Hill International, Inc.
Q2 2016 Earnings Call Transcript

Published: 7 Aug 2016

[Operator:]

Welcome to the Hill International reports 2016 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host Mr. Devin Sullivan, Senior Vice President of the Equity Group. You may now begin.

[Devin Sullivan:]

Thank you, Rob. Good morning, everyone. Thank you for joining us today. Our speakers on 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'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 second quarter and first half of 2016. So let's jump right to the numbers. Total revenue in the second quarter for our company was a $175.6 million, a 3% decline from the second quarter of last year. Consulting fee revenue for the second quarter was $152.6 million, a 4% decrease from last year's second quarter. With respect to the geographic breakdown of our growth, our Asia Pacific region was our fastest growing during the second quarter with consulting fees up 7%, followed by the Europe which was up 5%, and the U.S. which was up 4%. Our consulting fees were down in Africa by 2%, in the Middle-East they were down 12% and in Latin America they were down 22%. The overall 4% decline in our consulting fees for the quarter was driven primarily by an $8.6 million or 14% in our Middle East project managed operation particularly in Oman, the UAE and Saudi Arabia. This figure was not helped by our recent $79 million contract we had in Kuwait were $42 million contract in Qatar both of which did not kick off during the second quarter but have now started in the third quarter. This decline in the Middle-East was partially offset by strong increases of $2.2 million or 7% in our U.S. project manager business and $1.6 million or 14% in our European Construction Claims business. Company-wide our gross profit in the second quarter declined to $62.9 million down 7% in the second quarter of last year. Our gross margin as a percent of consulting fees was down 100 basis points to 41.2%. Our SG&A expenses in the second quarter were $54.6 million down 4% from a year ago, but our SG&A margin was up slightly by 30 basis points to 35.8%. HIL's EBITDA for the second quarter was $10.8 million down 20% from last year. EBITDA on margin as a percent of consulting fees was 7.0% for the second quarter down from 8.4% last year. Operating profit for the quarter was $8.2 million, a 23% decline from a year ago and our operating margin in the second quarter was 5.4%, a 130 basis point decline from last year's second quarter. Our interest expense was lower in the second quarter at $3.3 million down 5% from last year continuing a very positive trend. We had a big increase in our income tax expense which was $3.4 million up 31% from a year ago. This was an effective tax rate of 70% for the quarter which is unusually high and compares to 36.3% for the second quarter of 2015. As a result of all of the above net earnings for the quarter of $1.5 million or $0.03 per diluted share down 66% from last year. the primary drivers of this lower profitability with a higher than expected drop in our business in the Middle-East project management operations and a higher than normal effective income tax rate. Now taking a look at the second quarter performance of our two operating segments separately. Total revenue at HIL's project management grew during the second quarter was $131.8 million, a 4% decrease from last year. Consulting fees for the quarter of the projects grew were $110.1 million, a 5% decrease from last year. The project group [ph] is on 8% decline in gross profit to $39.5 million with gross margin on a percentage basis at 35.9% down a 110 basis points from past year. SG&A expenses at the PM Group were down 1% for the quarter to $27.9 million and as a percent of consulting fees our SG&A margin for the projects group was down a 120 basis points from the prior year to 25.3%. Operating profit for the group was $11.6 million down 23% versus the second quarter of last year and operating margin was 10.5%, a 240 basis point decline from a year ago. For HIL's Construction Claims Group total revenue during the quarter was $43.7 million a 2% decrease for the second quarter of last year, consulting fees for the claims group were $42.5 million also a 2% decrease. Claims Group saw it's gross profit decrease by 4% to $23.4 million, gross margins as a percent of CFR declined by a 100 basis points from last year to 55.0%. SG&A expenses were also down for the Claims Group by 3% to $18.8 million during the second quarter. As a percentage of consulting fees they were down by 70 basis points to 44.3%. Operating profit to the Claims Group during the second quarter was $4.6 million down 5% from the second quarter of last year and operating margin as a percent of consulting fees was 10.7% down 30 basis points from last year. In addition to the SG&A cost incurred by our two operating segments we also incur SG&A in our corporate group. For the second quarter our corporate SG&A expenses were $7.9 million, down 13% from a year ago. As a percentage of consulting fees, they were 5.2%, down 50 basis points from the second quarter of last year and getting closure to our target which is to keep them under 5% of our overall consulting fees. With respect to backlog, we had a fantastic quarter. Our total backlog at the end of the second quarter was $949 million, up 10% during the quarter. This was our company's biggest organic increase of backlog in a single quarter since 2008 pre-recession. This backlog consisted of $892 million in our project management group and $57 million in our construction claims group. the geographic breakdown of our total backlog is 42% from the United States, 42% from the Middle-East, 6% from Europe,6% from Africa, 3% from Asia Pacific and 2% from Latin America. Our 12 month backlog at the end of the quarter was $414 million, up 4% during the quarter. This was broken down into $357 million from our projects group and $57 million in our claims group. Hill saw new work during the first quarter of $236 million which equates to a book-to-bill ratio of 154%, well over our minimum quarterly target of a 110% and just a terrific quarter for new sales. Kudos to our entire sales and operations teams globally for such an outstanding quarter. The largest contract wins we booked in the second quarter and we have announced so far including the filing. A $79 million contract to manage the development of South Al Mutlaa City in Kuwait, a $42 million contract to Manage Construction of the Lusail Tram in Qatar, a $20 million contract to Manage Renovations at the National Cancer Institute in Maryland and $13 million contract to Manage Construction of two hospitals in Kuwait, a $9 million contract to Manage Reconstruction at the New York MTA's Clifton Yards, a $9 million contract to support the State of New York and managing Superstorm Sandy Recovery Efforts, $7 million extension of our contract to Manage Development of Al Djazair in Algeria, a $6 million extension of our work provide program management support to the Los Angeles metro, a $5 million contract to Manage Reconstruction of Inter-State 70 in Pennsylvania. With respect to guidance based on current market conditions and a strong increase in backlog I just mentioned. We have reaffirmed our prior guidance the consulting fee revenue this year will be between $630 and $669. This guidance reflects between 0% and 5% growth in consulting fees for the year. We also reaffirmed our prior guidance that 2016 EBITDA margin will be between 8% and 10% up from 6.5% in 2015. Our EBITDA margin for the first quarter was 5.2% and for the second quarter it was 7.0%. So we’re heading in the right direction and has been ramped upon the work we once [indiscernible] this year, that number should continue to improve significantly over the second half of this year. Thank you very much, John Fanelli, our CFO and I are happy to take any of your questions.

[Operator:]

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

[Tahira Afzal:]

David how fast is this new backlog going to ramp up? Clearly it's enough for you to meet your revenue guidance. But should we expect it to be more of a progressive lead backend loaded second half -- is this work that can ramp up fairly quickly?

[David Richter:]

It's work that is going to ramp up fairly quickly. We didn’t have any impact in the second quarter from either of those two largest wins that I announced. We have also got some significant work coming into the U.S. that we haven't announced yet that is going to be immediate and result in some significant ramping up before the end of the third quarter and heading into the fourth quarter. So we’re very confident that things are picking up, revenue lines are showing Delta in the second quarter was that we had anticipated a slightly drop in Middle-East project management revenue on the order of 5% and it was down 14%. So that was surprising. We had one significant client who dropped about almost 200 people that were available on several major projects and that was the cost that we missed.

[Tahira Afzal:]

And David if you look at the backend sort of implied G&A as a percentage to guidance, it seems like [indiscernible] 35% range for the full year. you’ve to be kind of running at 34% or below for the rest of the year. Is that all just leverage on the top line, is there anything else you think you can control on the cost side as well to make that happen?

[David Richter:]

Yes it's really [indiscernible] issues. We’re anticipating a ramp up in revenue and we’re anticipating taking a look at further ways to minimize our corporate overhead and we’re working on a plan right now to do that and implement at the beginning of the fourth quarter.

[Tahira Afzal:]

And last question for me David, in terms of debt reduction, capital structure any comments or update there and more color over there possible?

[David Richter:]

No not really, on cash flow we had a strong second quarter which gives us even more confidence the $20 million to $25 million of free cash flow we projected for the year we’re going to achieve but we had about $7.2 million of operational cash flow in the second quarter and we anticipate that that’s going to get better in the third and better in the fourth quarter so that should put us right where we need to be. As I said before our primary goal for cash flow is to reduce the outstanding debt on our credit facility and that our plan. As I think we continue to improve performance and as the debt comes down we expect to be in discussions with our bank over decreasing the cost of that [indiscernible] and restructuring it into some degree to continue to lower our interest expenses.

[Tahira Afzal:]

And so could we be entering 2017 where lower more normalized interest expense levels period or is this something which is more 2017 event so we shouldn’t assume that there could be a lower interest rate environment for the entire outyear?

[David Richter:]

I'm not sure what a normalized interest expense rate is but, we definitely expect it to be down from where it is and in 2017 we expect it is going to be down dramatically.

[Operator:]

Our next question comes from Chase Jacobson with William Blair. Please proceed with your question.

[Chase Jacobson:]

So, quick follow-up to Tahira's question about cash flow. Last quarter in the 10Q there was a comment about the Oman receivables, you said that you expect to collect the remainder of which I think is close to $35 million at this point in the third quarter, is that still the expectation?

[David Richter:]

I'm not sure that’s the statement that we made. We had as you know issues regarding Oman receivable, we’re doing a significant amount of work for Muscat International Airport and we had some issues regarding in collection of that and in getting approval for and coming to terms of our client on our second amendment that will take us through the completion of the project. We got positions resolved a couple of weeks after we were intending to file our fourth quarter numbers and our 10K and that’s what resulted in three week lag, but we did collect payments between March -- from March this year until the at present we have collected over $31 million from Oman. We’re back on a more regular payment cycle with them. The project has become to demobilize as we head into we got about 9 to 12 months left on the project at this point. The second amendment that we did come to charge with them on although it does provide for lower revenue and a lower gross margin for the work we’re doing in that project but as it comes down on those terms we have seen a significant decrease in work in Oman and especially the profitability from that operation. So in the second quarter our consulting fees in Oman were down 27%, but our operating profit was down 74% and that was one of our big profit centers for the last couple of years. So we’re adjusting to that, we’re looking at given that the business was down 14% in the second quarter, we’re looking at and implementing overhead changes there to factor in the lower revenue that we’re anticipating in that operation going forward.

[Chase Jacobson:]

And that actually kind of leads me into next question, some of which you talked about on the margin profile. So I mean the booking work hasn’t been an issue for you guys, you’ve been doing a really good job clearly you know good awards this quarter and it sounds like there are some stuff to come in the third quarter as well but I guess can you talk about the growth, the mix of business and how that’s impacting the margin profile in project management from the upper 30s, low 40s down to the mid-30s is that all because of the Middle-East? And then I guess can you just kind of round that out, can you generalize -- is there a difference in the margin profile in the different regions?

[David Richter:]

Our margins on work are very consistent. They have been consistent across good economic times and bad economic times, our clients are really not picking us based on cost, I think it's based on a technical excellence. And so we really don’t see much pressure on margins anywhere, but certainly on Oman, on the airport when you’ve the biggest project we have in the whole world and our gross margin goes, John correct if I'm wrong, but from about 35% down about 22% and 300 people working out and this could add a big impact on that country's profitability and I just told you what the impact was. Even across the entire company that’s going to have a negative impact on our gross profitability. Outside of Oman it's been a very flat and very consistent.

[Chase Jacobson:]

Okay so across North America, Middle-East, Europe it's all relatively consistent.

[David Richter:]

Gross margins across our business, I mean they jump and down little bit from quarter to quarter, but historically they are very consistent and we don’t expect them to change much.

[Chase Jacobson:]

And a higher level question, in today's world there is more technology involved and everything, and there is a lot more in the press constantly about the digitization of the construction industry, can you talk about that and how HIL is using it to it's advantage and if you see it any instances providing or acting as headwind to your business? If you could just maybe give us your high level view on technology and digitization of the construction industry?

[David Richter:]

It's a very interesting question because the comfort that we have in this business is that we don’t expect it to go away. I don’t think anyone is going to [indiscernible] that match construction process. It's a process driven by people and it has to be managed by people, with the changes in technology do will just give us better tools to be able to manage projects more effectively and we different kinds of software and hardware, laptops and tablets and things like that. For the people we had on the field that makes our job actually easier, it's not in any way going to dislike [ph] what we do and relating to the question, what are the best tools that are out there we’re using them and that’s part of the reason why we’re winning a lot of work.

[Operator:]

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

[Pete Enderlin:]

I think it's fair to say we don’t have a lot of excess cash on your balance sheet, and when you’ve this big new projects like Al Mutlaa and Qatar project, you’ve to invest to get them ramped up. Are they giving you or have you tried to get some advanced payments from them to defer some of that cash layout covers of it?

[David Richter:]

We do get in some cases advance payments when there is a large and quick mobilization required and on the South Al Mutlaa it's $79 million contract, we’re getting a 10% advance payment and that's in the word -- we had a provide a letter of credit to the client, that’s been completed and we’re expecting any weak now to get that $8 million of cash. So those tend to be relatively rare but we use them on very large projects that has very quick mobilization. So the project -- we have the client funding mobilization we are not doing it out of our own cash.

[Pete Enderlin:]

So you indicated previously that the backlog would between $900 million and a $1 billion at year-end and if you take kind of the mid-ranges of your revenue guidance and what people expect for that for the year, you probably and given what you’ve got in orders in the second quarter where your backlog is now, now you probably would agree that you should be toward the upper end if not at the upper end of that range by year-end is that fair thing? Is that a fair statement?

[David Richter:]

I think that’s a good question and I really should address that in my written presentation. Given what we have seen now even with the wins we have had today and the wins we were expecting, we’re now projecting backlog with over a $1 billion on a year-end.

[Pete Enderlin:]

And then one more, since we seem to be sort of in a battling press releases between you and the [indiscernible] group, are the text of the letters from ISS and Glass Lewis the actual letters or findings or report or whatever they put, are those available anywhere so we can parse them for ourselves instead of kind of taking you guys with respect to words for what they said?

[David Richter:]

I guess [indiscernible] ISS and Glass Lewis do business but my guess is that they are in business by selling those reports to people [Technical Difficulty] provide them but as far as I know they have not pulled the documents. We obtained them and we quoted from them, but to get to the [indiscernible] you got to cut back those costs.

[Operator:]

[Operator Instructions]. Our next question comes from Ryan Cassil with Seaport Capita. Please proceed with your question.

[Ryan Cassil:]

You sort of addressed it talking about backlog expectations now being over a $1 billion but just given the order strength in those comments, you know as the funnel in the big table improving here or is it some of this a function of just timing of when the orders come in?

[David Richter:]

No, we’re seeing a significant change. Last year it was a very challenging year for us especially in the Middle-East given the price of oil, and the impact that had on our clients, potential planned spending. This year we have seen a dramatic turnaround and we are winning a tremendous amount of work that’s driving our backlog and we kind of think we will continue to do so and the bulk of that is coming in the Middle-East and the U.S. Now the U.S. is just having a fantastic year and I think you will see in the next couple of weeks and months the press release is going to get out about new work, we are winning the big most profits out there and time and time again and it's really driving, something like 5% growth in the U.S., 4% for the U.S. business that’s going to be up dramatically by the end of the year and that business just really having a fantastic year.

[Ryan Cassil:]

So it's fair to assume a mix in the back half will start to shift more towards U.S. as we move to year-end at least in [indiscernible] announced?

[David Richter:]

Yes, I think the slowdown in the Middle-East will end, will flat -- begin to get back to some level of growth and the growth in the U.S. will pick up significantly. Certainly double-digit growth probably in the second half of the year in the 2017.

[Ryan Cassil:]

And I think I heard Middle-East revenue down 14% in the quarter. Have you seen that turn early here or is that still some we need to watch out for?

[David Richter:]

No it hasn’t turned yet, the work that we won there did not have any impact to us in the second quarter and it's just beginning to ramp in the third. So my guess is about a fourth quarter will stabilize and then we will be looking for growth in 2017 again.

[Ryan Cassil:]

And last one for me, sorry if I missed this but can you just give a little more color on what gets you to the higher end on those EBITDA margin expectations and why that range maybe still is quite as wide as it is given that we’re half way through the year?

[David Richter:]

The range is wide because there is a lot of uncertainty in what we do and so for the first half of the year we’re not quite there yet. We’re anticipating that as the revenue picks up and our utilization improves -- people billable again. We will be able to see a lot of leverage from that growth, at the same time as I said we may be looking at the corporate level and overhead, heading into the fourth quarter and we’re expecting to see that at least on a quarterly basis we could be at 10% by the end of the year. But for the overall year when you factor in the first half exited -- they are lower than that, we’re probably going to be closer to the bottom of the range for the whole year at the top.

[Operator:]

Our next question comes from Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question.

[Tahira Afzal:]

Dave this is just a follow-up to some of the earlier questions that were asked, you know as you see your revenues more of towards the U.S., do you still expect the DSOs to improve?

[David Richter:]

In the U.S. or overall?

[Tahira Afzal:]

Overall, because you’re seeing a positive mixshift away from the Middle-East potentially.

[David Richter:]

Well certainly Middle-East is the worst region for us as far as DSOs, it's just the place where the clients pay very, very slowly. I think recently the average is right between 4 and 5 months which is -- so they are not acceptable in the U.S. but it's standard operating procedure over there. I expect that we’re going to continue to see that part of the world being shrinking for set of our overall business, I think it was 45% or so. Recently the U.S. was running about 25%, I think we’re going to see in the not too distant future much better balance more like 1/3rd each of those two regions and then 1/3rd the rest of the world.

[Tahira Afzal:]

And based on the sort of backlog outlook you provided for the end of the year David and taking the midpoint of your revenue guidance, would you suggest that just to follow-up on your earlier comment that you end the year with backlog withdrawing in the sort of low mid-teens maybe a little higher. Is there a different burn-rate for that backlog if we step into 2017 or should we assume a lot of that starts to translate fairly fast in 2017?

[David Richter:]

Typically the Middle-East backlog ramps up slowly, typically not always. The U.S. backlog that we’re seeing right now that we’re adding is going to be very fast built and we will certainly have an impact on us in the fourth quarter and heading into next year. And wish I can be more specific but you know we are waiting for contracts to finalized and press release to be approved but we have got a lot of work coming our way and we’re very excited about it and I think we’re going to have a much more immediate on us on our profitability, it could be the U.S. operations and so on for this year.

[Operator:]

Ladies and gentlemen we have reached the end of our question and answer session. I would like to turn the call back over to David Richter for closing comments.

[David Richter:]

All right. Thank you, Operator. Thank you everyone else for your interest in our company and for participating in our call this morning. We look forward to our next call in November. Thank you.

[Operator:]

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.