Hill International, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Greetings, and welcome to the Hill International First Quarter 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. Devin Sullivan. Thank you. You may begin.

[Devin Sullivan:]

Thank you, Darren and good morning everyone. Thank you for joining us today. On the call today are Craig Martin, Executive Chairman of Hill International, Paul Evans, the company’s Interim Chief Executive Officer, Raouf Ghali, President and Chief Operating Officer and John Fanelli, Hill’s Executive 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 intention 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 plan, 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 forward-looking statements are reasonable, actual results could differ materially from those projected or assumed are 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 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 Paul Evans. Hill International’s Interim Chief Executive Officer. Paul, please go ahead.

[Paul Evans:]

Thank you, Devin. Good morning everyone and welcome to our first quarter 2017 earnings call. Before we talk about the first quarter results, I wanted to talk about our recent announcements. Yesterday, we entered into an agreement with Bridgepoint for the sale of our Construction Claims business for $140 million. We expect the transaction to close and fund on Friday May 5 2017. Also yesterday David Richter resigned as Chief Executive Officer and a member of the board and I have to assume the role of interim CEO until a permanent replacement is appointed. I will continue to be a member of the board. We owe a great deal of thanks to David and hope to build on his efforts as we move this company forward. I will now turn the call over to John to talk about Hill’s first quarter results.

[John Fanelli:]

Thank you, Paul and good morning everyone. As a result of the expected funding and closing tomorrow the Claims Group sale. For financial reporting purposes, we have treated the Claims Group together with our existing senior credit facility which will pay it off and terminate it on the close as it continued operation proposed period presented. So let’s get right to the numbers. Total revenue in the first quarter was $107.6 million which represented $26.8 million decline or 19.9% decreased from the first quarter of last year. Consulting fee revenue for the first quarter was $95.9 a $20.7 million decline or 17.7% decrease from last year's first quarter. With respect to geographic breakdown of our CFR decline Middle East region was the primary driver to decrease declining 30.7% or over $22 million. Other regions experienced declines were Brasil Asia-Pacific and our African regions. The decline was partly offset by continued strong growth in the United States with CFR of $5.4 million or 16.9%. Europe was also up slightly year-over-year. Our gross profit for the first quarter declined $6.7 million to $34.4 million down 16.3% from the first quarter of 2016. Our gross margin as a percentage of CFR was up 60 basis points to 35.8% versus first quarter of last year. SG&A expenses from our PM Group were $26.4 million in the first quarter of 17 down $2.6 million or 9% from a year ago. As a percentage of the CFR they were 27.6% up 270 basis points. Our corporate SG&A expenses were $8.4 million for the quarter down $900,000 or 9.8%. But as the percentage of CFR they were up 80 basis points from year ago to 8.8%. Operating loss for the first quarter, $0.50 million compared to operating profit of $2.7 million in the first quarter of 2016. This $3.2 million difference is due to the CFR decline and then related gross margin decline partly offset by decreases in bad debt expense and unapplied in indirect labor expenses. Hill’s had loss for continuing operations with a loss of $1.4 or $0.03 per diluted share compared to net earnings from continuing operations of $2.3 million or $0.04 per diluted share during the first quarter of the prior year. The net loss from discontinued operations was $5.7 million or $0.11 per share in the first quarter of 17 compared to a net loss of discontinuing operations of $900,000 or $0.02 per diluted share a year ago. On a consolidated basis, Hill’s net loss for the quarter was $7.1 million or $0.14 per diluted share compared to net earnings of $1.4 million or $0.03 per diluted share in the first quarter of prior year. EBITDA from continuing operations for the first quarter was approximately $1 million compared to $4.6 million in the first quarter of 2016. Hill’s backlog was up $52 million or 6.3% during the first quarter to $883 million. The geographic breakdown of our total backlog is 52% from the US, 33% from the Middle East, 7% from Europe, 6% from Africa, 1% from Asia-Pacific and 1% from Latin America. Our 12 month backlog at the end of the quarter was $324 million down 3% during the quarter. Hill’s started new project management work during the first quarter of $149 million equates to a book to bill ratio of 155% which is significantly above our minimum quarterly target of 110%. In our recent year-end earnings release, we provided guidance between $400 million and $425 million with respect to our consulting fee revenue for 2017. This guidance equates to between 2% to 8% decrease in consulting fees for the year. This guidance remains unchanged from our March 30 conference call. With that said, let me turn the call back to Paul Evans. Thank you, John. With that John and I are now happy to take your question.

[Operator:]

[Operator Instructions] Our first question comes from Tahira Afzal of KeyBanc Capital Markets. Please proceed with your question.

[Tahira Afzal:]

Hi, Paul. Good to hear your voice again on the call.

[Paul Evans:]

Yes, good to hear yourself too Tahira.

[Tahira Afzal:]

So Paul I guess the first question in regards to the numbers. You’ve reiterated the full year consulting fee guidance from the revenue side. Assuming you have certainty even around the lower end or the midpoint. Can you provide some color o how we should think about profitability trending for the rest of the year and if there's anything strategically you have to do in terms of cost rationalization et cetera. That we can watch as milestones.

[Paul Evans:]

Sure. Let's start with the end first. Without a doubt we need to look at our cost. I mean this company on a contract margin basis does very well. Something happens with this company when we take that number down to the bottom line. So my focus is going to be looking at financial performance and also liquidity. So we are going to dig into the cost, everything is on the table and that’s going to be my focus. Obviously as we progress through the year, we’ll also be planning to attend your conferences at the end of May we can give a further update on that. But to this point, I’m in the seat 24 hours.

[Tahira Afzal:]

Okay. Fair enough. But it seems like you have from the conference you just voiced, some idea what you might need to do? So there is somewhat of a game plan and I assume some of that was growing from last year, right Paul?

[Paul Evans:]

Yes. We definitely have an action plan and as we progress through the year, we will update our shareholders.

[Tahira Afzal:]

Got it. Okay. And I guess the second question I have, have you gone to your customers to talk about the continuity with leadership change, the divestment and have you received a positive response are they comfortable with Hill International as a company as of right now?

[Paul Evans:]

Yes, I mean Hill International has a stellar reputation. Our front office people do a great job in that process reaching out to our key customers has begun.

[Tahira Afzal:]

Got it. Okay, Paul. And I guess third question for me and then I’ll sort of hop back in the queue. And this is on the free cash flow side, I know you guys were giving a guidance early on in regards to that. Have you taken that off the table, is that still out there?

[Paul Evans:]

I think it’s off the table for now. We’ll revisit it. I mean obviously all seek feedback from our shareholders, from folks like yourself on what we should be putting out there going forward.

[Tahira Afzal:]

Got it. Okay. I’ll hop back in the queue.

[Operator:]

Our next question comes from Pete Enderlin of MAZ Partners. Please proceed with your question.

[Pete Enderlin:]

Thank you. Good morning.

[Paul Evans:]

Good morning, Pete.

[John Fanelli:]

Good morning.

[Pete Enderlin:]

First question; could you give us some better sense of why the price of the Construction Claims Group went down by $7 million, it almost looks like they did it just because they could.

[John Fanelli:]

I’ll answer that Pete.

[Pete Enderlin:]

Okay.

[John Fanelli:]

It’s just part of the negotiations. This has been a long process that started probably mid-year last year and as the process continues the Claims business on a month, on a 12 month year-to-date our processes and our EBITDA were declining. So they were in a better position to adjust the purchase price or suggest the purchase price. So this really continued until this week when we finalized a number and reduction of the $7 million of the headliner price.

[Pete Enderlin:]

Okay. What was the revenue trend for the Group in the quarter?

[John Fanelli:]

I don't have that right in front of me. But for 12 months it arrived on $165 million.

[Pete Enderlin:]

Okay. And did the trend weakened late in the quarter was that part of the adjustment?

[John Fanelli:]

The trend started to decline in the beginning of the third quarter, fourth quarter and first quarter and a lot of it had to do with focus, because they were focusing on trying to do the deal and a lot of the rainmakers were not out in the field getting work.

[Pete Enderlin:]

Alright. Okay. And then Paul mentioned that you need to do more on the cost side obviously. But S&A was only down 9% and corporate about that amount as well as I thought this was a process that’s been underway for quite a while actually so why didn't we get more of a reduction especially given the revenue trends?

[Paul Evans:]

I’ll answer it. We need to do better. It’s not good enough because what resulted the bottom line is just - it’s not good enough for our shareholders, we owe them more. So we’re going to look at all cost and where we got to make adjustments, we’ll make adjustments. We’ve given out revenue guidance we’re a smaller company than what we were before and so got to make sure we’ve got the right cost structure to service our front office.

[John Fanelli:]

The other part of that piece is that a lot of the cost with respect to corporate was contingent on the Claims sale and there was a four months transition agreement. So with the anticipation of what we thought we could do had really been deferred because a delay in actually getting this deal completed.

[Pete Enderlin:]

Right. Still having to carry some of that.

[John Fanelli:]

Yes.

[Pete Enderlin:]

On the last call, I think there was a comment about or a question about using consultants for cost cutting is that something that you're looking at or doing at this point?

[Paul Evans:]

We are going to consider that. We haven’t finalized anything around that.

[Pete Enderlin:]

Okay. And then just a couple more questions. What is small point but is there any particular reason why the pass-through expenses were down 35% in the quarter and the non-CFR revenues. They were down more than usual and more than overall decline.

[John Fanelli:]

Pete, I really don’t know the answer to that question.

[Pete Enderlin:]

Okay. It usually has something to do with the mix of domestic, where some of the government work has more of those kinds of expenses in it. But it’s not a major point. Then the other question I have is does the company have any long-term target. I know you are not giving any particular guidance on operating margins or EBITDA. But first of all do you have a preference to use an operating margin or EBITDA margin of a percentage of revenue. In the press release you gave operating margin as a percentage and I know in the part you talked about EBITDA. So anyway, the question is do you have any sort of general feeling of what would be a reasonable target to shoot for on a very long term basis?

[John Fanelli:]

Look, I personally have some thoughts I need to be in the seat for a while before we sort of revisit with a focus on top margin or EBITDA margin or some other margin. So as we sort of refine that it will be reflected in our next or subsequent filings.

[Paul Evans:]

The other factor Pete would be our success of our cost cutting and once the claims business transition period ends in the next four months, I think we’ll be in a better position to see what our costs will be going forward. We’ll be in a better position to access what we think is our target EBITDA numbers or percentage.

[Pete Enderlin:]

Well you have a couple of at least two I know conferences coming up, it doesn’t sound like you will be in a position to give guidance on that specific subject either of those coming up. Is that fair?

[Paul Evans:]

I mean at this point the only conference that we're planning to attend in the month of May is KeyBanc’s conference.

[Pete Enderlin:]

Okay. I think there was a tentative schedule for…

[Paul Evans:]

No.

[Pete Enderlin:]

Okay. Alright. Thank you very much.

[Paul Evans:]

You are welcome. Thank you, Pete.

[Operator:]

Our next question is a follow-up from Tahira Afzal of KeyBanc Capital Markets. Please proceed with your question.

[Tahira Afzal:]

Hi Paul, I guess as a follow up in the past one and a half years we’ve seen some people interested in looking at Hill and its opportunities clearly a program management business has a very compelling story to tell. As you look at the clean balance sheet and a pure play program management business. Do you feel that once again you could potentially be a target for other companies? And have you guys really thought about whether it would make sense for Hill to be part of a bigger company. It can really offset some of the regional volatilities you’re seeing today?

[Paul Evans:]

Yes, Tahira on the - we’re always anytime we could face an unsolicited offer and if we do then the board has its fiduciary duty. My focus is to optimize the cost and that's what it should be right now. We say - when we are through that process then we can sort of top our heads up and think about other ideas.

[Tahira Afzal:]

Got it, okay Paul. And then in terms of the field surge, can you provide any color in terms of where you are and what it started just today recently given David’s departure have you guys been planning it for the live are there any internal candidates and what type of profile are you looking for to lead the company?

[Paul Evans:]

So the answer is, and obviously everything just happened in this week. So the board will form a special committee that’s going to be chaired by our executive chairman and we will both consider internal and external candidates and that process will commence soon. And we’ll have a successful conclusion at some point. I just don’t know the end date of that.

[Tahira Afzal:]

Thank you very much Paul.

[Paul Evans:]

You are welcome.

[Operator:]

Ladies and gentlemen, we've reached the end of our question and answer section. I would like to turn the call back over to Mr. Paul Evans for closing remarks.

[Paul Evans:]

Thank you. I appreciate everybody being on the call. This morning on behalf of Craig, John, Raouf and myself, thank you and look forward to updating you on our progress during our next series called in early August.

[Operator:]

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