Hill International Inc (HIL) 2015 Q4 法說會逐字稿

Greetings and welcome to the Hill International reports 2015 fourth-quarter and full-year financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kalle Ahl of The Equity Group. Please go ahead.

Thank you, Matt. Good morning, everyone. Thank you for joining us today. Our speakers for today's call 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 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 statements regarding future economic conditions and 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 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, Kelly, and good morning to everyone joining us for today's earnings conference call.

On Thursday last week we announced, finally, our financial results for the fourth quarter and full year of 2015. Before I get to the quarterly numbers, first an explanation for the delay in releasing our earnings and filing our 10-K. The delay was caused by ongoing discussions that we had with our independent accountants regarding their audit of our financial statements as it related to certain accounts receivable owed to us by a major client in the Middle East. There has been a significant delay in payments from this client as we were negotiating an extension of our original contracts, among other issues.

Over the past three weeks, we were able to collect overdue payments in excess of $15 million and also to provide documentation acceptable to our auditors, evidencing our planned extension of that contract.

Thus, we have now completed our audit, and we will shortly file our 10-K which we expect to file tomorrow. Now jumping to the fourth-quarter results.

Total revenue in the fourth quarter was a record $189.8 million, an 11% increase from the fourth quarter of 2014. Consulting fee revenue or CFR for the quarter was a record $161.5 million, an 8% increase from the prior year's fourth quarter. This growth consisted of 6% organic growth, plus 1% growth as a result of our acquisitions of Cadogans and IMS over the prior year.

With respect to the geographic breakdown of our growth, our operations in Africa were our fastest-growing business during the fourth quarter with consulting fees up 14% year over year, followed by the Middle East which was up 13%, the US was up 12%, our European operations were down 1%, Latin America was down 4%, and our Asia-Pacific operation was down 16%.

Company-wide our gross profit in the fourth quarter rose to $67.3 million, up 4% from the fourth quarter of 2014. Our gross margin as a percentage of consulting fees was down 150 basis points to 41.7% versus the fourth quarter of the prior year.

Our SG&A expenses in the fourth quarter were $64.4 million, up 4% from the year earlier quarter. Our SG&A margin as a percent of CFR was down 130 basis points year over year to 39.9% in the fourth quarter.

Extraordinary one-time SG&A expenses which adversely impacted our results in the fourth quarter totaled $5 million and include the following items: $2.2 million of increased bad debt expense, primarily related to certain accounts receivable in the Middle East; $1 million related to a write-down of the value of a note receivable; $0.8 million of legal and other fees related to the shareholder proxy contest held last year; $0.6 million of severance costs related to our cost optimization program; and $0.4 million of legal and other fees related to the restatement of our consolidated financial statements last year related to our Libyan receivable.

As a result of these charges, Hill's EBITDA for the fourth quarter was only $5.5 million, up just 2% from the fourth quarter of 2014. EBITDA margin as a percentage of consulting fees was 3.4% in the fourth quarter, down by 20 basis points from the year-earlier quarter. Operating profit for the fourth quarter was $2.9 million, a 5% decline from the prior year, and our operating margin in the fourth quarter was 1.8%, a 20 basis point decline from the fourth quarter of 2014.

Our interest expense for the quarter was $3.4 million, down 7% from a year ago. And as a result of all of the above, Hill had a net loss for the fourth quarter of $1.1 million or $0.02 per diluted share, which compares to a net loss of $4 million or $0.08 per diluted share in the last quarter of 2014. Absent the impact of the above listed one-time expenses, adjusted EBITDA in the fourth quarter would have been $10.5 million, adjusted operating profit would have been $7.9 million, adjusted net earnings would have been $3.6 million or $0.07 per diluted share.

Now looking at the fourth-quarter performance of our two operating segment separately, total revenue at Hill's Project Management Group during the fourth quarter was a record $150 million, a 15% increase. Consulting fee revenue for the quarter at the Projects group was a record $122.8 million, a 10% increase from the prior year's fourth quarter. This growth breakdown is 9% organic and 1% from the acquisition of IMS. The Project Group saw a 7% increase in gross profit to $46.5 million in the quarter, but gross margin on a percentage basis at 37.9% was down 110 basis points in the fourth quarter of 2014.

SG&A expenses at the PM group were up just 4% during the quarter, $33.6 million, whereas a percentage of consulting fees, SG&A margin was down by 160 basis points from the prior year to 27.4%. Operating profit for the Projects Group was $12.9 million, up 16% versus the fourth quarter of the prior year, and operating margin as a percentage of consulting fees was 10.5%, a 50 basis point improvement for the prior year.

For Hills Construction Claims Group, total revenue during the fourth quarter was $39.8 million, a slight increase from the fourth quarter of the prior year. Consulting fee revenue for the Claims Group was $38.7 million, a 1% increase from the prior year. This growth in consulting fees was primarily related to the acquisition of Cadogans made earlier in the fourth quarter of 2014. The Claims Group saw its gross profit drop by 2% to $20.8 million, and gross margin as a percentage of consulting fees declined to 53.8%, down 150 basis points from the prior year.

SG&A expenses for the Claims Group were also down 2% to $20.8 million during the fourth quarter, and as a percentage of consulting fees, they were down by 160 basis points to 53.6%. Operating profit for the Claims Group during the fourth quarter was $0.1 million, unchanged from the fourth quarter of 2014, and operating margin as a percentage of consulting fees was also unchanged at just 0.1%.

In addition to the SG&A incurred by our two operating segments, we also incur SG&A in our Corporate Group. For the fourth quarter, our corporate SG&A expenses were $10 million, up 24% from the prior year quarter, primarily as a result of the extraordinary expenses referred to earlier. As a percentage of CFR, they were 6.2%, up 80 basis points from 2014 last quarter.

With respect to backlog, our total backlog at the end of 2015 was $860 million, down 2% during the fourth quarter. This backlog consisted of $807 million from our Project Management Group and $53 million from our Construction Claims Group.

Twelve-month backlog at the end of last year was $388 million, also down 2% during the quarter, this breaks down into $340 million from our Projects Group and $48 million for our Claims Group. Hill sold new work during the fourth quarter of $181 million, which equates to a book-to-bill ratio of 112%, slightly better than our minimum quarterly goal of 110%.

We also had several major terminations and a major scope reduction, which collectively had a $38 million adverse impact on backlog during the quarter.

Based on current market conditions and the backlog I just mentioned, we estimate that our consulting fees in 2016 will be between $630 million and $660 million for the year. This guidance reflects between 0% and 5% growth in consulting fees for 2016.

We also estimate that our EBITDA margin in 2016 as a percentage of consulting fees will be between 8% and 10%, up from 6.5% in 2015.

Thank you all very much. Our CFO John Fanelli and I are now more than happy to take any and all of your questions.

(Operator Instructions). Chase Jacobson, William Blair.

Hi, David. Good morning. So the bad debt expense in the quarter, is that related in any way -- I know you said you collected on the receivable that was mentioned in the release a couple weeks ago, but is there any relation between those two? I think you said that there is some more left to be collected there. Can you quantify that at all?

Yes, happy to. There's a small amount of receivables related to that client in the bad debt expense, but the reason we put off the earnings announcement for three weeks was to satisfy auditors. They were initially looking to take 100% reserve against the receivables from that client, which was in the tens of millions of dollars, and we knew that money was coming, we were in negotiations with the client over finalizing an extension to that contract, and it was worth it to us to delay the numbers, which we hated doing, but we felt we had to to satisfy our client.

As I said, over the past three weeks since the numbers were due to be out, we collected in excess of $15 million from that client. The year-end receivables in that client was $35 million. So we are still owed money, but as I said, we think everything is on track, and we expect to collect all or nearly all that money.

And is that receivable from a -- is that receivable related to one project for that client, and what other large receivables should we be aware of in your -- that are outstanding? (multiple speakers)

The $35 million I just mentioned was from one client. It was the client we delayed the earnings release for. We hadn't been paid, and those receivables go back about seven or eight months, which is why our auditors were concerned about collections. And certainly given the post-restatement world we now live in, I think that was reasonable. And we knew that everything was on track. The client was working extensions of our contract through their bureaucracy as a public client in the Middle East, and we had every expectation that the money was coming in and quickly, and as it turned out, that was accurate, and we pushed hard to make sure that money came in as quickly as possible.

We have big receivables all over the world. So nothing from one client that's close to $35 million. But we've obviously built work over the course of the first quarter, and we've collected the $15 million that we just got in. So it is certainly down from the $35 million as of year-end.

And then I guess looking at the revenue guidance for next year compared to where the backlog and 12-month backlog ended the year, the guidance assumes a considerable increase in work that comes in and gets booked throughout the year. So can you just help bridge that based on exit, and I guess this really includes giving color on the market environment in the Middle East. Because from our seat, it seems like that market is still going to be under pressure, and your guidance assumes that you have a pretty significant increase in that book and burn work throughout the year?

A couple different things. One is, yes, we expect to continue to see headwinds in the Middle East market related to the price of oil. We expect sales to be up this year in 2016 versus 2015. In 2015 they were significantly below what we were burning off, although we had a very strong year. Our sales -- our revenue in the Middle East last year was up nearly 12%, our consulting fee revenues. But we are expecting stronger sales this year. Rumors of the demise of the Middle East market construction market are vastly overrated. There continues to be a lot of work coming out of that market. We have got some very large contracts that we are expecting to hear on positively over the next couple of months. And while we are not expecting growth out of the Middle East this year, we are only expecting a very slight decline. We are expecting that to be more than offset by growth elsewhere. The US and Africa we are expecting to be the growth markets like they were last year, and we are expecting that to drive us to positive growth in 2016.

Okay. I'll get back in queue. Thank you.

Michael Shlisky, Seaport Global.

Good morning, Dave and John. How are you doing? I also want to touch on your EBITDA margin for 2015 as well here after those great comments of the previous question. So much of the business is based on leveraging a lot of your fixed costs. So I'm curious if you could outline for us how much some of the cost cuts you've done are going to contribute to the 200 basis points increase in EBITDA guidance or so for 2016, how much it might be from cost leverage, and how much it might be from some additional new costs that might come in the next couple of quarters here?

Well, you got a couple things that are going to be helping us in 2016 against that EBITDA margin range that we gave. One is the cost-cutting program that we did in 2015. We took a hit of about $21 million of annualized overhead costs out of the business, and while we realized about $15 million of that during 2015, obviously we will get a full four quarters' benefit of those costs. Most of them on average the cost took place in the early part of the second quarter of last year.

So we'll see a benefit from that, that should improve margins, and we also had an unusually high number of one-time expenses. High enough and large enough that they were worth mentioning in the press release and today on the call that we don't expect to repeat in 2016.

So if you take out all the one-time charges, or just if we talk about annualizing the overhead cuts, if you just take out the one-time charges, our EBITDA margin would have been 7.9% in 2015. So we're going to continue to be aggressive on overhead. We expect to get the full-year benefit. We are expecting to have a lot fewer one-time issues, and getting to 8% to 10% we don't think is going to be that difficult even on slower growth.

Excellent. Great. Can you also give us a sense of your debt repayment goals for 2016? Would it be maybe on the order of your EBITDA generation in dollars or somewhere around that level?

We are expecting record cash flow this year, and our number one, number two and number three priorities for that cash is debt reduction. We continue to feel the amount of leverage that we have on our balance sheet is too high for our Company, for our market cap, and we want to get our debt down as quickly as possible.

Okay. And does any of that has to do with collecting receivables, or is that a big piece of it? And (multiple speakers)

It all has to do with collecting receivables. (multiple speakers)

Are there any individual one-time chunks like Libya, etc., that might be a big piece of that, or is it all just your everyday course of business?

No, not planning on any money coming out of Libya. We have had the delay in payments from that one time -- major client in the Middle East that we expect will get caught up in 2016, and that certainly will add to that. But slowing growth is actually an aid in pushing our cash flow higher. Usually the faster we grow, the more of a negative impact there is on cash flow.

So even though we are expecting to go from 9% CFR growth to between 0% and 5%, that's actually a positive thing for our number one priority, which, as I said before, is cash flow.

Thanks. If I can squeeze in one last one here, I mean it is already March 28, so could you maybe give us some sense as to how you think the first quarter has gone for you versus plan or versus the prior year or prior quarter?

No, I can't do that. We generally haven't done that. Until we have the full results for the quarter, we don't want to give any nods, winks or any other type of guidance as to how it's going. I can tell you that we were hurt in the fourth quarter, in addition to the one-time things by a relatively weak December, but January and December are typically our two weakest months of the year. So that was nothing unusual.

I tried. Thanks, guys. Appreciate it.

Thanks, Mike.

Tahira Afzal, KeyBanc.

Hey, David. David, the Project Management side, I know that's where you guys put a lot of effort, and it's showing and it's doing really well now. Could you elaborate a bit more on the Construction Claims side? As we look at the year, there have been good quarters, there have been bad quarters. If I look at your implied guidance as well on the revenue side, it kind of shows the mixed tier for Construction Claims. Any help over there would be useful.

John, you've got a better handle on those numbers. Do you want to take the first crack at that?

I think your first question is the projections going forward or the claims business in general.

If you recall when you were sitting here last year, the fourth quarter was kind of a bit all over the place, Construction Claims, and you guys were right in saying you would pick up again. But the fourth-quarter gain was a little light on the revenue side, but more importantly on a profitability side. So maybe something first on that, John.

Before John answers that -- I'm sorry, I throw it (inaudible). As I said, December tends to be a pretty bad quarter just because of holidays and vacations and things like that. The claims business, because it's more of a pure consulting practice, dips in utilization, which they certainly had in December, can really dramatically impact the bottom line. And we saw that as usual this quarter.

The one-time expenses didn't impact the Claims Group, but they were slower than expected over the course of the quarter, and December was even worse than the quarter as a whole.

Got it. Okay.

Just to add, the overall year, because there's a lot of ups and downs in the claims business, overall the revenues increased almost 10% and as well as their operating profit. So that's the nature of the business. Quarter to quarter it may be higher and lower than other quarters, but generally over a 12-month period, there is growth in both top-line and operating profit.

Okay. And if I look at your guidance and maybe the midpoint a bit, right now it assumes it's at best sort of flattish for claims on the revenue side. Would that be correct, and if so, what color -- what are the assumptions behind that?

No, exactly the opposite. We are anticipating claims is going to be the faster grower in 2016.

Sorry, so the claims side (multiple speakers) 0% to 5%.

No, the entire business we expect will grow 0% to 5% in consulting fees this year, but we are expecting the Claims Group to grow faster than the Project Management Group. Certainly they are less impacted like capital spending in the Middle East and our PM Group, and it's very tough to model any kind of going forward performance based on one quarter. Despite the fourth quarter, we are expecting 2016 to be a very strong year, in fact a record year for the Claims Group. Revenue and profitability.

Fair enough. The second question I had was on the profitability side, data. You did have a record revenue quarter, and this was pretty admirable. But if you look at the margin side and I'm stripping all those one-time charges out to begin with, would you say it was kind of in line with what you thought or expected for the fourth quarter? And I know the Claims business and Project Management might have some holiday seasonality in there.

Well, certainly December was probably a little worse than we expected, which dragged the quarter down. If you take the one-times out, it was -- and this is not even typical. It was a little below the average for the year, 10.5% adjusted -- I'm sorry, $10.5 million in operating profit on an adjusted basis was a little down from what we anticipate the average quarter for the year to be. But the second and third quarters are almost always our two best quarters of the year. And the first and the last get impacted by January and December numbers, which are always usually two of the worst months of the year.

So no, we are not -- we certainly would like to be making more money, we gave earnings guidance, we gave EBITDA guidance of between $50 million and $58 million for the year, and on an adjusted basis, we did $49.7 million. So a little on the downside. We had an unusually high number of one-time events this year and distractions to our business we are hoping won't be there this year, and we are expecting this year to do significantly better profit-wise than we did last year.

Got it. Okay. Thank you very much. David, just one last question, and I'll hop back in the queue. In line with what you said, our project tracker does show the Middle East has probably more resilience than people are thinking. There are some pretty large projects going forward. Are those going to be important in terms of really driving your revenue assumptions on the Project Management side, or is it just a product-based momentum on the growth side, maybe perhaps in the US?

It's really a mix of things, but certainly we are expecting strong growth in the US again this year. We are expecting a slight decline in revenues in the Middle East, and that's based upon a combination of some of the older projects that we already have continuing to ramp up, especially some of the real projects over there that are longer-term and are continuing, but also bringing in some significant new wins this year. And I don't like to ever go into any specificity about that until we actually have an official win, but we have got some very, very big projects that we think we are closing in on, and we will be in a position to announce before midyear.

So could you see a book-to-bill potentially of over 1 times based on what you're seeing right now, David, for your entire business?

Absolutely.

Great. Thank you.

(Operator Instructions). Pete Enderlin, MAZ Partners.

Good morning, guys. Following up a little bit on the Construction Claims business, I understand that it's not exactly lumpy, but it kind of goes in spurts you might say. Is there any indication that it is or should be somewhat countercyclical in the sense that when the Project Management business on a macroeconomic basis starts to run into problems that you get more claims and more controversy and, therefore, a boost in the Construction Claims business?

Our view historically had been that that was the case, but I think the reality has shown that the claims tends to do very well really in all times. Construction is one of the most challenging and complicated things that we do. It's perfect for generating lots and lots of legal disputes between all the different parties who touch a project but don't want to take responsibility when there's a problem. And we are seeing an increasing number of those not being resolved amicably, but going through to litigation or typically more so in the international construction market through arbitration. And I think we've become questioned over the last -- call it seven or eight years, the premier firm in the world in that business, and I think clients are turning to us more and more.

The international disputes are bigger and more complex, we've got parties from different countries, and we've seen a very strong claims business certainly looking at the century in good times and in bad times. But we are expecting them to have a very good 2016. It's really independent of whether PM businesses is up or down. They've been doing selective strategic hiring and bringing in some very strong players domestically and internationally, and we are expecting to reap the benefit of that this year.

Well, the fact that the fourth-quarter revenues in CFR in that business came in basically flat reflect just simply projects, I mean programs that ran to completion, or was there something else structural going on there?

There's always 1000 different reasons why it's up or down. It's a business (inaudible) assignments that have no particularly to them. They can start on a dime, and they can settle just as quickly. So you've got -- consultants have to juggle multiple assignments to keep billable, and they stay busy and profitable. And depending on when those start and stop, it's -- it can have a major impact on the performance of that group in any given month or any given quarter.

And David, looking at SG&A overall, and I recognize there are lots of different ways that that can be sliced, but it was up $24 million, and maybe $9 million of that was due to the unusual items. Does that not indicate some need for more stringent additional cost cutting, especially on the basic level of salaries and benefits?

We are -- no, we've never looked at cutting people's pay. There was a great quote I read in 2008 when the recession hit, and the CEO in the UK was asked about forcing his employees to take pay cuts. And he said the perfect answer, and I agree with it 100%, which is I would rather (expletive) off 5% of my employees by firing them than (expletive) off 100% of my employees by forcing them all to take 5% pay cuts. We need to keep our overhead costs down as low as we possibly can. I think we had a tremendous amount of success last year in doing that. And we also saw less revenue than we are anticipating, primarily because of the drop in new work for the Middle East, and those things tended to largely offset each other.

But we're going to continue to look aggressively at keeping our overhead costs down. Certainly in a slower growth environment we need to do that. And we need to keep pushing our EBITDA and our operating profit margins higher. And that's (multiple speakers) what we are focused on.

Around this time last year, you were beginning to implement a cost-cutting program in terms of headcount. Is there a possibility you will do some more of that going into the second quarter?

We will do what we always do, which is beginning of the second quarter take a look at how the first quarter performed relative to our budget and our internal expectations. And to the extent we need to make adjustments to achieve the profitability that we need to show to our board and for our shareholders, then we will do so. But we haven't started that process yet and felt that we're going to need to. But that is certainly the plan every year.

And then speaking of distractions to your business, which you are hoping not to have, has the full text of the letter that was set on March 10 by Full Value Partners been made available in any public filing? I've tried to find it and I can't. I've seen reference to it, but I don't actually see anything that shows the full text of that letter.

The full value, which is part of Bulldog gave us nominations of several candidates to the board this year. We had been anticipating another proxy contest this year, we've been planning for it, and lo and behold, they sent us a letter. I don't believe their nomination letter is public. I could be wrong. They generally have filed everything that they have sent to us with the SEC, but I don't recall whether that specifically was or was not. But --

Okay. Well, if they don't file it, do you have any obligation to file it?

I don't believe that we have any intent to make it public if they haven't, but we will review that with our legal counsel and make a determination.

Okay. Thanks a lot.

If there are no further questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you, everybody. We're glad to have finalized our year-end numbers, and we apologize for the delay in releasing them and hosting our quarterly conference call. We are looking forward now to getting back to business and making 2016 the best year for revenue and profitability in the history of our Company, which is what we fully expect.

Thank you all for your interest in our Company and for participating in our call this morning. Take care.

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