Hill International, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Greetings and welcome to the Hill International First Quarter 2015 Financial Results. 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. It is now my pleasure to turn the call over to 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 for today 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 maybe 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. Well let’s talk about, so let’s get right to it, yesterday we announced our financial results for the first quarter of 2015. Total revenue for the quarter was a record $171.6 million, a 14% increase from the first quarter of 2014. Consulting fee revenue for the first quarter was also a record at $152.5 million, and 11% increase in the prior year’s first quarter and our 12th consecutive quarter of record consulting fee. This growth in consulting fees consisted of 10% organic growth, plus 1% growth as a result of our acquisition last year of Scottish consultancy firm Cadogans. Our gross profit in the first quarter rose to a record of $65.8 million, up 12% in the first quarter of last year. Our gross margin as a percentage of consulting fees was up 40 basis points to 43.1% in the first quarter versus the prior year’s first quarter. Our SG&A expenses in the first quarter were $59.6 million, up 13% from the year earlier quarter. Our SG&A margin as a percentage of consulting fees was up 70 basis points year-over-year to 39.1% for the quarter. EBITDA was $8.3 million in the first quarter, up 1% from year earlier. EDITDA margin as a percentage of consulting fees was 5.4% down 60 basis points from the year earlier. Operating profit for the quarter was $3.3 million, down 52% year-over-year. Operating profit for the quarter was $6.0 million unchanged year-over-year. And our operating margin in the first quarter was 3.9%, a decrease of 50 basis points from the first quarter of 2014. After losing money in the fourth quarter of last year, we returned to net profitability in the first quarter of this year with net earnings of $1.1 million or $0.02 per diluted share. This is compared to net earnings just $53,000 in the first quarter of 2014 will breakeven per share. Now looking at the first quarter performance of our two operating segments separately, total revenue at Hill’s Project Management Group during the first quarter was a record $131.3 million, a 16% increase from the first quarter of last year. Consulting fee revenue for the quarter of the Projects Group was also a record at $113.4 million, a 11% increase. This growth was entirely organic. The Projects Group saw a 14% increase in gross profit to $44.4 million for the first quarter with gross margin on a percentage basis at 39.2%, up 80 basis points from last year’s first quarter. SG&A expenses of the Projects Group were up 11% in the first quarter, $31.2 million. As a percentage of consulting fees, SG&A margin was 27.5%, down 10 basis points year-over-year. Operating profit for the Projects Group’s was $13.0 million, up 19% versus last year’s first quarter. Operating margin as a percentage of consulting fees was 11.6% an 880 basis point improvement from a year ago. For Hill’s Construction Claims Group, total revenue during the first quarter was a record $40.3 million, a 9% increase from the first quarter of 2014. Consulting fees for the Claims Group was a record $39.0 million, a 10% increase from last year’s first quarter. The Claims Group growth in consulting fees was comprised of 7% organic growth and 3% growth from the acquisition of Cadogans. Claims Group saw its gross rise by 9% to $21.3 million, but had a decline in its gross margin, as a percentage of consulting fees a 54.6%, down 70 basis points from last year’s first quarter. SG&A expenses for the Claims Group were up at 12% from $ 19.0 million during the first quarter. As a percentage of consulting fees they were up by 70 basis points at 48.7%. As a result, fourth quarter operating profit for the Claims Group – I’m sorry first quarter operating profit for the Claims Group was down 11% at $2.3 million. Operating margin as a percentage of consulting fees was 6.0%, 140 basis point decline from a year ago. In addition to the SG&A incurred by our two operating segments, we also incurred SG&A in our corporate group. For the first quarter, our corporate SG&A expenses were $9.3 million, up 23% from the year earlier quarter. As a percentage of consulting fees this was a 6.1%, down 10 basis points from the prior year’s first quarter. With respect to backlog, our total backlog at March 31 was $1.039 billion, down 4% during the quarter. This backlog consisted of $990 million in our Project Management Group and $49 million in our Construction Claims Group. 12 months backlog at March 31 was $445 million, down 5% during the first quarter. This is broken down into $397 million from our Projects Group and $48 million from our Claims Group. Hill had net bookings during the first quarter of $112 million which equates to a book-to-bill ratio of to 73%, well below our quarterly goal which is at least 110%. On the acquisition front, three weeks ago Hill acquired IMS one of the leading project management firms in Turkey. A combination of Hill and IMS gives us nearly 130 professionals in that country and makes a much stronger competitor not just in Turkey, but also throughout surrounding regions where we see significant growth opportunities. The purchase price was approximately $6.2 million in an all-cash transaction, plus the potential earn out of up to an additional $600,000 and certain EBITDA targets of net. We believe that this acquisition will be accretive to Hill’s earnings in 2015. In spite of already expecting record EBITDA this year for the past few months our senior management team has been preparing a cost optimization plan to shrink and minimize our SG&A expenses as much as possible and deliver an even better performance this year. Yesterday our board approved our plan which will eliminate more than $25 million in annualized overhead costs and which we expect will be fully implemented by the end of this second quarter. Based upon this plan and management’s confidence that our operating performance over the balance of the year we have provided guidance on EBITDA margin for the first time. As a percentage of consulting fees, we estimate that EBITDA margin in 2015 will be in the range of 8% to 10% which is up from 6.6% that we delivered in 2014. In addition, based on our March 31 backlog, our financial performance in the first quarter and current market conditions we have reiterated our prior guidance on consulting fee revenue in 2015, that we expected to be between $650 million and $675 million for the year, which is equivalent to approximately 13% to 17% growth in 2015. Finally, we received the letter yesterday morning from private equity firm DC Capital Partners offering to acquire our company for a price of $5.50 per share in cash. As we disclosed earlier this morning, our board met yesterday and set the suitable time reviewing and discussing this offer. After thoroughly considering their proposal, the board determined that the proposal substantially under value sales, common stock, given our current strategic plans and prospects for continued growth and stockholder value creation among other considerations. One of these other considerations was the cost optimization plan that the board had approved earlier in the meeting. The board therefore determined that acceptance of the DC Capital’s proposal was not in the best interest of the company or its stockholders, and rejected the proposal. Separately the board also unanimously approved the adoption of a stockholder rights plan that was intended to ensure that all stockholders have the opportunity to realize the long-term value of their investment in our company. The plan was also intended to ensure the decisions on corporate strategy and control made by the board, focus on the best interest of the company and its stockholders over the long-term without undue short-term pressure. The decision to adopt rights plan aims to provide the board with adequate time to fully access with options, execute in the company’s strategic plan and promote and maximize shareholder value. Details about the rights plan will be included in a Form 8-K that the company intends to file in the near future that the Securities and Exchange Commission. With that, John Fanelli, our CFO and I are happy to answer any of your questions.

[Operator:]

[Operator Instructions] One moment, please, while we poll for questions. Our first question comes from Mike Shlisky, Global Hunter Securities. Please proceed with your question.

[Mike Shlisky:]

Good morning, guys.

[David Richter:]

Good morning.

[John Fanelli:]

Good morning, Mike.

[Mike Shlisky:]

So just wanted to may be start off on yesterday’s letter and the cost optimization plans you have put out in your release last night, are they connecting at all, I mean, without any specifics to what happened in your meeting with the folks who wrote the letter. I mean I guess have your thoughts about where you could take the EBITDA margin improved thanks to your cost plan and did it come as a reaction to investors asking you about where were the margins going. I guess have things changed since the last quarter’s conference call as far as, where you can take your cost and your earnings?

[David Richter:]

Yes, they’ve changed this last conference call as a result of the plan that our management has been putting together for the last two months. And has nothing to do with the offer we received just yesterday morning right before our board meeting. Obviously, this is my first year as CEO. I wanted to renew our focus on overhead cost control. We’ve done that, we asked management to see how much cost they could take out of the business without impacting revenue and they delivered a plan that we think reasonably can deliver more than $25 million of annualized cost savings. Obviously, we won’t get all of those this year. We are implementing the plan some of it has been implemented in the first quarter we expect to implement the rest before the end of the second quarter. Well we are confident that we can deliver a much, much better year than we delivered last year, when we delivered about $37.8 million of EBITDA. And if you take the guidance and just apply the risk that we take we are talking about a range of $52 million to $68 million of EBITDA for this year which is a significant improvement. And we are very comfortable and confident that that we can achieve that margin or we wouldn’t have made it public.

[Mike Shlisky:]

And just on that on that range there, what gets you to the high end or to the low end of that margin range, is it based upon how quickly you can get things implemented, or are there some potential ups and downs within your contracts that really are at your control at this point?

[David Richter:]

Well there are a lot of things that are out of our control, and there are lot of variables in fact that go into where we fall in that range. We wanted to give a big enough range that we are comfortable that we are going to be in it. It obviously is highly depended upon our revenue as we hit the low end of this guided range. So that percentage is going to be lower number. But like I said, we are comfortable that we will be in that range and even though low end of our range is the major improvement over the last year.

[Mike Shlisky:]

Just speaking one more here, was there any kind of – as far as FX goes in the quarter, was there any kind of impact to your revenues, profitability or your backlog based on just currency changes?

[David Richter:]

There have been lots of impacts to everything. Over the last several years, the dollar has become a lot stronger. The impact on our balance sheet, the impact to our backlog, the impact to our revenues and even to our earnings, has all been negatively impacted. In the first quarter the impact was $400,000 through our earnings, but even the other drop in backlog that get when the dollar becomes stronger.

[Mike Shlisky:]

Could you maybe quantify what the backlog impact was or is that [indiscernible] provide just on?

[David Richter:]

Yes, that’s the $16 million of the drop was due to currency fluctuations.

[Mike Shlisky:]

All right, David. I will hope back in queue. Thank you so much.

[Operator:]

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

[Tahira Afzal:]

Hi, David and John.

[David Richter:]

Good morning, Tahira.

[John Fanelli:]

Good morning.

[Tahira Afzal:]

David first question is I know you talked about those cost optimization plan even in your last call. And at that point you had indicated you’ll start to gain traction around the third quarter when it becomes truly visible. It seems like you’re not expecting maybe some of this to flow through to the second quarter. So I’d love to get a sense of the milestones we should look for to really get a sense that this is gaining traction and really where we see the ramp coming in as it more second quarter it’s been or could it be the third quarter when we really start get into that 8% to 10% range.

[John Fanelli:]

I said that we will be very little impacted on the second quarter, we’ll see a small impact, but we’ll see the full impact of the cost cutting in the third quarter. It’s our goal and our plan to have it all implemented by June 30.

[Tahira Afzal:]

Got it, okay. Thanks. And just going to the letter one of the concerns that was recent, you’ve addressed it a lot of times in your presentation through a great extent is our exposure in the Middle East. We’d love to get a sense of what you’re seeing on the bidding pipeline there from some of your core customers and whether you’ve seen anything really slowdown in terms of ramp that’s already in your backlog.

[David Richter:]

We haven’t seen any negative impact to the Middle East market I get asked that question quite a bit, because of relatively weak price of oil over the last couple of quarters. We haven’t seen any impact to the marketplace from that, the only negative impact we’ve see in the Middle East mainly was in Iraq, because of the ISIS fighting up in the northwest, there’s been an impact to Iraq finances and their public funding available for the projects that we are working, which are almost all public projects has been significantly impacted. And we’ve seen a big decrease in opportunities in Iraq including the demobilization of our major contract in Basra. That had about a $1 million impact to us in the first quarter, because we had built a PM [ph] facility for the clients that cost us almost a $1 million. The cancellation of contract we weren’t able to recover the cost of that. So that negatively impacted us in the first quarter that was over $900,000.

[Tahira Afzal:]

Got it okay, David and one more last question and I will hop back in the queue. I think obviously you find the value that’s been offered for share by DC Capital and already maybe the way it’s come out maybe it’s not palatable, but do you feel that Hill as a separate entity makes more sense or do you feel that at the right price, Hill being a part of a bit of a larger entity would make a most sustainable enterprise?

[David Richter:]

That is pretty open ended question. The question that we have built Hill to be an independent public company and there’s no reason why we would ever need to sell the company as long as we continue to perform. We’ve also felt for a long time that the market has not been recognized in the value of the business and obviously our lack of earnings over the several years has, I think, caused that to some degree. We’ve had net losses three of the last four years. I think also that’s been due to a very high level of interest expense and some balance sheet write-offs and debt restructuring that are pretty much behind us. And we’re expecting some significant profitability this year and going forward. The cost cutting as an attempt to

[Tahira Afzal:]

Got it, thank you David and I will hop back in the queue.

[David Richter:]

Thank you, Tahira.

[Operator:]

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

[Chase Jacobson:]

Hi, good morning.

[John Fanelli:]

Good morning.

[David Richter:]

Good morning, Chase.

[Chase Jacobson:]

So another question on the cost savings here. So I think the last official cost savings plan that you had was back in 2012, you were targeting $20 million of savings, I believe. So following that, we did see a strong improvement in EBITDA margin in 2013, but then saw declines in 2014. So what’s different about this round of cost savings? Is it more in the segments, is it more in the corporate line and I guess why there is going to be more sustainable this time around?

[John Fanelli:]

The cost cutting that we did in last 2011 and early 2012 was really response to situation in Libya and a small degree of Iraq where the two largest, most profitable contacts we had in the company ended almost simultaneously, one predictably, and one very unpredictably. And we saw a need to take out a significant amount of cost from the business. Subsequently, our growth picked up considerably. 2013 was our first year getting back to double-digit growth, we grew up both increased by 23% after five years of averaging about 6% growth during the recession. Last year we grew about 12%, this year we’re projecting 13% to 17% growth. So we’re in high growth model. Our goal is to do everything we can to maximize our earnings. We haven’t been able to deliver net earnings consistently for our shareholders, I think, it’s wide [ph] the Street has had difficulty in evaluating us, and we want to make sure that we do everything we can. Last year our focus was on refinancing our debt and strengthening our balance sheet. And that was a six month to nine months effort, but we accomplished that. This year our focus is on minimizing our overhead cost. Once we get through this process, I think, we’re going to be delivering major improvement in our EBITDA overall and our EBITDA margin. I’ve been taking for a long time about getting that well over 10%, getting operating margin even to 10% or more. And I think this gets us to that point where we’re guiding to 8% to 10% this year, and that’s only about six months of the cost cutting having an effect on our margins, next year we’re going to have the full effect. And I think most important thing right now is that once the cost cutting is implemented that we have the discipline internally to make sure that we don’t back overhead as we continue to grow. And we grow with a leaner, more effective management team and cost structure in place. So our profitability stays there and hopefully it improve in there.

[Chase Jacobson:]

Okay. And did you saw what the cost associated with this we are going to be, I apologize if I missed it.

[John Fanelli:]

No, the costs have been negligible typically severance cost and about 75% of cost we expect will be labor cost. Severance is usually, relatively de minimis within our company.

[Chase Jacobson:]

Okay.

[John Fanelli:]

Most employees have been in the two or four weeks of severance. So the cost of severance is really more than the continuing to employ them for another 30 days.

[Chase Jacobson:]

Gotcha.

[John Fanelli:]

We also think that cost cuts are going to have a very minimal impact on revenue.

[Chase Jacobson:]

Okay.

[John Fanelli:]

That’s why we continue the prior guidance we gave on the consulting fee.

[Chase Jacobson:]

Yes. So may be on the market you talk a little bit about the Middle East, but the awards – they were up year-over-year, but they were lower than they have been – yes, recently calculated basis, I know there was some currency impact, but is there any other big moving pieces in other regions, North America or South America or Europe?

[David Richter:]

You’re talking specifically about the first quarter or all in the past year?

[Chase Jacobson:]

First quarter and kind of how it’s been going over, year-to-date?

[David Richter:]

Well we had some nice wins in the Middle East in the first quarter, and principally on oil and gas side is trenching up. For ADNOC on Zirkel Island, which was a major project. The biggest wins that we’ve seen globally is the keen to be in the Middle East and U.S. market. Those are just a largest contract typically we see much smaller contracts elsewhere in the world. We’re seeing and expecting to continue to see growth in every market that we’re in with one exception that is in Latin America, where their performance is disappointing as largely based on macro economic conditions which have not been real strong. And we are in the process of as part of the cost optimization plans [indiscernible] the management team down there is well. Get them [indiscernible].

[Chase Jacobson:]

Okay.

[David Richter:]

We see this year just continue to be a good year for sales. Our first quarter was a little bit disappointing, we never liked to sell less than we burn off on a quarterly basis, but backlog has a habit of being sporadic and lumpy [indiscernible].

[Chase Jacobson:]

Okay. And then one last question if I could.

[David Richter:]

Okay.

[Chase Jacobson:]

Just as it relates to the release that you put out this morning, you talked about the strategic plans and the long-term value creation. And I know you are focused cost cutting and you want to get the margins up, and I imagine that acquisitions are going to continue to be a capital allocation priority, as well. But when we look longer term I was just wondering if you could provide some insight as to what the longer term goals are for Hill. And is it a just is it to continue growing your core businesses or are there opportunities for – I won’t say new platforms but new types of businesses some of that things that you’ve looked out in the past. If you could comment at all just about the longer term goals are that would be great.

[David Richter:]

Yes, I would be happy to take. To answer your question is really yes and yes. Yes we are focused on staying primarily in the two services that we provide today, Project Management and Construction Claims, we’re world-class in both of those. Still in the Claims side, we’re the global leader in that business, more than double the size of our number two competitor. The business right now we are focused continuing their strong growth and trying to improve their operating performance. They had their growth last year but not the bottom line performance, expect as the weakest operating margin at any point since we became a public company. And it’s a business that should be seeing stronger profit in the industry, based upon their market position not weaker. So we are focused on improving their performance. In Project Management, we are continuing to focus on growing that business. We think there is a lot of leveragability at the bottom line from continuing to grow into our global footprint. And there is a lot of upside in the market, there were probably about a 1% player in. We think that the end markets are at least $50 billion a year and we have only about 1% market share. So there is lot of potential upside in those two areas, without getting in other businesses. We continue to keep an eye on other opportunities. We have a small operation in the Middle East, North Africa that is pushing into offering facilities management services and so far we’ve done that profitably. You can see we are on a kind of growth prospects we’re out for that. But we continue to look for ways that we can improve the value of the business, maximize our earnings, throw into new markets. Our acquisition at Turkey was an attempt to do that, where we see a big market there, good opportunities in the Project Management and Claims space. And we took our current operation which is about 30 people and turned into a 130 with the acquisition of IMS, which is a great firm, and we expect it will help us do great things in that market.

[Chase Jacobson:]

All right thank you very much.

[David Richter:]

Thanks Chase.

[Operator:]

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

[Pete Enderlin:]

Good morning. Thanks for taking my questions. Hi, David and John if you look back at the first quarter and just have serve a simple question, is there basic reason why the SG&A was up more than consulting fee revenues and for the margin pressure in the Construction Claims Group? Is this any single factor or is that just more than same basically.

[David Richter:]

On the corporate SG&A, there were a variety of factors, one was, I was promoted beginning of the year and got a raise for moving from COO to CEO.

[Pete Enderlin:]

All right.

[David Richter:]

The COO Raouf Ghali was moved from the Project Management Group into corporate. So his costs weren’t there a year ago and now they are. We have a CIO on board today that wasn’t here in the first quarter of last year. And those are some significant IT expenditures and cost related to our move that we’ll incur in the first quarter.

[Pete Enderlin:]

Right.

[David Richter:]

That would [indiscernible]. So that’s really why.

[Pete Enderlin:]

And on the Construction Claims side was in terrific margin pressure, but there were some and had decent revenue growth was un-applied overhead or out of that work.

[David Richter:]

Claims’ performance can be lumpy from time to time. They have historically not had great first quarters. Now we have a theory as to why, but that’s an historical trend, the consulting fees were up, but the profit margin was down a little bit of down about 11%.

[Pete Enderlin:]

All right.

[David Richter:]

We’re expecting that to improve significantly, a significant amount of the cost that are coming out as part of our plan are coming out of the Claims Group. And we are expecting their performance over the balance of the year to be significantly better than we saw in the first quarter.

[Pete Enderlin:]

Can you get the SG&A ratio versus CFR to 35% to 37% for the year?

[David Richter:]

We had talked about that historically as a target range.

[Pete Enderlin:]

Right.

[David Richter:]

This year with the cost cutting and the growth we’re expecting that to be way down. I mean you could almost through the math yourself. And the range that we are expecting for the full year 2015 is in the range of 32% to 34%, which will be the best year we’ve ever had.

[Pete Enderlin:]

And that’s including corporate.

[David Richter:]

That’s including everything.

[Pete Enderlin:]

Yes, great. Your interest expense…

[John Fanelli:]

Pete, I just wanted to add that…

[Pete Enderlin:]

Okay.

[John Fanelli:]

This 32% to 34% is when the cost optimization plan is fully implemented. So the ratio will decrease overtime, but the end of the year we may be in that 34% to 36%.

[Pete Enderlin:]

For the full year?

[John Fanelli:]

For this 2015, but after to fully implemented the annualized rate, going forward, should be in the 32% to 34%.

[Pete Enderlin:]

Got it. Okay. Thanks. And your interest expense was again a little more than expected. Any specific reason for that?

[David Richter:]

It’s really a combination of two things. One was, we continue to have some duplication on whether it’s a credit process from moving those ahead of our senior revolver and into local banks, it’s just taken longer than we expected. So we’ve got some duplication on LC cost, which are expensive. And that is also prevented us from being able tofree up some of the cash collateral that we have with banks that we’re established several years ago, when we were in a weaker bargaining position. One of the process of moving those over to other banks on better terms and John, your expectation on when that’s going to be completed.

[John Fanelli:]

We believe it should be completed by the end of June.

[David Richter:]

By the end of June of this year.

[Pete Enderlin:]

And after that what would be the run rate for interest expenses roughly per quarter?

[David Richter:]

Well, as the second part of the answer was that we’ve also had more borrowings under our revolver than we would anticipate going into the year. It’s tough to give you an expected run rate on interest expense without knowing exactly what is going to be borrowing. But I would assume it’s going to be down from where we are – where we were in first quarter.

[John Fanelli:]

Probably in the [indiscernible] of $3 million to $3.5 million, it’s probably pretty good estimate.

[Pete Enderlin:]

Okay.

[David Richter:]

Quarterly.

[Pete Enderlin:]

Do you see capital was not listed among the top 50 institutional holders? Do you know how much they actually own at this point?

[David Richter:]

No, I don’t know that information.

[Pete Enderlin:]

Okay. And one of their objections are concerns is the percentage of revenues from the Middle East? What percentage was that in the first quarter?

[David Richter:]

I’m not aware that they have an objection to our Middle East operations effect. Our operations in Middle East are extremely profitable and I don’t know if that was [indiscernible] or not.

[Pete Enderlin:]

Well they said you just proposition to exposure to the Middle East.

[David Richter:]

Yes, as I said we don’t have conversation of any shareholder, we don’t really work Middle East exposure, that’s in a negative way. Despite the fact that that’s where a significant amount of our profitability is coming from that.

[Pete Enderlin:]

Sure.

[David Richter:]

In any events, I think the percentage of Middle East in the first quarter, was that your question?

[Pete Enderlin:]

Yes.

[David Richter:]

John, I’ve put that here we will find that in next couple of seconds.

[John Fanelli:]

Okay.

[David Richter:]

Well, we will move to next question and we will solve that out…

[Pete Enderlin:]

One more if I might and that is, what’s the duration of the rights plan?

[David Richter:]

It’s a three year plan.

[Pete Enderlin:]

Three year. Okay.

[David Richter:]

49.6% in the first quarter.

[Pete Enderlin:]

Okay. Thank you very much, Dave. Good talk to you.

[David Richter:]

Thank you, Pete.

[John Fanelli:]

Thank you, Pete.

[Operator:]

Our next question is from Michael Conti with Sidoti & Company. Please proceed with your question.

[Michael Conti:]

Hi, good morning.

[David Richter:]

Good morning.

[John Fanelli:]

Good morning, Mike.

[Michael Conti:]

Yes, so Dave you mentioned, you had some of your biggest wins from the U.S. so I was wondering, can you just may be talk about what areas we’re seeing strength and may be talk bit more about future M&A opportunities here, to us.

[David Richter:]

Sure, over the last year, we had a significant number of wins and it was really all across the board. Certainly the transportation has been very strong market for us. And we have some big wins and on rail projects in Denver and Seattle. We had a significant amount of work that we wanted in the New York region. We made it recovery efforts for Hurricane Sandy, everyone contracts with the City of New York, the State of New York, State of New Jersey and the New York MTA, that’s helping our New York region, because do very well so far this year and we expect that to continue to ramp up. On the acquisition side we, continue to look at opportunities. We’ve had discussions with several firms, we have one ongoing discussion. Right now, our focus for the next couple of months is going to be on the cost optimization plan and implementing that.

[Michael Conti:]

Okay, and…

[David Richter:]

And our [indiscernible] acquisitions are probably taking backstreet right now to that improving our performance going our stock price up. We certainly don’t want to give out under price stock in connection with acquisitions, the last couple we done something for cash. If our stock reacts positively, which we expect it to, to the cost cutting and improved earnings performance so we expect to deliver, we maybe a little more aggressive on the acquisition front with a much more variable stock that’s nothing real big or eminent at the present.

[Michael Conti:]

Okay, and then secondly just on the corporate expenses, I know you mentioned some of the drivers there with notions and rates, but I mean going forward. Do you still expect maybe get that number at 5% of both [indiscernible] revenue and inclusive of the cost optimization plan, I mean what’s the internal target there?

[John Fanelli:]

Yes, 6.1% of the first quarter was higher than we anticipate throughout the rest of the year, we do expect it be back down to 5% we’re hoping for the full year, but certainly on a going forward basis 5% is our – is a target we want to break.

[Michael Conti:]

Okay, great, thanks.

[David Richter:]

Thanks Mike.

[Operator:]

Our next question is from Mark Braha a Private Investor. Please proceed with your question.

[Mark Braha:]

Good morning, David. Good morning, John.

[David Richter:]

Good morning.

[John Fanelli:]

Good morning, Mark.

[Mark Braha:]

Hi, as you know from previous calls I’m here as a Private Investor, I’m here as an analyst. However, there have been with current stories they shuffle all over again. And at the last call, I raised concern about the expenses and your answer at that time was – excuse me if I tariff prices that we are looking to grow and we have to ramp up expenses for the anticipation of growth. When it came to the refi the synergies of better interest rates were guiding to go directly to the bottom line. These are two examples of that the execution just hasn’t been there. I’m kind of frustrated hearing this over and over again. I would like to address that first and then I have some follow up questions.

[John Fanelli:]

Sure I’d be happy to. On the cost side, we just yesterday approved the implementation of our cost plan. We are taking 25 least $25 million of over head cost out of the business, immediately. And we expect that to be fully implemented before the end of June. I think we are addressing the overhead cost structure. This is – I mean despite that this is an inherently high overhead type of business. We are in 40 countries around the world to deliver high level, high quality professional services to our clients. We are a fast growing company we make major investments in growth and sales people, office expansions, things like that. But it did get to a level that we thought was too high, relative to our business and where we are expected to be this year. And we’ve taken them, what I think is a pretty big axe to it, kind of like certainly very familiarity both internally or externally, I think, $25 million is a small cut and those cuts will dramatically drop to the bottom line. And so many of the cuts in the Unites States will drop entirely to the bottom line and so they don’t pay you those income tax. The interest expense has come down significantly we were a run rate a year ago of $23 million a year of interest expense which with facilities that were much more expensive than we were able to put in place back in September with facilities in a row on anchor, we’ve had some duplication on whether it’s a credit which we’re in the process of eliminating. And our costs have come down like in the first quarter our expenses were down 30%. We expect to be close to 50%, but the duplicate LC costs [ph], the higher levels of borrowing under our senior revolver didn’t quite [indiscernible], that number has come down dramatically. Well again, I’m only going back to what we said that the decrease in interest expense based on the new loans were suppose to go immediately down to the bottom line and obviously that has happened. Let me move on. I want to go back…

[David Richter:]

I think that has happened this cost savings which is – what was it, I think it was, yes, I will give the exact numbers in one second.

[Mark Braha:]

Excuse me, really what I’m saying…

[David Richter:]

Mark, go ahead.

[Mark Braha:]

Really what I’m saying is I’m not saying that weren’t savings in interest expense but, what I’m questioning or what I’m making the comment on is that we were hoping that this would be going to the bottom line. And for whatever reason the decrease in interest expenses seems to have given you license to increase other expenses where SG&A went up significantly and there wasn’t the same viewpoint towards SG&A as there was towards the borrowings. And what I haven’t seen is the increase in stock value and that’s how we measure whether the company is really a success or not, isn’t it?

[John Fanelli:]

That’s one way to measure it. Really the way to measure your success as an investor in the company, but it’s not good when you measure the success of the company itself. Our interest expense in first quarter went down, to answer the first part of your question from $5.1 million last year, $3.6 million this year’s first quarter. Our net savings was on the U.S. and dropped entirely into the bottom line. I realized the bottom line was less than that delta. We have a focus and have had focused on our overhead cost structure. I think our management team has done a great job in the last month or two. They put together a plan that drops our overhead cost significantly. Overall it’s about a 10% cut in our in companywide SG&A cost. We’ve made $38 million or so of EBITDA last year. And we’ve just given guidance to market that we’re going to do $50 million to $68 million this year, which I think is a dramatic improvement. And I think once we start talking about that and actually deliver it. I think the stock price will react.

[Mark Braha:]

Okay. I like to focus if you can put a little – like to ask you if you could put a little more color on who DC Capital is and why all of a sudden, and if it is all of a sudden their interest in Hill? Can you put any color on that?

[David Richter:]

The little that I know is that they are a private equity firm that has a focus on the engineering and construction industries acquired Michael Baker a few years ago. And I think they are interested in other firms in the same space. What I’m [ph] saying is they talked a quite a few firms and I guess they are up to the Hs because they now they are talking to us. There was nothing about their offer that was attractive to our board yesterday financially or otherwise and they rejected.

[Mark Braha:]

Okay, one of the things that they mentioned in the press release that came out was that they were concerned with the exposure of Hill’s exposure in the Middle East and with the situations with ISISs and other fragmented groups out there, are you kind of rethinking, especially in light of the losses that we’ve had with Libya and Iraq that maybe the focus should away from the Middle East.

[David Richter:]

No, we have not. Secondly, what surprised me is that a company that doesn’t like Middle East exposure just offered to by the entire company, whose business is 49.6% in the Middle East. So I would take what they’ve said in that letter with a very large grain of salt. We make a considerable amount of money in the Middle East that extremely profitable for us. We are a major player in that marketplace in both Project Management and Claims. We have done, I think, a significant amount of work over the last, at least 10 years in focusing our organic and acquisition growth effort outside the Middle East and an attempt to balance out, minimize our geographic concentration there. Having done that, the Middle East continues to be a growing and growing part of our overall business, which, I think, reflects in how strong our growth has been there and how successful on management team in the Middle East has been. So we’re now looking to get out of the Middle East or minimize it, or shrink it, or do anything else, other than to continue to benefit from our dominant position in that market.

[Mark Braha:]

Okay and just two more quick follow-ups. Has there been any change on the accounts receivable out of Libya.

[John Fanelli:]

No nothing to update anybody about.

[Mark Braha:]

Okay, so it’s right now it doesn’t look good.

[John Fanelli:]

No, I didn’t say it doesn’t look good it’s just there’s nothing to update anybody about that. It’s been in the same status it was two months ago during our last earnings call.

[Mark Braha:]

Okay, and your reaction at the beginning – your statement that the beginning of the conference call relating to DC Capital’s offer, was that you feel it was inadequate and does not value the company adequately. What do you think the company is worth on the market right now?

[David Richter:]

Right now, [indiscernible] $0.43 a share, I think rejected DC Capital’s offer. So it’s certainly more than it was worth on Friday. Staying on the right direction Mark.

[Mark Braha:]

Okay, I hope so.

[David Richter:]

Thank you for your question anything else Mark.

[Mark Braha:]

I guess no. Thank you.

[Operator:]

[Operator instructions] Our next question is from Mike Shlisky with Global Hunter Securities. Please proceed with your question.

[Michael Shlisky:]

Hey guys take my other question here. I was good point you were kind of up earlier, could you may be share with us whether the move to build off your increase or decrease your corporate costs and will that be a part of your cost plan going forward?

[John Fanelli:]

We just moved in on Monday, so I think it’s kind of really to talk about leaving for outdated their [ph] cost. But obviously this move was two years in the planning. And I think we’re going to see significant benefits from being downtown at Philadelphia we were able to consolidate two offices. We have a much nicer expanded and a more modern corporate headquarters which, I think, is going to benefit the company in numerous ways. But there is no question the [indiscernible] here are going to be more expensive than they were before. But we’re also going to benefit from about $4.7 million in tax, incentives and grants that we received from the City of Philadelphia and the State of Pennsylvania. We have two years of free rent which is going to help our cash flow over the next 24 months. And I think that overall this was very likable for our company during the time.

[Michael Shlisky:]

Okay I think you guys kind on touched on it earlier, but the kind of broader point, what – can you give us a sense as to how much of the cost savings got planned here are going to be domestically which was like [Indiscernible] as opposed to international?

[David Richter:]

John do you have a geographic breakdown of the cost savings?

[John Fanelli:]

No I don’t have.

[Michael Shlisky:]

Very, very broadly, but basically within the U.S. versus outside the U.S. if you could.

[David Richter:]

Well I can answer that at different way. Mike I can say that with the implementation of the cost optimization plan are it will impact our effective tax rate and lower by almost 10% from the mid-40s high-40s to the mid-30s to the high-30s.

[Michael Shlisky:]

Okay got it great, thanks. And so that is an off take it is going to take full litigation [ph] to get to that level so in the second quarter that might not happen, but perhaps in the third and fourth and in 2015 that’s the kind of tax rate that might take place.

[John Fanelli:]

Yes over time our effective tax rate will have its presence from around the mid-40s to high-40 and would gradually go down to the mid to high 30s over time, by the end of the year, we should be below – the around 40%.

[Michael Shlisky:]

Great, thank so much.

[John Fanelli:]

You’re welcome.

[Operator:]

And there are no further questions at this time, I would now like to turn the call over to Mr. David Richter for closing remarks.

[David Richter:]

Thank you very much. And we appreciate you joining us this morning. We have a lot of work to do. We’ve been not only focused on continued revenue growth this year, the implementation of our cost optimization plan and also delivering as we’ve guided the market yesterday and today to a significantly higher EBITDA, and net earnings balance of 2015. We appreciate your interest in our company and our stock, and we look forward to our next earnings calls which will be in early August. Thank you all very much.

[Operator:]

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