Hill International Inc (HIL) 2014 Q4 法說會逐字稿

Greetings and welcome to the Hill International fourth-quarter and full year-end 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 today, Mr. Devon Sullivan, Senior Vice President of The Equity Group. Thank you, sir. You may begin.

Good morning, everyone. Thank you for joining us today. Our speakers for today will be David Richter, President and Chief Executive Officer of Hill International and John Fanelli, the Company's Senior Vice President and Chief Financial Officer.

Before we begin, I would like to remind everyone that certain statements made during the course of 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 earnings or other financial items, any statements concerning plans, strategies and objectives for future operations and any statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on 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 of our forward-looking statements. Important factors that could cause our actual results, performance and achievements or industry results to differ materially from estimates or projections contained in our forward-looking statements include modifications and termination of client contracts; control and operational issues pertaining to business 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 our backlog.

Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in the reports we have filed with the Securities and Exchange Commission. We do not intend and undertake no obligation to update any forward-looking statement. With that said, I would now like to turn the call over to David Richter, President and CEO of Hill International. David, please go ahead.

Thank you, Devin, and good morning to everyone joining us for today's earnings conference call. Yesterday, we announced our financial results for the fourth quarter of 2014. Total revenue for the fourth quarter for our Company was a record $169.1 million, a 17% increase from the fourth quarter of 2013. Consulting fee revenue or CFR for the quarter was also a record at $148.7 million, a 14% increase from the prior year's fourth quarter.

This growth in consulting fees consisted of 12% organic growth plus 2% growth as a result of our acquisitions of Scottish consultancy, Cadogans and a New England project management firm, Collaborative Partners, over the past year.

Our gross profit in the fourth quarter rose to a record $64.4 million, up 10% from the fourth quarter of 2013. Our gross margin as a percentage of consulting fees was down by 150 basis points to 43.3% in the fourth quarter versus the prior year. Our SG&A expenses in the fourth quarter were $61.1 million, up 18% from the year-earlier quarter. Our SG&A margin was up 160 basis points year-over-year to 41.1% for the quarter. The largest increases in SG&A expense for the fourth quarter were the following -- an increase in unapplied labor of $2.8 million year-over-year, an increase in bad debt expense of $2.7 million, an increase in indirect labor of $1.6 million, an increase in administrative travel expenses of $400,000 and professional fees incurred in connection with the Cadogans acquisition of $200,000 during the fourth quarter.

Hill's EBITDA for the fourth quarter was $5.7 million, down 38% from the fourth quarter of 2013. EBITDA margin as a percentage of consulting fees was only 3.8% in the fourth quarter, down 330 basis points from a year earlier. Operating profit for the quarter was $3.3 million, down 52% year-over-year. Our operating margin in the fourth quarter was just 2.2%, a decrease of 310 basis points from the fourth quarter of 2013.

With operating profit down so much in the fourth quarter, we saw a net loss during the quarter of $3.5 million or a loss of $0.07 per diluted share compared to a net loss during the prior year's fourth quarter of $1.3 million or a loss of $0.03 per diluted share.

Our net loss was also negatively impacted by an increase in income tax expense of $900,000 between 2014 and 2013. One area where we saw significant improvement in the fourth quarter however was interest expense. As a result of the debt refinancing we closed at the end of the third quarter last year, our interest expense during the fourth quarter was $3.7 million, down 35% from $5.6 million during the fourth quarter of 2013. Despite the net loss, the fourth quarter was a very strong quarter for cash flow with Hill having positive operating cash flow of $12.7 million for the 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 a record $129.5 million, a 16% increase from the fourth quarter of 2013. Consulting fee revenue for the quarter of the Projects Group was also a record at $110.2 million, an 11% increase from the year-earlier quarter. This growth was comprised of 10% organic growth and 1% growth from the acquisition of Collaborative Partners at the end of 2013. The Projects Group saw a 7% increase in gross profit to $43.1 million for the quarter with gross margin on a percentage basis at 39.1%, down 140 basis points from last year's fourth quarter.

SG&A expenses at the Projects Group were up 12% to $31.7 million in the fourth quarter. As a percentage of consulting fees, SG&A margin was 28.8%, up just 10 basis points year-over-year, but that included an increase in bad debt expense of $1 million year-over-year, $1.5 million last year versus $500,000 the year before. Absent that, the Projects Group's SG&A margin would have been down year-over-year.

Operating profit for the Projects Group was $11.4 million during the quarter, a 3% decline from the prior year's fourth quarter. Operating margin as a percentage of consulting fees was 10.3%, a 150 basis point drop versus the year-earlier quarter. All in all, a very solid quarter for our Project Management Group.

It was a very different quarter however for our Construction Claims Group. Total revenue during the fourth quarter at the Claims Group was $39.7 million, a 20% increase from the fourth quarter of 2013. Consulting fee revenue for the Claims Group was a record $38.5 million, a 21% increase. The Claims Group's growth in consulting fees was comprised of 19% organic growth and 2% growth from the acquisition of Cadogans. The Claims Group saw its gross profit rise by 15% to $21.3 million, but saw a drop in its gross margin as a percentage of consulting fees to 55.3%, down 280 basis points from the prior year's fourth quarter.

SG&A expenses for the Claims Group were up 33% to $21.2 million during the quarter and as a percentage of consulting fees, they were up by 490 basis points to 55.2%. This increase in overhead expense was primarily the result of an increase in unapplied labor of $2.2 million, an increase in bad debt expense of $1.7 million, an increase in administrative travel expenses of $400,000 and the professional fees incurred in connection with Cadogans of $200,000.

As a result, fourth-quarter operating profit for the Claims Group was just better than breakeven at $55,000, unfortunately a 98% drop from the fourth quarter of 2013. As a percent of consulting fees, this was a 790 basis point decline from the year earlier with operating margin dropping to just 0.1% in the fourth quarter. Obviously a disappointing quarter for the group and one that adversely impacted the entire Company's performance in the fourth quarter.

But having started 2014 with three outstanding quarters, the Claims Group still had a great year overall. The group delivered 24% growth in consulting fees and $11 million in operating profit, its second most profitable year ever after 2013 where the group delivered $12.2 million in operating profit.

For the comparable fourth quarter, or even an ordinary fourth quarter, operating profit would have been a record as well. The Claims Group and our entire senior management team are working hard to ensure that the fourth quarter isn't repeated in 2015 and the group gets back on track for delivering a record performance 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 fourth quarter, our Corporate SG&A expenses were $8.1 million, up 12% from the year-earlier quarter. As a percentage of consulting fees, it was 5.5%, down 10 basis points from the prior year's fourth quarter.

Regarding backlog, we ended 2014 with a record total backlog of $1.08 billion, up almost 1% during the fourth quarter. This backlog consisted of $1.034 billion from our Project Management Group and $46 million from our Construction Claims Group. 12-month backlog at the end of the year was also a record at $470 million, up 3% during the quarter. This was broken down into $424 million from our Project Management Group and $46 million from our Claims Group.

Hill had net bookings during the fourth quarter of $156 million. Absent a major project in Iraq that was canceled and which was previously included in our backlog for $47 million, we would have had net bookings of $203 million during the quarter, which equates to a book-to-bill ratio of 137%.

Some of the major new contracts that we announced over the past four month since our last earnings call include a $56 million contract to manage Super Storm Sandy recovery efforts for New York City Transit, a $34 million contract to provide construction management services to the New Jersey Turnpike Authority, a $30 million construction management contract for GSA's mid-Atlantic region, three contracts totaling $25 million to manage nearly $1 billion of residential projects for the Abu Dhabi National Oil Company, a $22 million contract to manage the expansion of the East Link light rail project in Seattle, a $7 million contract to act as project manager for a new headquarters building for the European Investment Bank in Luxembourg, a $4 million contract to manage the $0.5 billion renovation and expansion of the Miami Beach Convention Center, a $4 million contract to provide PM services in connection with a Bahrain affordable housing project and a $3 million contract extension for our work managing the construction of BBVA Bancomer Operating Center in Mexico City.

Based on those major contract wins and others yet to be announced, we are once again anticipating double-digit growth in consulting fees for this upcoming year. We currently expect to achieve $650 million and $675 million in consulting fees during 2015, which equates to approximately 13% to 17% growth for the year.

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

(Operator Instructions). Mike Shlisky, Global Hunter Securities.

Good morning. I want to just start off with just asking about the effect of foreign exchange rates on your backlog at the end of the year. Was there anything major there? Would they have been a lot higher had we not seen a major change in some of the global exchange rates versus the dollar?

Yes, it certainly would have been at least a little bit higher. The dollar has been very strong. 80% of our business is international. Certainly the euro has been weak relative to the dollar and a lot of other currencies as well. So it has had an impact on us. It has been a negative as far back as I can remember now. We don't do any hedging; we don't plan to. So we just have to suffer the consequences of the strengthening dollar.

Okay. Perhaps on a related note, given such a strong dollar, are you seeing any more appetite for your international acquisitions from here if you can get a good deal on them thanks to the good rate?

Yes, that is certainly a factor and in some areas, it does help us. Acquisitions is one of those areas. We are looking at a handful of acquisitions right now. In fact, we expect to have one close before the end of this quarter. I would say our primary focus going forward is on acquisitions domestically.

Okay, okay. Can you also maybe give us an update on what is going on over in Libya? Has there been any change or any news we can talk about as far as the AR issue out there?

We don't have any direct news. Obviously, there has been a lot of change going on in Libya in the last six months. There was a court decision that sort of mediated the dispute between the two contesting governments. One government was named the legitimate government of Libya, the one most of the international community is now dealing with. They are working with the other government to sort of settle things down, normalize the situation in Libya and hopefully get the country moving forward. We have maintained a very good and positive dialogue with, ODAC, our client. They have not been authorized to pay any outstanding debts; in fact, haven't been authorized to make any payments other than payroll in the ordinary course. Once that changes and the country gets back to normal, we expect to be in position to collect our remaining funds.

Mike, this is John Fanelli. I just wanted to add to what David said. From our financial report, the only change we made is that we reclassed this receivable from a current asset to a noncurrent asset, but the position that we know we are going to get paid, we just don't know when.

Okay, makes sense. I am going to squeeze in one more here about your interest costs. Interest was down 35%, certainly a good drop, but I don't know why I thought we would see a little bit more, like maybe 50% down. Was there anything in the quarter we should be aware of that might have been one time in nature and can you give us what your thoughts are as far as the quarterly run rate of interest in 2015?

Yes, we originally projected and disclosed that we expected the drop to be about half. We had some letters of credit that we sort of had to pay twice for. They were still in the Bank of America accounts. They were backed by Societe Generale LC, so we were basically paying twice for the same letters of credit for quite a few months. We are also in the process of working those LCs out of our senior revolver and into local banks, primarily in the Middle East where we have a need for them. We also have a significant amount of cash collateral with certain banks that was put in place over the last several years that we now expect with a normalized banking relationship with Soc Gen to be able to free up. Hopefully a significant amount of cash we will be able to get out of restricted accounts in the Middle East. We have been actively doing that. It's taking a little longer than we expected like most things do, but over the next couple months, we expect to free up that cash, which will have a big impact on our interest expense as well.

Okay. Thanks so much, guys.

Chase Jacobson, William Blair.

Good morning. Can you give us some more color on the increase in the bad debt expense? Maybe something as to what it was related to. I guess I was surprised to see how much of it was in the Construction Claims business given that the contracts there tend to be smaller and shorter cycle.

Yes, which actually tends to create more cash collection problems when you are doing short-term work than the Project Management Group. Historically we have seen most of our collection issues, Libya notwithstanding, on the Claims side of our business, not Project Management.

Two things. One is they were across the board geographically, but primarily Asia, the Middle East and the US and secondly, just with my dad retiring and me coming in, I wanted to take as good a scrub on the balance sheet as I possibly could, make sure we get any outstanding receivable issues behind us so we can start 2015 with as clean a slate as possible.

Okay. That is helpful. I appreciate the color that you gave us on breaking out the increase in the G&A, but again in construction claims, the unapplied labor, you mentioned a $2.2 million headwind there, but you still had pretty good revenue growth. So is that to support growth next year or is that something that you need to cut going forward and are you still looking at getting to 35% to 37% for SG&A as a percent of CFR in 2015?

To answer the last part first, yes, we are. That is still our target. It seems strange to complain about the record revenues in the Claims Group, but we actually expected them to be much higher in the fourth quarter. They were down from what we expected. The group grew 24% for the year, so they obviously added a lot of staff over the course of the year and in the fourth quarter, with less work than anticipated, they saw a big increase in unapplied labor. It was $2.8 million for the whole Company, so $2.2 million was in Claims and $600,000 was in Project Management. So Claims was most of it and Claims was also about two-thirds of the bad debt expense.

Okay. Last question is we hear and read a lot about what is going on in the Middle East as it relates to their budgets and what the impact of lower oil is having. Can you maybe give us an update, just some market color on what you are seeing in the Middle East? It seems like it is still pretty good given your backlog results, but I would just love to get any color. Thanks.

Yes, I would be happy to. The countries that we predominantly do business in the Middle East are the ones that are the most stable. The vast majority of our revenues come from essentially four countries, which is Saudi Arabia, the UAE, Qatar and Oman and they are the four most politically stable countries. Not too worried about political instability and it hasn't impacted our business much at all other than obviously for Libya.

We have seen work slow down significantly in Iraq, including that one project I talked about that was about $47 million that we removed from our backlog because of funding issues with our client. Other than that, the bulk of the operations in the Middle East are strong. We saw again it was 22% growth in consulting fees during the fourth quarter in the Middle East, which was to us very strong.

We have heard rumors of and have read in publications about the same kind of questions that we get asked, which is is the price of oil going to impact future spending. The answer is we don't know. It hasn't impacted our operations to date. We don't see it affecting the current projects that we are on. What happens in the future as far as budgets for construction, development infrastructure we just don't know. We also don't know where the price of oil is going to go. It seems to have been heading a little bit back up lately, but the reality is that the plans that are made over there are long term in nature and aren't really dependent upon last week's price of oil.

Okay, that is helpful. Thank you.

Tahira Afzal, KeyBanc Capital Markets.

So if you look at your revenue target for the year, you came in slightly below your expectations for 2014 at the end of the year. How should we be thinking about -- how should we get comfortable around 2015, the revenue targets you are setting? It is up roughly at least 13% year-on-year while your backlog is up 5%. Anything you can provide us that can provide some comfort around that would be helpful.

Sure. We did miss slightly from the target we gave four months ago for our year-end consulting fees. It was $580 million to $590 million. I think we did $576 million. As I said, the fourth quarter, despite record revenue in both PM and Claims, was less than we expected. We had some major wins in the second half of last year that we expected to ramp up on in Project Management and those have been ramping up slower than expected or hoped for and the fourth quarter was a little slower in Claims than we expected. We thought we were going to be right in the middle of that range and we were just a hair below it. We have factored that in. We have now given annual consulting fee guidance, this is our third year in a row. I think we have been fairly on target with those estimates. We do revise them over the course of the year as we deliver quarterly results, but we are obviously confident enough with this projection for 2015 that we put it out there in the market. So it is significant growth, midteens and we are, as I said, confident that we can achieve that.

Got it, okay. And then in regards to the cost tightening that you talked about in the press release and today so far, how fast should we expect that, what milestones should we be looking for and how rapidly should we see that being visible in your earnings or at least in your operating margin so that we can see the visible improvements coming through?

Sure. Earlier this year before the fourth-quarter numbers came out, we put together a plan to do a global review of our overhead structure and our costs and that process we expect will be done by the end of the second quarter and we are going to make sure that we get our overhead as low as we possibly can so that we absolutely maximize our profitability for this year. We are expecting a significant amount of growth, between $75 million and $100 million of additional consulting fees. We want to make sure we wring every last dollar of profit we possibly can out of that. I don't want to be running a business that is losing money. We lost money last year. I think it was a third out of four years that we have been not able to deliver net profit to our shareholders and I am certain that this year we will.

Okay, thanks. Just one last question, David, along those lines, could you or John provide any guidance around free cash flow expectations for this year?

John's giving me the same blank look I am. We typically don't give that kind of projection out in the market. We have some internal projections, but they also can be wildly inaccurate in either direction. Collections can be even just offset by a couple weeks can have a big impact on what we get in a quarter. Certainly we expect significant positive cash flow this year as we start to ramp up our EBITDA.

Got it. Thank you very much, David.

Pete Enderlin, MAZ Partners.

Thank you. Good morning, David and John. When was the $47 million contract with Iraq actually canceled?

I am not sure it was officially canceled, but we removed it from our backlog because we weren't getting additional task orders. We understand that there has been funding issues with our client, but essentially we removed it from backlog in January for the end of the year.

Okay. Given that it is such a significant contract, was a significant contract in a highly visible area, did you give some thought to putting out a press release about that?

No, we don't put out press releases related to our backlog adjustments, positive or negative. Projects get canceled from time to time and we include that in our ongoing backlog calculations. It was significant enough that I mentioned it related to our net sales during the quarter. Absent that, we had about $203 million or $204 million of net bookings. That brought it down to about $155 million or so. So that's why I discussed it.

Talking about the revenues in the fourth quarter, with a month gone in the fourth quarter, you had indicated consulting fee revenues that were about $10 million more than where you ended up. So what was the timing and the source of the slowdown that occurred in the fourth quarter?

I can break it down for you by month. We had a very strong October overall, a very weak November. October was a month, and this impacts us much more so in the US than overseas, but October was a month of 23 billable days and November was a month with 18 billable days. So in November, we had five fewer billable days with exactly the same cost structure. Then we lost five days of revenue that came right off the bottom line. We thought we would be ramping up in November to offset some of that, but November was a bad month and December is always a bad month just because of holidays, vacations and other things.

Right. Did you actually collect a little money from Libya because I think the stated amount went down about $400,000?

That might have just been a rounding error or a foreign currency translation adjustment. We have not collected any money in about 13 months, since February of 2014.

And then, David, can you give us the status of your headquarters move and what that might mean in terms of cost and savings?

Sure. We are about a month away from relocating our headquarters from southern New Jersey into Philadelphia, consolidating our headquarters office with our local Philadelphia office. The cost will be slightly higher. We are paying about $26 a square foot for space here and in Philadelphia. Our effective rent in Philadelphia, when you factor in two years of free rent, is going to be effectively $29 a square foot, so not much more, about 10% higher, although we are taking about 20% more.

Over what period of time, if you have two years free rent?

It is a 12-year lease.

Okay.

This may be more detail than you wanted, so it's effectively $29 a square foot. We are taking about 20% more space there than we have combined in Philly and Marlton for anticipated growth and anybody that is sitting right now in New York knows that $29 a square foot is not expensive office space. So we are looking forward to being in there. We are going to have some costs in connection with the move. Most, if not all of the costs are being paid by our landlord and the city of Philadelphia and the state of Pennsylvania.

Okay, great. Thanks a lot, guys.

Walter Schenker, MAZ Capital Advisors.

Two questions. First, on the currency, you largely bill in local currency or US dollars since most of it is in the Middle East?

We almost always bill in local currency.

And therefore the strength of the dollar, and you pay local people I assume unless they are US-based in local currency as well?

Yes, we do.

Correct.

So the strength of the dollar isn't that significant or shouldn't be that significant if most of the business is not done either on a cost or a revenue basis in dollars? Obviously, in the US, it is, but --.

It has a lot smaller emphasis to us than if we were a manufacturer building in the US and selling in the Middle East and our costs are in dollars and are revenues are in a foreign currency. So you are talking about basically the profit differential. You have got some translation adjustments on our balance sheet because our receivables, our cash held gets converted on a quarterly basis and so we have some impact from that. It is typically several hundred thousand dollars a quarter recently. John, do you know what the number was in the fourth quarter?

It was around $400,000.

So about $400,000 negative impact from the strength of the dollar.

Okay, thank you. Secondly, you are now running the Company, David. Clearly, the last -- as you pointed out -- three of the last four years, the Company has not made money. This past year, you only were profitable one quarter. Although you did make some achievements in revenues and cleaning up the balance sheet. Since it is now your company, I realize your father is still head of the Board, could you just give me an overview of your view toward management broadly, not just you, compensation and to what extent bonuses should be tied to what type of performance?

Yes, Walter, I can do that. We had a couple negative years. 2012, the loss was principally driven by a writeoff of our deferred tax asset. We basically booked our NOLs in the US and we had enough losses in a row that our auditors required us to write that off. Our loss in 2014 was primarily driven by the debt refinancing that we did and the $11 million charge that we took to pay off our second lien lender two years early.

The -- I'm sorry, Walter. Ask the second part of your question again.

Sort of a general view on compensation in periods in which both the stock is down and the Company -- and I realize there are extenuating factors, but there have been a series of them, the Company doesn't make any money.

I just blanked on the bonus question. We have basically three or even four types of bonus plans here. The Claims Group, their bonuses are tied to individual and office performance as a motivator in getting them to achieve as much revenue as they possibly can. It is not tied to Company performance. The Project Management Group typically gets a bonus that is tied to their operating profit and in most cases, it's are a relatively small percentage. It's 2% typically; although in some situations, it is higher. The Corporate staff has discretionary bonuses and that very much is tied to the overall Corporate performance and how much is available to be paid on a discretionary basis and the exception is myself as CEO and Raouf Ghali as COO, we have a bonus that is tied to both EBITDA and EPS of the entire Company.

Okay. I appreciate that explanation. Thank you, David.

We also, Walter, have, in many cases, at the very highest levels of the Company, stock options that obviously are only valuable if the stock moves forward and that is a significant part of my compensation certainly going forward.

Stewart Pond, Medley Capital.

I just had another follow-up question on the Construction Claims business. I know that you had mentioned earlier that a large part of the margin compression came from unapplied labor. And I was just curious if you could dive a little bit deeper into that and just maybe help me better understand why that part of the business struggled so much in the fourth quarter. And in terms of bringing costs back in, kind of what your expectation is for kind of how quickly you can ratchet that in?

Yes, the Claims Group through three quarters was having a terrific year, 24% growth eventually for the year, record revenues, record operating profit. In the fourth quarter, expected that to continue. They had added staff over the course of the year, anticipating not just continued growth in 2014, but more growth in 2015 and as can happen to a consulting practice that has relatively short-term assignments that can stop and start with very little predictability or visibility, they had a slower quarter than they expected even though it was still a record quarter in consulting fees and had higher billable staff then they needed for the work. And as a result, unapplied labor was up in the Claims Group by $2.2 million.

The overhead review that we are going through in the first half of this year, it has obviously cost the entire Company, Corporate, Project Management and Claims and they will be a part of the review to see whether or not they have overstaffed a little too much and whether we can get our costs back in line with what our revenues are expected to be going forward.

Okay. What is the term of these contracts that you are generally signing up this extra labor for? Can it be kind of ratcheted in fairly quickly or -- I know that you had mentioned that you are bringing on extra overhead expecting more work and I understand there is less predictability or consistency in the work that you receive. I'm just trying to understand how quickly you can kind of reign in labor costs as needed if work is not there?

Yes, a couple things. One is there is almost never a term to our assignments in Construction Claims. We are told to start work on something and we continue working until the client tells us to stop. So we may not know on day one that this is a six-month or a 12-month assignment. We may not know if the claim settles in the middle of our work and then we have people with nothing to do for a while until we can get them rebillable. But these are people that we added to the overhead. These are billable professionals that we added to the operations.

The way we keep score is that unapplied labor, which is that cost for billable people when they are not billable and that is to be distinguished from indirect labor, which is the cost of overhead people, so really not expected to ever be billable. Unapplied labor moves into SG&A when people aren't busy. Their direct costs, which is the cost of them when they are billable, is direct cost and comes between consulting fees and gross margin.

So we have faced this before where we have a slow -- let's say Claims has a slow quarter and it looks like SG&A took a big pop up and people are asking the question and it is a reasonable question to ask if you don't know how we calculate these numbers that if you had a slow quarter, why did you increase your overhead? Well, we didn't do it automatic -- we didn't do it by hiring indirect staff; it happened automatically because as people aren't billable, their costs become part of SG&A and that is what happened to us in the fourth quarter.

Thank you.

Mike Shlisky, Global Hunter Securities.

I just wanted to touch on the overhead question on your guidance. I mean, at the end of the year, it sounds like you still had people that were -- you didn't kind of lose any headcount, but given that you have got 15% growth approximately in your guidance for 2015, do you expect to grow into that overhead throughout the year? I guess that is part one of the question and then part two is do you think you have to actually staff up further to meet what you think is going to be 13% to 17% revenue guidance growth?

Yes, we will certainly need to add staff to achieve that and I think that we will add staff and we will achieve those revenue targets. The trick is to add the staff more slowly and to get the people you already have more billable so you can get revenue for their time and you can take their unapplied labor out of our overhead costs and get that number as low as we possibly can. But we certainly can't grow 13% to 17% with our current staff.

But the folks who you have hired today who were sort idle a little bit in the fourth quarter here, they are able to do some of the work that you have got in your backlog for the first part of 2015, have those kind of skills and knowledge, is that (multiple speakers)?

It is fair to say and if you look at our press releases over the last let's say two quarters because we always announce what our total staff is, we are at 4600, we have been that for about six months now. You can see we are not ramping up drastically; we are trying to get the people we have more billable and absorb that unapplied labor first and then grow from there.

And then as you try to get through some of the overhead here, do you have any plans to, of course, I guess besides Philadelphia, consolidate any of your other offices throughout the world to kind of save on overhead? Is that part of the plan or are there other ways you can kind of get some of those fixed costs down?

We could consolidate LA and San Francisco, but I think that would require a major earthquake to move those two cities close together. This was an obvious relocation just because I think being downtown in Philadelphia makes more sense for our headquarters. That gave us the chance to consolidate two of our biggest offices, which are only about 20 to 30 minutes apart. Elsewhere, I don't really see that happening anywhere.

We have been very cautious in the last couple years about adding new offices. We have opened a few here and there where we've see strong demand locally. Certainly in Project Management, you have to physically be where the projects are. In Claims, you can have more sort of regionalized offices that can serve an entire region just from one office, but we have also been at about 100 offices for several years now. Other than picking up a new office here and there from acquisitions, we very infrequently will open a new office. And our goal for a long time has been gaining critical mass. And doubling the size of the business not by doubling the offices from 100, 200, but by doubling the size of each office, we can wring a lot more profitability out of doing that and I think we are certainly growing into our overhead. At the same time, we are trying to trim it around the edges and get it down this year so we can be profitable in 2015 and even more profitable going forward.

Okay, fair enough. Thanks very much.

Michael Conti, Sidoti & Company.

Good morning. Yes, so most of my questions were answered, but, Dave, I was wondering if maybe you can just give us an update on the competitive landscape just given the inflationary period of commodities, stronger dollar, what have you? Has bidding behavior changed from any of your customers or maybe some of your clients in terms of pricing pressure, any of that sort?

No, we haven't seen any change in pricing pressure or anything else. Our clients really aren't hiring us based on price; they are hiring us on a number of factors, all of which tie to our technical capabilities to help them on their project or on their claim. This is not an industry where the low bidder gets the work the vast majority of the time. So pricing hasn't impacted our business, hasn't impacted our gross margins, nor do we expect it to.

Okay, fair enough. John, how should we think about the effective tax rate in 2015?

2015, you know that our income taxes can vary quarter to quarter depending on where the profit is located in what jurisdiction, but we are projecting that will be mid to high 40%s overall, but there may be some ups and downs, but overall we think it is going to be in the mid to high 40%s.

Perfect. That is all I have. Thanks, guys.

(Operator Instructions). Tahira Afzal, KeyBanc.

David, as so much hinges in terms of your margin expansion story on delivering the revenue side of the equation, could you talk a bit more on when you set that $650 million, $675 million and given that you have seen some lumpiness and progressively saw some of the projects ramping up more slowly, what kind of incremental cautions potentially you have taken or cushion you have taken when you have looked at the revenue projections for this year?

Certainly there is some cushion built into that number. It is conservative enough that we expect, and as I said before we are confident that we can reach it, we will refine the number over the course of the year. Variability typically would be on the Claims side just because we have a lot less visibility into how they are going to perform going forward. We have a lot of confidence on the Project Management side, which is 75% of our business and 75% of our revenues, that that number for them is achievable given the long-term nature of those contracts. And all I can say is we wouldn't have put it out there if we weren't confident we were going to hit it.

Got it, okay. And then as we look at opportunities for this year clearly, the US seems to be the bright spot globally this year. Can you talk a bit about backlog growth, whether you do see that being achievable on an organic level? And I assume more of that is going to be coming from domestic sources.

Yes, I think that is true. I think it will. If you look at 2014, historically, the biggest contracts we were winning in the world were in the Middle East just because of the size of the projects and the level of our involvement in them.

If you look at last year, I think our biggest contracts and the most number of them came from the United States. I think that is a very good sign for growth, not just in 2015, but going forward in this market. We are expecting growth in most regions of the world. We expect the Middle East to continue to grow, but certainly not to the level it has been over the last couple of years. I think two years ago we saw 80% growth in the Middle East, which was a result of I think four or five very large contracts that ramped up very quickly. I don't think on the bigger base now that we are going to see 80% growth in that business anytime soon.

Certainly we are projecting strong growth in that market; we are expecting strong growth in the US. We are very pleased to see last year that our European business grew after about five years of shrinking and we are expecting strong growth in Europe this year and elsewhere. We had a great quarter. I think our fastest-growing region in the fourth quarter was Asia-Pacific, which was a very good sign and I think not just I, but I think our entire management team are very confident that this is going to be a very strong year on the top line.

Got it, okay. I guess last question for me, David, if you look a few years out, where do you see your revenue mix settling down as the US grows organically, potentially faster and given that you are making your inorganic investments? And also in regards to that, what you do at least directionally expect your DSOs to do as a consequence?

Our DSOs are naturally high just because the nature of this industry, but ours are unusually high because of a heavy concentration in the Middle East business, which is for us the slowest payer of any of our geographies. I don't see the Middle East becoming more than half our business; that is where it is now. I expect that number to come down over time. I think the US will pick up. I think Asia will pick up. I think Europe will have a very strong year.

We are pushing into some new markets like South Africa in the Claims Group. We have been in Australia now for about four years. That market looks like it is going to be a strong one for us long term. Latin America has been disappointing, but we are hoping that that market will do better long term, the longer we have been there and the more relationships that we have built. It has been a very strong market for the Claims Group. They pushed into that market a couple years ago. So I expect that the US will be a much bigger component of our business going forward than 20% and as you said and as I said before, our acquisitions are more focused on the US market than anywhere else and hopefully that will drive growth here as well.

Thanks a lot.

Pete Enderlin, MAZ Partners.

Thank you. I don't want to beat this too much, but you do express a lot of confidence, David, in the revenue guidance for this year. If we look at the orders that came in for 2014 and adjust for Iraq, they were up about 10%. We are facing a strong dollar, very weak oil prices, generally sluggish economies around the world. And so I guess the question that comes up is, as you look out and your crystal ball is fairly short term, is your confidence based more on the overall pipeline or is it a lot on unannounced deals that you already have in hand?

It is based on everything that we know as of right now. That includes the backlog that we have disclosed, the work that we have won so far this year that hasn't been announced, but hopefully will be soon. The backlog change in the Claims Group was almost de minimis, but we are expecting growth out of that operation as well. That wouldn't be reflected in the backlog and really can't tell you anything more than, over the course of this year, we announce first-quarter numbers in early May, which will be on May 4, we will have a review of that number and how closely we are to target and if we think we need to make an adjustment up or down, we will do that.

Can you give us any sense of the magnitude of unannounced contracts at this point in the tens of millions of dollars or anything you can help us get a handle on that?

Not really, not off the top of my head right now, but there is always a lag between winning work and the press releases. There are a lot of clients, and I said this before, a surprising number of clients today don't want us announcing anything, no press release or make us wait a quarter or two either because they just don't want press coverage or they want to be the first one to announce their project. So we have more projects than we have announced and as soon as we can announce any specific project we will.

Okay, great. Thank you.

[Mark Braha], a private investor.

Good morning, Dave. Good morning, John. As you know, I have been on these conference calls over the years. I have been a loyal shareholder for quite a number of years, been through the lean times. And the remark that seems to be popping up is that the expenses are higher than we've expected and from time to time, we are hitting record revenues. And it just seems to be the deja vu all over again. Why can't we get the expenses to a point where we are making profit dollars as opposed to just generating salaries and generating revenues? That is the first part of my question.

The second part of my question, if we factor out the one-time charges on the closing of the new financing, all things being equal this year to next year, this past year to 2015 with the anticipated revenues, where do you see the profitability going forward?

Let me answer that one first. We have given now consulting fee guidance for three years. We have not given any kind of either EBITDA or EPS guidance. You can see in the variability of our performance that numbers can swing wildly even when the revenues are exactly where we expect them to be. So we haven't wanted to give any kind of earnings guidance at all; I'm not going to do it on this call.

Your first question is a fair one, which is we keep delivering record consulting fees and three of the last four years, we have lost money and I can tell you I started telling why before. Typically, there is one large item that drives us from a profit to a loss. Last year, we had an $11 million charge on our refinancing. It was a very positive event for the Company. We also had three quarters of higher interest than we are going to have going forward and that savings is going to drop right to the bottom line. It doesn't have to be tax-affected because we don't pay US taxes. So the interest line will be a lot improved this year. They EBITDA line I can tell you will be a lot improved from last year. I'm going to make sure that that happens and the overhead is high because we are a business providing professional services to our clients.

We have a lot of competition. Most of our competitors, many of our competitors are 10 or 20 times our size with more resources and a lot of our other competitors are a lot smaller firms with a lot less cost than we have. We have to make sure that we do everything we can to win work and perform the work at an exceptional level and I think we have done that and done that through some of the 20 years I have been here. I think my dad would say for 40 years now. That is an expensive process. It requires having very high level people. Those people are expensive and we get rated by our competitors and we do the same to them and it drives labor costs up. I think we have a team here at Hill that is, for what we do, the best in the world and I wish I could just go through and have everybody take a big pay cut, but that is not going to help us keep those people and they are the reason we are successful.

We are going to take a really strong look over the next couple months at where we can cut our expenses. Unfortunately, 75% of our expenses are people, so my guess is 75% of any cuts that we are going to make are going to be people, but we are going to do that in a way that doesn't affect our revenue growth this year, and doesn't affect the quality of the services we deliver to our clients.

It seems to me that, as you mentioned earlier, that in every one of your press releases you indicate the number of employees that are in the Company and I might be wrong with the numbers, but it seems to me a year or two years ago, that number was in the low 3000s. Now all of a sudden, we are back up in the mid-4000s and maybe you might want to look at is the increased revenue at the expense of the increased personnel worth it? Are you better off doing less business with less overhead, creating more profitability? If you say 75% of your expenses is people, maybe that is where we need to look.

Yes, most of the growth, the vast majority of the growth in people that you have seen over the last couple of years are billable people. Our Corporate group has not grown much at all. Certainly the two operating groups have their own overhead. We think the opposite. We think that we can get better profitability by growing the business, not by shrinking it. That is why we are so focused on top-line revenue growth. We had five very difficult challenging years during the recession, but we averaged 6% growth. We have now two years of double-digit growth. We are a third year this year and we think as we get bigger, we can leverage that growth and wring more profitability out of this business. We don't think retrenchment is the right way to go; we think further growth is.

Well, I would think that you would be looking to grow into -- not looking to overanticipate personnel looking for the job as opposed to outgrowing the personnel and then adding, which everything becomes incremental profit dollars.

Yes, I think that is true. That's certainly a lot easier to do on the Project Management side of our business where we have a lot more visibility into when the work starts and when it ends. It is much more difficult on the Claims side and that is the challenge that they had in the fourth quarter was they got a little ahead of themselves regarding staffing relative to their workload, but that can change quarter to quarter and we have got to make sure that right now they are not extended or they are not hiring until their existing people are billable and I think you will see the results of that this year. No question.

We certainly hope so.

Thank you, Mark.

At this time, I would like to turn the call back over to Mr. David Richter for closing comments.

Thank you very much. We had a lot of accomplishments in 2014, but unfortunately we were not able to deliver a net profit to our stockholders last year. We are working hard to make sure that our Company not only continues its strong growth in backlog and revenues, but also significantly improves on our profitability. We were able to lower our interest expense in a major way last year. Our focus this year is to do the same to our overhead expense. We are certain that we can continue to improve our business's fundamentals and deliver positive profitability in 2015. Thank you all for your interest in our Company and for participating on our call this morning. We are looking forward to our next earnings call, which will be on May 5. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.