Hill International, Inc.
Q4 2016 Earnings Call Transcript

Published: 30 Mar 2017

[Operator:]

Greetings, and welcome to the Hill International Incorporated reports 2016 Fourth Quarter and Full Year Financial Results Conference Call. At this time all participants are in a listen only mode. A question-and-answer 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, Mr. Sullivan. You may begin.

[Devin Sullivan:]

Thank you. Good morning everyone and thank you for joining us today. Our speakers for today's call will be David Richter, Chief Executive Officer of Hill International and John Fanelli, Company’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 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 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 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 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 including that unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realized as revenue, our expenses may be higher than anticipated and the closing of the sale of our Construction Claims Group may be delayed or cancelled. 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. David, please go ahead.

[David Richter:]

Thank you, Devin and good morning to everyone joining us for today’s earnings conference call. First, let's apologize for the delay of the release for our fourth quarter earnings, which occurred yesterday and the filing of our 10-K, which will occur tomorrow. This was necessary because certain potential tax liabilities were discovered in the course of due diligence related to the sale of our Construction Claims Group. This required [ph] that we obtain assistance of an independent tax advisor to value our potential liability. We couldn’t complete our year-end numbers until their review was complete and accepted by our auditors. That review was just completed and as a result, we incurred a $2.19 non-cash reserve in the fourth quarter of last year to account for those potential tax liabilities. Those are historical liabilities that relate only to the Claims Group and do not impact or affect our project management group. Second, as result of the depending Claims Group sale which we currently expect will close on or about April 30th, for financial reporting purposes, we have cleared [ph] the Claims Group together with our existing senior credit facilities which will be paid off and terminated upon closing as discontinued operations for all periods presented. This of course means that models of our financial performance, both past and future will need to be updated accordingly. So, let's get right into the numbers. Total revenue in the fourth quarter was $128.8 million, a 14% drop from the fourth quarter of 2015. Consulting fee revenue for the fourth quarter was $100.6 million, an 18% decline from the prior year's fourth quarter. The overall decline in our consulting fees for the quarter was driven primarily by $22.8 million decline or 34% in our Middle East operations and by a $3.2 million drop or 47% in our Latin American operations. This was partially offset by strong growth in our U.S. operation with consulting fees up $5.1 million or 17% during the quarter from a year earlier. Our Company's gross profit in the fourth quarter declined $37.8 million, down 19% from the fourth quarter of the prior year. Our gross margin as a percent of consulting fees was also down but only slightly by 30 basis points to 37.6%. Companywide, our SG&A expenses in the fourth quarter were $41.7 million, down 4% from the year earlier quarter, but SG&A margin as a percent of consulting fees was up by 600 basis points to 41.5%. SG&A expenses from our project management group was $32.5 million in the fourth quarter, down 3% from a year earlier; as a percent of consulting fees, they were 32.3%, up 490 basis points. Our corporate SG&A expenses were $9.2 million for the quarter, down 8% from the fourth quarter of 2015; as a percent of consulting fees, they were up a 100 basis points from a year ago to 9.2%. Hill’s operating loss for the fourth quarter was $3.9 million versus an operating profit of $2.8 million during the fourth quarter of 2015. The net loss from continuing operations was $4.3 million or negative $0.08 per diluted share compared to net earnings from continuing operations of $2.1 million or $0.04 per diluted share during the fourth quarter of the prior year. Net loss from discontinued operations was $10.5 million or $0.20 per diluted share compared to a net loss from discontinued operations of $3.1 million or $0.06 per diluted share a year earlier. On a consolidated basis, Hills net loss for the fourth quarter was $14.9 million or $0.28 per diluted share compared to a net loss of $1.1 million or $0.02 per diluted share in the fourth quarter of 2015. EBITDA for the fourth quarter was a negative $2.3 million compared to positive EBITDA of $4.8 million in the fourth quarter of 2015. Unusual expenses for the quarter totaled $5 million or $0.10 per diluted share, adversely impacting Hill’s profitability. Most of these unusual expenses were included in discontinued operations including $2.2 million in legal and another fees in connection with the sale of our Claims Group and the $2.1 million tax contingency I discussed at the beginning of the call. In addition, in continuing operations, we incurred a $700,000 loss on the sale of a long-term investment. In addition, although we have not termed it an unusual expense, we had a very high level of bad debt expense during the fourth quarter totaling $6 million. Of this amount, $1.9 million was from the Claims Group and $4.2 million was from the project management group. Although less than $8.6 million of bad debt expense we incurred in the third quarter of last year, this level of reserves in a single quarters is extremely unusual. For comparison, in all of 2015, we took $9.1 million in accounts receivable reserves. For the full-year of 2016, we had $17.9 million in bad debt expense. As a result of our financial results for the fourth quarter, Hill would have been in default for certain financial covenants under our senior credit facilities, but we have obtained a waiver of those defaults from our lending group. With respect to backlog, our backlog was down 7% during the fourth quarter to $831 million. The geographic breakdown of our total backlog is 55% from United States, 33% from the Middle East, 5% from Europe, 5% from Africa, 1% from Asia Pacific and 1% from Latin America. Our 12-month backlog at the end of the year was $334 million, down 6% during the quarter. We sold new project management work during the fourth quarter of $117 million, which equates to a book-to-bill ratio of 116%, above our minimum quarterly target of 110%. But we had two contracts totaling $73 million of backlog get canceled during the quarter which is why our backlog was down as of year-end. Large contracts we won and announced since our last earnings call include a $35 million contract to provide project management and construction management services to the Santa Clara Valley Transportation Authority in California; a $16 million contract to provide facilities management services to the Abu Dhabi National Oil Company and $8 million to manage the reconstruction of a 13-mile segment of the Pennsylvania Turnpike, a $7 million contract to manage construction of a container facility at a port in Morocco, a $4 million contract to manage construction of Al Wa'ab City in Qatar, $3 million contract to manage modernization of two buildings at the Social Security Administration campus in Maryland, a $3 million contract to manage our Masdar Institute Neighborhood in Abu Dhabi, several contracts totaling $3 million to provide construction engineering and inspection services to the Florida Department of Transportation, a $2 million contract to manage renovation of the Ashley [ph] Courthouse in Ohio, and a major contract to manage $1 billion Uberseequartier Sud mixed-use development in Germany. With respect to guidance for this year, in our earnings release we provided guidance of between $400 million and $425 million with respect to our expected consulting fee revenues for 2017. This guidance equates to the tune of 2% and 8% decrease in expected consulting fees for the year. Other than consulting fees, we are providing no further guidance for the year at this time. And with that, John and I are happy to take any of your questions.

[Operator:]

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

[Tahira Afzal:]

Thank you. David, first question is in regards to the bad debt you saw in the fourth quarter. What was this? We've been seeing a lot of scrubbing on your receivables which obviously improves the quality of your balance sheet, but would love to get a sense when this all ends and what you assess as the risk of further scrubbing going forward.

[David Richter:]

Yes, Tahira, thanks for the question. Obviously, a lot of these receivables, in fact the majority of them relate to clients in the Middle East. And the economic situation over there is there's no secret and has been pretty poor for the last several years. It's why we saw a shrinkage in our business last year, revenue wise in the Middle East and we expect another one again this year. Low oil prices have caused a lot of difficulties with a lot of our clients public and private in their construction activity; it's impacted their cash flow, the cash availability, has made situation more difficult for us. The biggest write-down, more than a third of it in the fourth quarter related to the contact, one of the contacts that was cancelled. In the third quarter, it related -- the biggest number of -- about half it related to us writing overseas [ph] and it was in Iraq because of the political situation there. So, the foresight is this is a difficult time to have a major presence in Middle East, which we do. But, as I said earlier in the call, we'll be getting work in the Middle East; we're expecting that to improve as oil prices have headed up. So, maybe this is little more robust than others, but certainly, we're not the only [ph] doing business in the Middle East to see some challenges.

[Tahira Afzal:]

Got it. And David, how much in receivables do you still have on your balance sheets from these particular regions, and not the Middle East as a whole because clearly there's some portions that have a better liquidity right now than some of the others. So, really the ones that you are seeing some write-downs if you can quantify that for us?

[David Richter:]

We have about $200 million in net receivables throughout the Company, neither John or I have geographic breakdown of those receivables. But if you look at the numbers for the whole year, about 2% which is extraordinarily high number for us historically, even last year at $9 million which was about 1.25%. We very rarely historically have seen that number go over 1% of our revenues.

[Tahira Afzal:]

Could we kind of see something similar you think this year as well, I guess I'm just trying to see what the risks are to further write down this year.

[David Richter:]

Without a crystal ball, to try to give you any color is guesstimate. [Ph] We’re expecting that situation in Middle East has sort of bottomed out; we're expecting 2017 to kind of be a better year with respect to new work. Work we win this year help us a lot more in 2018. And as I said, we're expecting our Middle East business to shrink this year, and we're planning for that and reacting to it.

[Tahira Afzal:]

Could you still see your free cash flow, net-net, do we expect it to be positive this year, David? So, are the rest of the businesses at this point really offsetting some of the pressures you’re seeing there?

[David Richter:]

Yes. We expect operating cash flow to be positive this year; it was positive last year. We’ve given some guidance earlier in the year of about $20 million to $25 million of operating cash flow. And we saw that $10 million, because of lot of unanticipated the expenses, sale of the Claims Group, the proxy fight [ph] and some other issues related to some of these Middle East projects that impacted it. But, we expect to see even better cash flow this year.

[Tahira Afzal:]

I’ve got more questions, David, but I'll hop back in the queue. Thank you.

[Operator:]

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

[Pete Enderlin:]

David, I didn’t get the number that you mentioned on the project cancelations from backlog in the first quarter. What was that number?

[David Richter:]

That was $73 million related to two projects, one in Africa, one in the Middle East.

[Pete Enderlin:]

Right, okay. And just broadly speaking, do you think in the Middle East specifically in terms of new contracts, new business wins, are you losing market share or holding market share? In other words, the overall economy and the market is bad but are you doing as poorly or worse than the overall environment in that particular geographical region?

[David Richter:]

Market share is really something we talked about, just given how huge the market is, how big [ph] players are. But I think when the sand blows [ph] everybody else with it. [Ph]

[Pete Enderlin:]

I mean, do you think that your win rate is still holding up fairly well, given the reduced level of activity.

[David Richter:]

Yes, I think it is. We're still bringing work in door; we're seeing fewer project opportunities out there, we're seeing delays in existing projects. We also said had some major projects end last year because we completed it, our most successful [ph] projects, actually finished the project. That was a major revenue generator for us and that completed in the third quarter. And we're also seeing -- we’ve begun processes of demobilizing, slowing on the airport project, which still has about a year and half to go. And we're currently negotiating a one year extension of our contract, but as the project gets close to the completion, we’ve been winding down our staff to some degree. So [indiscernible] revenues on that project as well. That’s the biggest project we have [indiscernible].

[Pete Enderlin:]

Right. And then, same kinds of questions related to Brazil. Is it really just the overall market weakness or do you think you have an issue with your subsidiary there in terms of the ability to generate new business?

[David Richter:]

I think that we have a very good team in Brazil, but I think we a market as an economic and political environment in Brazil is just an absolute collapse. I don’t know any better way to describe it than that but there is very well little activity there; the business has been shrinking for a while. We had some significant work on the Olympics last year in Rio, both work directly on the Olympics and work related to it. And now that work is all completed. And that’s something I could say [indiscernible] about the environment down there or our expectations for future work. We anticipate that business is likely to continue to shrink until there is a major economic change in that market.

[Pete Enderlin:]

Right, okay. And then, I know you are not giving specific EBITDA guidance but how should we think about the factors that are going to influence that just sort of directionally? Your gross margins have held up pretty well and you are taking a more aggressive approach to costs but you have to wait a little while to get over the support of the construction claims business. So, what do we think is going to be the general trend of EBITDA margin for the year?

[David Richter:]

We are not going to give any specific guidance on that. There is a lot of moving parts to this. And the situation we are in is that we've got now the Claims Group being treated as discontinued operation on our financials. But we've got the corporate overhead to continue to run both the PM and the Claims Group. In fact [indiscernible] this year than they've ever been with the transition to sale, the things we we’re doing to get the closing and then if we are going to have to continue for several months after closing to support that company as it becomes an independent firm. Once that completes, and we expect it will be complete in various stages over the course of the summer, then we are going to be taking a real strong look at being able to cut our overheads structure, costs, as a result once Claims Groups is fully [ph] spot off. We're anticipating that we are going to spend -- once that transaction is closed, the remainder of the year looking at rightsizing our overhead.

[Operator:]

[Operator Instructions] We have a follow-up question from the line of Tahira Afzal of KeyBanc Capital Markets. Please proceed with your follow-up.

[Tahira Afzal:]

David, first follow-up is in terms of setting the top line guidance. I kind of see it's sort of in line with your year-on-year backlog decline, which has been a pretty good correlation in the past. But, would love to get a sense on how you've approached setting your revenue guidance, given the last couple of two years have been -- last couple of years have been tough, have you tried to take a more conservative approach or change anything?

[David Richter:]

Well, the guidance is based upon a couple of different things, one is our budget for the year. We don’t disclose our budget but our budget is within that range. It factors in the fact that we are expecting shrinkage in Latin America and the Middle East and expecting that to continue. Claims Group typically provides a lot of variability and expectations regarding revenues, although lately they've been sort of right in the middle of their range. And I wouldn’t say it’s more conservative or less conservative than it has but certainly we had a lot of factors affecting us in 2016 that led us to missing our original targets. And I expect that financial group [ph] expense in 2017 will be able to deliver consulting fees within this range that is given.

[Tahira Afzal:]

And David, is there reason you haven't given some sort of parameters around your EBITDA outlook for 2017? Are you -- is it because your cost cutting plans are still pretty nascent? I would love to get any color on that.

[David Richter:]

Like I said to Pete, I mean, a lot of this is up in the air for quite some time. [Ph] We've been doing a lot of cost cutting over the last six months, in response to three principal things. One is we knew the Claims Group was going to be spun off and we're taking a hard look at our corporate structure and overhead cost. The business has been shrinking over the last year. This is the first year in 23 years I've been with the Company that we shrank revenues and it looks like 2017 will be the second year. And we're planning for that. So, we’ve got to bring our overhead costs in line with that and we have a new board in place that's going to be aggressive in forcing me and the rest of the management team to improve profitability, cut our overhead costs and other indirect costs and deliver more and more consistent profitability for our shareholders. We'll have a better ability to take costs out once the Claims Group is formally spun off and we no longer have to provide corporate support for it. Given a lot of that stuff is in flux, it's really difficult for us to give EBITDA guidance, like we've done the last couple of years.

[Tahira Afzal:]

David, last quarter you did kind of hint in a sense at what those corporate costs could be and where you could take them. Do those sort of guidance factors still -- I wouldn't say guidance but indicators, would those still hold or is what you said over the last quarter or so is that not valid anymore?

[David Richter:]

I would say that once we get through this process, and by through I mean probably by Labor Day, we'll have a sort of a normalized I expect third quarter and fourth quarter. And we'll be able to probably use that as a benchmark for establishing guidelines on SG&A expenses, on EBITDA margins going forward. But until the Claims Group is spun off, until our cost cutting is fully complete, it's really difficult for us to do any there.

[Tahira Afzal:]

Got it, okay.

[David Richter:]

With any degree of accuracy which is what you want, of course.

[Tahira Afzal:]

Right. Well, I guess what I'm trying to see is can you strive to get back -- if I look at 2013, and granted you don't a claims business and you have a smaller business in general, but, are we still looking at sort of 9, 10% EBITDA margins, adjusted EBITDA margins as being possible or the headwinds you're facing on the macro side and all the adjustments it's tough to really see those in your near to medium term?

[David Richter:]

Well, the biggest challenge we're facing is that historically we had two operating groups that were profitable, supporting the corporate cost of a public company. Going forward, we're going to have one group and that group is going to be smaller than it was over the last couple of years, smaller and less profitable. The Middle East has really been our profit engine, and last year and this year we're expecting that operation, while still profitable and while still contributing a lot to the Company's overall profitability, not going to be what it was two or three years ago. To your question specifically, I think 10% EBITDA margins in the short-term term are not realistic.

[Tahira Afzal:]

And I guess by asking what would be possible I’m cornering you into something you don’t want to give, right, right now. So, I mean if you look over let's say the next couple of years, are we looking at potentially sort of 8% type of EBITDA margin spend in a sense? And I know I'm not cornering your for really what you think in 2017 but once you’ve adjusted all your EBITDA cost -- sorry your corporate costs out, just so that we can -- we're not setting numbers that are too aggressive?

[David Richter:]

I really can’t give you any numbers; I can't say if that’s reasonable or unreasonable. We simply don’t want to give any guidance or pick a number out of a thin air. I think once we get through this process and we can have a clean quarter without any unusual expenses, without severance, without cost of us carrying a business that’s being treated discontinued on our financial statements, I think we’ll be in a better shape to say, what this is going to look like coming out of this. So, I think once we have our third quarter in the books, absent any other major changes in our market environment or cost structure, I think that’s where we're going to be in a short-term.

[Operator:]

Our next question comes from the line of [Arnav of Engine Capital]. [Ph] Please proceed with your question.

[Unidentified Analyst:]

Couple of questions, I guess one on the cost cutting that Tahira was talking about and I guess you were talking about, is any intention to use a consultant to look at that?

[David Richter:]

That is one thing that board has been discussing; they haven’t made a final determination. But I think it’s probably more likely than not, we may bring in somebody [ph] from outside to help guide us through this process as we [indiscernible].

[Unidentified Analyst:]

Okay. For what it’s worth, I think that would be a good thing to have outside eyes taking a look at the cost structure. You talked about $25 million of operating cash flow earlier during the call, was that -- can you remind me again the context of when that number was given?

[David Richter:]

Yes. I think exactly a year ago, we gave a forecast for 2016 of $20 million to $25 million of operating cash flow. We did about 10 but we also had a lot of unexpected things occur.

[Unidentified Analyst:]

And so, I think after that comment, you said that you expected the operating cash flow to be higher and did you refer to 2017, did you refer long-term, did you mean to comment that operating cash flow was going to be higher than that?

[David Richter:]

What I meant was in 2017, we expect operating cash flow to be significantly higher than $10 million.

[Unidentified Analyst:]

Oh, than 10, but compared to the 20, 25?

[David Richter:]

I’m not sure I’m prepared to give a target.

[Unidentified Analyst:]

Okay. And I would think that since you have some much working capital tied to the Middle East, as the Middle East shrinks, I would think that it's going to become a very significant source of cash, is that a fair assumption.

[David Richter:]

Our experience has been that business like ours, it's carried a lot of receivables, our business is growing quickly, it's consuming cash, when it’s shrinking throwing [ph] cash. And a good example of that is the MI Airport, as I said, we think we're about 18 months away from the conclusion of that. We have a significant amount of money tied up [indiscernible] and what's called the DLP, the defects and liability period that’s money held by client until about 12 to 18 months after the project is completed. We're expecting all of that money to be returned to us in addition to the receivables that we’re owed. So, once that project completes and we have no more costs related to it, we see a significant withdrawal of cash coming our way just with that one project.

[Unidentified Analyst:]

So, you said you would get that money 18 months after completion which is in 18 months or is that two years from now or now you are expecting the cash to come in 18 months?

[David Richter:]

The final payment is -- the two various payment periods. The cash should come in over the course of 12 to 18 months from the completion of the project. Over the next roughly two to three years.

[Unidentified Analyst:]

Okay. Directionally can you give us an indication of how big the number is?

[David Richter:]

John, what’s the total retainage and DLP?

[John Fanelli:]

Around $16 million.

[David Richter:]

Around $16 million. That’ separate from the receivables that were owed and that were collecting as of the year-end, as of December 31st.

[Unidentified Analyst:]

Okay. Because pro forma of the sale -- if I get the number right, pro forma of the sale of the claim [ph] the enterprise value year-to-date is on 200. So, I mean you are talking about almost close to 10% of the enterprise value and you say that's not receivable that's like a retainage you said?

[David Richter:]

It's a combination of retainage and what's called the DLP where for a certain period of time after the project is completed, the client holds the money in case there are any major problems and we don’t at this point anticipate any of that money being withheld by the line. And you’re right, it’s about 10% of our market cap money that will see after the completion of the project, once we have no more cost related to providing our services.

[Unidentified Analyst:]

Okay. Can you give us an update on the timing -- you guys talked about the timing for the sale of the Claims division. Can you just talk about what's holding it up and any updates there?

[David Richter:]

Yes. We were originally targeting the end of February, which got pushed to end of March as over the last couple of weeks it became apparent that Bridgepoint wasn’t in a position to close and we weren’t in a position to satisfy all the closing conditions out of the stock purchase agreement. So, we pushed it to April 30th and they are anticipating [ph] closing month end. So, this is a one month delay and we are working hard to complete all the things that we need to complete. Those involve assignments and consensus from some of the largest clients and landlords; it involves completing all of the corporate restructuring that we've done and making sure all the new entities in certain places are licensed to do business have appropriate tools, [ph] and then Bridgepoint getting their file internal approvals and the consent of their lenders to sign the deal and having it closed. We worked hard to get it done March 31st but that just didn’t happen so the current time we are expecting is April 30th.

[Unidentified Analyst:]

And I guess the bigger picture question, given the size of the corporate overhead in relation to I guess EBITDA overhead, at what point does it make sense to consider as strategic alternative in thinking about whether more value could be realized from shareholders by looking at different owner that potentially does not need to carry this big corporate overhead.

[David Richter:]

That's upto our Board to decide. We haven't had any conversations regarding doing exactly that. But that's always a possibility we're public company; we're for sale every day for the right buyer at the right price. We're focused on writing the business, improving our margins, getting our corporate overhead down. We need work and continue to execute, and we've got a lot of headwinds as you well know, as we well know at the moment but I think we’re doing all the right things right now to position the shareholders to make more money going forward…

[Unidentified Analyst:]

So, you were talking about $10 million free cash flow, you expect this year to be better, so against pretty significant free cash flow as compared to the enterprise value, plus you talk about the stuff from Oman. So, for what it’s worth, the stock seems very cheap.

[David Richter:]

Thank you, we agree.

[Unidentified Analyst:]

Okay, well maybe hopefully we're going to see some insider buying after the transaction close. I would love to see some insider buying, so maybe you can share that with the Board.

[David Richter:]

Yes, I will. And keep in mind, we've been restricted from trading effectively for the last 15 months with the Claims…

[Unidentified Analyst:]

Understood. So, I'm sure that there is pent up demand from the Board that I expect to see.

[David Richter:]

I will pass that message along.

[Unidentified Analyst:]

Thank you, David. Talk to you soon.

[Operator:]

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

[David Richter:]

Great, thank you everyone for your interest in our Company and for participating in our call this morning. We are looking forward to our next earnings call in early May. Take care.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.