Hill International, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Greetings, and welcome to the Hill International reports 2016 First Quarter Financial Results. At this time, all participants are in a listen-only mode. And a brief 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 Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may now begin.

[Devin Sullivan:]

Thank you, Rob. 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. Also joining on the call is Raouf Ghali, Hill's Chief Operating Officer. Before we begin, I'd like to remind everyone that certain statements made during this call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it is our intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings or other financial items; any statements concerning our plans, strategies and objectives for future operations; and 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 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 factor 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.

[David Richter:]

Thank you, Devin, and good morning to everyone joining us for today's earnings conference call. Yesterday, we announced our financial results for the first quarter of 2015. So let's get right to the numbers. Total revenue in the first quarter was $176.2 million, a 3% increase from the first quarter of last year. Consulting fee revenue or CFR for the first quarter was $157.3 million, a 4% percent increase from last year's first quarter. This growth consists of 3% organic growth plus 1% growth as a result of our acquisition of Turkish project management firm, IMS, last year. With respect to geographic breakdown of our growth, our Asia Pacific region was our fastest growing region during the first quarter with consulting fees up 19%, followed by the U.S. which was up 12%, Europe was up 5%, the Middle East was up 2%, our Africa operations were down 3% and Latin America was down 22% year-over-year. Our gross profit in the first quarter declined slightly to $63.2 million, down 2% from the first quarter of 2015. Our gross margin as a percentage of consulting fees was down 260 basis points to 40.2% versus the first quarter of last year. This was primarily driven by gross margin contraction and our project management groups Middle East region. Our SG&A expenses in the first quarter were $57.7 million, down 2% from a year ago. Our SG&A margin as a percentage consulting fees was down 230 basis points year-over-year to 36.7% in this year's first quarter. or us forced. HIL's EBITDA for the first quarter was $8.2 million, up 4% from the first quarter of last year. EBITDA margin as a percentage of consulting fees was 5.2% in the first quarter, unchanged from last year. Operating profit for the first quarter was $5.5 million, a 1% decline from last year. Our operating margin was 3.5%, a 20 basis point decline from the first quarter of 2015. Our company's interest expense continued to decline at $3.4 million for the quarter, down 5% from last year and our tax expense was down 42% for the quarter to just $700,000. As a result of the above, Hill had net earnings for the first quarter of $1.5 million or $0.03 per diluted share, up 107% from net earnings of $700,000 or $0.01 per diluted share in the first quarter of last year. Now looking at the first quarter performance of our two operating segments separately. Total revenues of Hill's Project Management Group was $134.4 million, a 3% increase from the first quarter of last year. Consulting fee revenue for the quarter of the projects group was $116.6 million, a 4% increase from last year. This growth breaks down as 3% organic and 1% from the acquisition of IMS. The projects group saw a 5% decrease in gross profit to $41.1 million for the quarter with gross margin on a percentage basis at 35.2%, down 350 basis points from last year. SG&A expenses of the PM Group were also down 5% during the quarter to $29.1 million. As a percentage of consulting fees, our SG&A margin was down 240 basis points in the prior year to 24.9% in the projects group. Operating profit was $12 million, also down 5% versus last year, and operating margin as a percentage of consulting fees was 10.3%, a 90 basis point decline from a year ago. For our Construction Claims Group, total revenue during the first quarter was $41.9 million, a 4% increase, and consulting fees were $40.7 million, also a 4% increase from last year. This growth in consulting fees was entirely organic. The claims group also saw its gross profit increase by 4% to $22.2 million for the quarter and gross margin as a percentage of consulting fees declined by 20 basis points from last year to 54.5%. SG&A expenses for the claims group we're up 2% at $19.3 million during the quarter. But as a percentage of consulting fees, they were down by 130 basis points to 47.4%. Operating profit for the claims group was $2.9 million, up a strong 23% from the first quarter of last year. And operating margin as a percentage of consulting fees was 7.1%, up 110 basis points from last year. In addition to the SG&A incurred by our operating segments, we also incur SG&A in our corporate group. For the first quarter our corporate SG&A expenses were $9.4 million, unchanged from a year ago. As a percentage of consulting fees, they were 6.0%, down 20 basis points from last year. With respect to backlog, our total backlog at the end of the first quarter was $866 million, up nearly 1% during the quarter. This is the first time since 2014 that we saw an increase in total backlog during a quarter. This backlog consisted of $804 million from our project management group and $62 million from our construction claims group. Twelve months backlog at the end of the quarter was $399 million, up 3% during the quarter and this was broken down into $337 million in our project management group and $62 million in our claims group. Hill saw new work during the first quarter of $162 million -- I'm sorry, $164 million which acquainted to a book-to-bill ratio of 103%, a bit under our minimum quarterly goal of 110% but good not to grow our backlog for the first quarter. Based on current market conditions in the backlog amounts we just mentioned, we reaffirmed our prior guidance that consulting fee revenue in 2016 will be between $630 million and $660 million. This guidance reflects between 0% and 5% growth in consulting fees for the year. With 4% growth in fees for the first quarter, we are well on our way to delivering within this range. We also reaffirmed our prior guidance for 2016 EBITDA margin as a percentage of consultant fees will be between eight 8% and 10%, up from 6.5% in 2015. Our EBITDA margin for the first quarter was below that range at 5.2%, so we always expected to do far better during the remainder of the year. Now I also want to briefly discuss our recently filed 10-K(NYSE

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question.

[Unidentified Analyst:]

Good morning, gentlemen. This is Sean [ph] here for Tahira today. I guess just to start, it's really great to see some stability in backlog after a few quarters of declines. I was just wondering in light of the trends you've seen this quarter, is there any update on your Middle East outlook, in particular? If you got to tied into what kind of prospects you're seeing in the region. I know, Saudi Arabia, it's come up with some big plans, it looks like Egypt's got some big plans, and we've read about Hill getting involved in one of these smart cities in Kuwait. So any kind of color there on what you're seeing in Middle East backlog trends through the year? It would be very helpful.

[David Richter:]

Yes Sean, thanks for the question. Obviously 2015 was a very challenging year, given the price of oil and the impact that had on our client spending projections. We're seeing 2016 being significantly better. We see some big opportunities out there right now that I think maybe able to announce as early as by the end of the second quarter. There was an article in Mid a couple days ago, about a big project that we've appear to have won in Kuwait, $83 million dollar contract, to manage a new smart city. But that contract hasn't been finalized yet and we're at the point where we're prohibited from talking about it in detail. We've seen opportunities in Saudi Arabia as well, there Saudi Vision 2030 plan which they recently talked about, is an attempt to move away from their petro-economy to a more diversified economy which bodes very well for us. We have a large operation in Saudi Arabia, we do almost no oil and gas work there but we have significant operations managing, building and infrastructure projects. So any increased funding in that area could have a big impact on us. And we're seeing lots of opportunities to continue growing in Egypt and elsewhere in North Africa. And we've got a lot of work there so far this year. So we think that trend to work bigger contract and warrants this year, and growing our backlog again, that trends is going to continue.

[Unidentified Analyst:]

Thanks, David. So would it be fair to say that you guys expect -- like total backlog to grow year-over-year? How should we be thinking about total backlogs trend this year?

[John Fanelli:]

Thank you for the question. We are anticipating that our backlog by year-end is going to be between $900 million and $1 billion.

[Unidentified Analyst:]

That's very helpful. And then just lastly from you guys, maybe one more for John, it looks like receivables remanded pretty high in levels this quarter which I suppose is not overly surprising? But how should we be thinking about your DSOs and how should we be thinking about free cash flow and relation to net income for the year?

[John Fanelli:]

Thank you for the question. The first quarter, we didn't have some negative operating cash flow but based on our projections, and our improvement mainly anticipating our DSO we should be a positive net cash flow by the end of the year. And also targeting to reduce our current debt balances as well.

[David Richter:]

Our current expectations for free cash flow for the entire year are between $20 million and $25 million. And our plan is to use that most entirely to reduce our debt.

[Unidentified Analyst:]

Very helpful guys, thanks so much.

[David Richter:]

Thanks, Sean.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Pete Enderlin with MAZ Partners. Please go ahead with your question.

[Pete Enderlin:]

Thank you, good morning guys. Could you just shed a little more light on why there was pressure in gross margins in the project management group in the quarter?

[David Richter:]

Yes, the primary driver of that was we are now at the -- what we call our second time extension on the Muscat International Airport project in Oman, that's the largest project that we have in the company at the moment. The second extension time has significant lower rates for us through the balance the project for instance about a year ago and we saw a significant margin contraction on that project beginning of this year, actually beginning of December. And it's significant enough that it had an impact on the gross margin across entire region and it affected the who Company.

[Pete Enderlin:]

And the potential large contracts that you may be getting in the Middle East including the one that's not official yet and Kuwait, how does the pricing on those and the billing rates compared with other projects, is there any pressure on that front so for?

[David Richter:]

We expect all the new projects that are waiting to be in the same range as traditional margin, gross margin projects in the region.

[Pete Enderlin:]

Okay. And then…

[David Richter:]

That historically has been on the 35% to 40% range.

[Pete Enderlin:]

Right. Your corporate SG&A expense was -- I think actually up slightly, and I thought that you might get some benefit from a consolidation of your tank orders facility and some other things. So is there anything else that contributed to some upward pressure that you haven't been able to offset yet?

[David Richter:]

No, there is no upward pressure obviously, in the beginning of this year with raises and things like that to kept it even from last year, I think is a positive. We've got the percentage down from 6.4% to 6.2%. I'm sorry, 6.2% to 6.0%. So we think that's going to continue to trend down, get back into the 5% where it should be.

[Pete Enderlin:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from the line of Ryan Cassil with Seaport Global. Please go ahead with your question.

[Ryan Cassil:]

Hi, good morning guys, thanks for taking my question. I just wanted to -- for stamp and margins you guys expect for the remainder of the year, if you could just talk about the timing and cadence to that, it sounds like you expect Middle East gross margins to pick up a little bit but is that going to be starting in the second quarter more back half loaded?

[David Richter:]

I think it's more likely to be -- going to be in the second half. The projects that I've talked about earlier, they get awarded in the second quarter then I've got much of an impact to our margins in the quarter. So we expect that to benefit us in the second half.

[Ryan Cassil:]

Okay, great. And then, just on -- last quarter we sort of talked about where the backlog was and the fact that you needed to probably have a little bit more of that booking burn business during the year. Where do we stand here looking today -- has the outlook changed at all or some of these orders you're expecting in the second quarter -- potentially we're going to believe that second half outlook?

[David Richter:]

With respect to backlog we're expecting the need of warrants to significantly contribute to what's going on backlog in the last three quarters of the year. We're expecting some significant wins, one of which we've already got and are about to announced once we signed contract with our client. And as I'm sure you know, our contract wins, the big wins in Middle East are very, very large contracts for us, in tens of millions. So we've got a bunch of those, we think they're coming in the next two quarters and we hope to get them announced as soon as we can. We're going to grow from [indiscernible] now to north of $900 million, possibly even $1 billion of backlog, that's going to be on some very major projects awards and are we're expecting a bunch in the U.S. as well.

[Ryan Cassil:]

And maybe any sense on timing, when you would start those projects from a revenue recognition standpoint?

[David Richter:]

They tend to ramp up fairly quickly. My guess is within 60 to 90 days of award, we're out to almost our full size staff on the project. The earlier we try to get higher in the project, the more we're in the design face using a small our initial staff will have but moves to construction and that it will start to ramp up.

[Ryan Cassil:]

Okay. So fairly atypical there. Okay, thanks guys. Appreciate it.

[Operator:]

[Operator Instructions] And there are no additional questions at the time. I will turn the floor back to management for closing remarks.

[David Richter:]

Great, thank you operator. And thank you everyone else for joining us on today's call. We are very happy here, we've had a solid start to 2016 and we expect even better performance during the balance of the year. Thank you all for your interest in our company and participating in our call this morning. We'll talk to you again in August.

[Operator:]

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