, down from the 20% we are paying under the Tennenbaum second lien term loan. We expect that this new debt financing will close before the end of this month.

The combined effect of the new debt and equity refinancing means that we should be able to significantly lower our interest expense going forward, which has been running at an annual rate of about $23 million per year. We will be able to reduce this by more than half going forward and we will also be able to significantly improve our borrowing capacity so that we have adequate capital for our anticipated growth in the near term. With that, our CFO, John Fanelli and I are happy to take any of your questions.

(Operator Instructions). Chase Jacobson, William Blair.

Yes, hi, good morning. So first, I guess, John, can you just confirm or David, can you confirm how the proceeds from the equity offering will be used towards the cash and debt balances and just what the fees we should be expecting in the third quarter as it relates to the income statement?

Okay. As David mentioned, the sources of our cash will be $165 million, of which $120 million we will receive at closing. We received a gross amount of $40 million from the term loan -- I'm sorry -- from the public offering. That $160 million will pay off our existing revolver with BofA and also pay the existing term loan of $100 million. With the transaction fees, we should net around $5 million on our balance sheet. Our balance sheet will delever from the current 3.6 times to 3.1 times and as David mentioned, our annual interest will almost be reduced in half from $23 million down to $11 million, $12 million.

We will have a -- a revolving credit facility that we will have with Societe Generale will be unused on day one except for some letters of credit that will carry over from the Bank of America line and our long-term plan -- actually our short-term plan is to move those LCs out of our senior revolver where it is expensive and obviously impacts our borrowing ability and move those to local banks in the Middle East and elsewhere where they are needed.

Okay. I guess, secondly -- so good job on the gross margin, but the SG&A continues to be above the 35% target. Are you still -- do you still think you can get to 35% to 36% for the year and maybe just some examples of what you are doing to get that number down or is it all going to come from overhead leverage?

We gave a target of 35% to 37%. We were at 36.4% in the second quarter. It has been higher than we've expected. Unapplied labor in particular has been higher than we've anticipated and that is going to be a core focus of ours as we end the second quarter heading into the fourth quarter. We definitely want that number to come down and it should come down as a percent. I think it will be a lot closer to 35% towards the end of the year.

Okay. And then I guess just one more and I will turn it over, but now with the equity offering out of the way, the debt refinanced, can you comment on the acquisition pipeline I guess now that you are more free to execute your growth strategy?

Yes, we have been fairly quiet for the last 3.5 years. Our acquisition of Engineering SA in Brazil in February of 2011 was our last really big acquisition. We closed two small acquisitions last year both for stock because we were prevented under our Bank of America terms from doing acquisitions for cash during that time period. With the new availability that we will have under the line and a stronger balance sheet, I expect that we will be more aggressive going forward on the acquisition side.

Okay, thanks.

Tahira Afzal, KeyBanc Capital Markets.

Good morning, folks. I guess the first question is as you look at your pipeline of prospects, David, how do you see the organic growth shaping up? Are we looking at -- as you are looking at your G&A and where it is going to be embedded in that, what kind of organic growth rate are you assuming?

We are really not assuming anything, but we are certainly expecting a better sales half in the third and fourth quarters of this year. We've got some visibility into that already, but there's also some big projects out there we are still waiting to hear on. So it's certainly our expectation that we will be above that 1 to 1 book-to-bill ratio that we really view as a floor.

The organic growth that we see, we had essentially 22% organic growth last year, 23% overall. We are targeting 13% to 15% this year and again, about 1% of that, maybe 2% will be from acquisitions and the rest will be organic growth. We don't see any challenge in having double-digit organic growth. And frankly, we'd be disappointed with anything less than double-digit growth organically. How much better than that we can do, it all depends on the wins that we get and how quickly we can ramp up on those projects.

Got it, okay. And if I look at the whole breakdown you gave us, which was very helpful, on what you have won since the close of the second quarter, it roughly adds up, if I'm getting my numbers right, to around $55 million or so. So as we look forward, and you've seen some pretty nice big projects, $8 million type of projects coming in, should we expect the prospects that you are seeing to be of a similar size or is there something outsized as well in the near term?

Yes, I would say that while the total number was a little lighter than we expected, I said 96% book-to-bill, we always aim for more than 1 to 1. The size of the projects as well were relatively small. There were some big projects in there, projects like Denver and Sydney that I think are much bigger. They are going to wind up being much bigger work for us down the line, but sometimes the initial contract may be a small amount or an indeterminate amount.

We have a couple of large projects that we are chasing now and a couple large projects that we have won that are much, much bigger than this range of contract as I think the largest project I announced on that list I gave was a $10 million contract. We've been seeing contracts $25 million, $50 million, $75 million contracts in the last couple years. We have some of those that we are chasing and hopefully we will be reporting on those real soon, the second half of this year.

Thank you very much, David.

Gerry Sweeney, Boenning.

Good morning, guys. I'd like to touch on the margins real quick. You've set the goal at 15% for both segments. Obviously, the claims is down in the single digits, which sounds like you are not that happy about, obviously. But in both of those, how do you start effecting a way to get there because you trend up and then you trend back down? Just curious if there is a particular roadmap to make that road to 15% a little bit more clear.

I wish I could summarize it in 60 seconds for you, but the biggest issue really has been -- and first of all start with the fact that the claims group just delivered record revenues and strong growth in the first half of this year and they've been ramping up staffwise and unfortunately, at the same time, we've had an increase in unapplied labor, which to some degree is a reflection of that staffing up. As new people come onboard until they are fully billable, there is going to be that unapplied cost to having them.

But we are obviously going to go through a review of -- as we always do at the end of the year when we are planning our budget for 2015, we are going to be going through and looking at the cost on both sides of the house, claims and projects. We are going to be looking at who is performing and who is not and we are going to be aggressive in making sure that we've got the cost structure in place that we need for the kind of growth we are expecting in 2015. And we are going to do the best we can to bring down our SG&A and the easiest number in that category to bring down is unapplied labor.

And in the claims group, I mean some guys transfer in and out depending on when projects end, correct? That is part of the unapplied labor aspect of it?

Unapplied labor is the cost of people that are normally billable when they are not billable.

Okay, so all right. And then as people ramp up or come on, I mean is there generally -- is it a six-month timeframe from day one to fully billable or is there -- or does it vary?

No, it is not that long ever. We wouldn't bring them onboard. It's usually measured in weeks or a month or two.

Got it. Switching gears a little bit, I know in Q3 there is going to be some fees associated with the repayment. I think interest cost is going to be a little bit higher in the quarter. I think the amortization of the Tennenbaum loan. Can we just get a touch of clarity on that? And then also just go over what the anticipated tax rate on a go-forward basis is going to be?

Sure. Let me answer the first half of that and I will let John talk about the tax rate. The fees and expenses of both -- firstly the equity offering will just come off the amount raised. The fees and expenses of the debt refinancing will be amortized over the term of the loans, which are five for the revolver and six for the term loan. The only one-time costs that we will have is -- the Tennenbaum loan is carried on our balance sheet as of the end of the second quarter at $89 million and we have to pay back the full par value of that loan, which is $100 million. So we will see a one-time $11 million hit in the second quarter -- in the third quarter. We also have some unamortized costs in connection with the Bank of America revolver that will be written off when that loan is terminated and that is about -- John, $1.5 million?

$1.5 million.

$1.5 million. Those will be one-time costs in the second quarter that will hit us on the interest expense line. On a going forward basis, we are anticipating our interest expense to come down from about $5.5 million a quarter down to between $2.5 million and $3 million a quarter. So a big savings that will drop entirely to our bottom line. Because we don't pay US income taxes, we don't have to tax effect that savings, so that will come straight to and benefit us at the EPS line.

And what that does, Gerry, is that it also will bring down our effective tax rate going forward in 2015. With the savings in our interest cost and improved profitability, we are forecasting to be in the mid-40%s in our effective tax rate.

Got it. Okay. So one-timer in Q3 will be cumulative $12.5 million and I think it's fair to do the assumption maybe half the quarter at the old interest and then maybe half the quarter at the new interest on a combined basis?

That's exactly the right way to look at it.

Okay, great. Thank you.

Michael Conti, Sidoti & Company.

Hi, guys, good morning. Dave, can you maybe talk about the change in the price-sensitive nature of your current and prospective clients, international clients and the impact it had on gross margin?

I really can't because pricing really hasn't changed. We didn't see much pricing pressure during the recession. Unlike what general contractors do, we are not bidding the work, we are not the low-price -- the low-price bidder doesn't get the work in professional services. Our clients are selecting the firm that is best technically capable of managing their projects or helping them resolve their claims. So it's generally not a price-sensitive competition. So we haven't seen too much of an impact over the last couple years from that and we are not seeing any kind of benefit from it coming out of the recession.

So our pricing is fairly consistent if you look within the two groups. We've certainly had some changes over the years as our share of PM versus claims has changed because PM has lower gross margin than claims. But if you look at the two groups historically, it doesn't really move around very much.

Okay, great. That's helpful. And just regarding the 12-month backlog, can you give us a sense of I guess the type of margin you are seeing there or is that still more or less in line with historical project management and CC groups and perhaps break out the backlog by geographical region?

It is in line with the historical gross margins. We don't see any change in that and no, we don't give a breakdown of backlog by geography.

Okay, fair enough. And I guess lastly maybe your view on the competitive landscape with the new AECOM acquisition, how that may have changed or potentially changed your outlook going forward?

I have been asked that question quite a bit. We view the AECOM URS combination as very positive for us. First of all, that is two competitors that become one. They have one bite at the apple instead of two and certainly given the size that they are and the depth that they have in design, I think that is going to conflict them out of more and more project management assignments because in certainly the vast majority of cases the same designer, same firm is not both designer and project manager. So I expect that their PM business will suffer as a result and that our PM business will benefit as a result.

Okay, interesting. And I guess just touching upon with the consulting claims, obviously strong growth in the first half. Can you give us an idea of what the utilization was for the quarter and the year-over-year growth?

I actually don't have the utilization numbers in front of me. I don't think John does either.

It's around 62%.

For the quarter?

Yes.

62% for the quarter in claims, which is right in line with our historical average of about 60% to 65%.

Okay. Can you break out project management?

No, we just don't have those numbers in front of us. If you want, Mike, we can email those to you.

Okay, great. I appreciate it.

(Operator Instructions). [Pete Eberlin], [Maz Partners].

Good morning. Thank you. Did the refi have any specific terms limiting your ability to do acquisitions and at what kind of level do those begin to come into play?

Yes, there were typical contract provisions regarding acquisitions. Generally, they have baskets that we don't need their permission for and then above and beyond that, we do. Those don't restrict stock acquisitions, only cash. We have enough borrowing availability in the new line with our cash balance that anything that we think we're going to look at in the near term we are not expecting any issues regarding.

So that implies that near term at least you are not talking about any really big acquisitions?

No, we have a small acquisition that we are probably about two months away from closing on, a European firm that would come into our construction claims group. We are pretty far along in that process. It's relatively small, it's in line with the two last acquisitions that we did, less than $5 million in annual revenues and that's structured as an all-stock deal. We don't have any other acquisitions pending. Although now that we have this in place, we are going to start looking at more and more opportunities to grow our business, especially as the economy is improving and we have the available borrowing capacity to be able to effect acquisitions then.

Okay. And the perennial question about Libya and the possibility of you getting that money anytime in the foreseeable future?

It's been a difficult couple of months. We had every expectation that we were going to be getting a major payment at the beginning of the summer from Libya following up on the $10 million that we received in the first quarter of this year and the third quarter of last year. Slowing that down in the late spring, the national Congress had a vote of no-confidence in the Prime Minister and he was thrown out of office. A new prime minister came in and given the change in leadership, it slowed the bureaucracy to a crawl. Nobody wanted to make any decisions that might be second guessed or reversed by the new administration. And then obviously in the last couple of months, there has been a major uptick in violence over there.

So right now, we don't have much visibility into what is going to happen and when, but we remain just as confident as we did before that, at some point, we are going to continue to collect most, if not all of our funds out of Libya and eventually get back to work there. But it is a troubled situation. Like a lot of parts of the world, they are going through quite a bit of strife right now and unrest, but most of the country is continuing to operate and we are just going to have to continue to be patient for our funds.

David, is the letter of credit that you have for $14 million against that, is that at risk because of all the turmoil over there?

Well, we do have several letters of credit totaling $14 million, standby letters of credit and it gives us some assurance that if need be we can get paid. We don't think those LCs are at risk and we don't think that there is a question of our payment; it is only a question of timing. It is a question of when not if.

Okay. Then getting back to the general question about SG&A costs and overall level of expenses, you have more than 100 offices worldwide, many of which are pretty small. Is there any thought to consolidating some of those or how do you go about making them eventually more efficient than they are now?

Well, we look at offices on a regular basis and to the extent that they don't have enough work to support their staff and be profitable, from time to time we do close offices. There is no major review being undergone right now to do that as far as I know, but that happens from time to time. The key for us is that we spent most of the last decade building out, taking really what was at the beginning of the century primarily an American company and really building out a global presence. And that global footprint is expensive. We incur a lot of cost from doing so. And we did that right when the construction market was coming down dramatically in 2008 and the next couple of years.

The trick for us to really drive our profitability upward is to grow into that infrastructure, which we are in the process of doing now that we are back to double-digit organic growth and be able to leverage that growth into significantly lower SG&A as a percent and higher operating margins as a percent. We've talked about we can get the two groups to 15% operating margin, we can get our corporate costs under 5%, we should be able to throw off a 10% operating margin. That would be the highest in the industry. Last year we were, as measured by operating profit divided by total revenue, we were the second-most profitable company in the industry of the firms that we looked at after [Jacobs]. And we are just beginning to get to the levels of profitability that we should be at and we can be at. So the trick for us is to double our business not by adding another 100 offices, but by doubling the size of the 100 offices we have and if we can do that, our bottom line will change dramatically for the positive.

And then looking again at the changing landscape in the industry with AECOM and URS and I think they made another acquisition of a company called Hunt, Balfour Beatty is reported to be considering selling Parsons Brinkerhoff. Do you have any comments to make about that?

Yes, if you have got $1 billion you want to lend us, we'd love to buy Parsons Brinkerhoff. It's a great company and you are going to see -- this is an industry that has been consolidating for a long time. It was surprising to us that they were divesting of that company so quickly after buying it. They have only owned it for about five years, but they will move on to somewhere else.

Overall, we see consolidation as a real positive for us. Same thing I talked about regarding AECOM and URS is true. Every time there is a combination. It is fewer competitors out there with more conflicts. We are a pure project management firm. We don't have the design conflicts or the construction conflicts that a lot of our bigger competitors have and longer term, we are very positive on being able to gain marketshare in a growing industry as our competitors are consolidating.

Okay, and then one more if I might, David, and that is what about possible adjacent businesses that you could get into on a long-term strategic basis?

There are certainly opportunities for us in the construction sector and outside the construction sector to expand. What we have tried to do as we've been on an acquisition program for the last 17 years. We bought 22 firms. Every one of those firms is either a project management firm or a claims firm. We are world class in providing those two services and we've decided to stick to our knitting and grow along those two service lines. We don't see any ceiling to our ability to continue to grow those two businesses for the foreseeable future, but I'm sure at some point we may look at other opportunities, but that point isn't right now.

Okay, thanks a lot.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Richter for any further or closing comments.

Great, thank you very much. We are very pleased with our Company's growth in the first half of this year, but we know where our focus needs to be going forward, which is on the bottom line. Once we refinance our debt later this month, which will significantly lower our interest expense, we are going to be focused on improving the operating margins of our two segments during the second half of this year and heading into 2015. By continuing to grow our revenues and minimize our overhead and interest costs, we expect that we can deliver substantially better earnings to our bottom line for the benefit of our shareholders. Thank you all for your continuing interest in our Company and for participating on our call this morning. Bye-bye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.