Hill International, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Greetings and welcome to the Hill International Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 introduce your host Mr. Devin Sullivan, SVP of the Equity Group. Thank you sir you may begin.

[Devin Sullivan:]

Thank you, Adam. 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 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 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 2015. Relative to both the second quarter of last year and the first quarter this year, we saw a huge improvement in our financial performance and we expect this trend to continue into the second half of this year. Now getting right to the numbers. Total revenue for the second quarter was a record $181.6 million a 14% increase from the second quarter of 2014. Consulting fee revenue for the second quarter was also a record at a $159.7 million and a 11% increase in the prior year second quarter and our 13th consecutive quarter of record consulting fees. This growth consisted of 9% organic growth plus 2% growth as result of our acquisition of Cadogans and IMS over the past year. With respect to the geographic breakdown of our growth the U.S was our fastest growing market during the second quarter with consulting fees up 27% year-over-year. This is followed by Africa which was up 17%, Europe which was up 13%, Asia Pacific rose 11%, the Middle East was up 10% and our Latin America operation was down 38%. Our gross profit in the second quarter rose to a record $67.3 million, up 10% in the second quarter of last year. Our gross margin as a percentage of consulting fees was down slightly by 20 basis points to 42.2% in the second quarter versus the same quarter last year. Our SG&A expenses in the second quarter were $56.7 million, up 8% from the year earlier quarter. Our SG&A margin as a percentage of consulting fees was down 90 basis points year-over-year to 35.5% in the second quarter. And these numbers look even better on a sequential basis as we begin to see results from our cost optimization program. During the second quarter our SG&A expenses dropped 4.9% equivalent to a 360 basis point decline in SG&A margin versus the first quarter of this year. EBITDA for the second quarter was $13.5 million, up 27% from the second quarter of 2014. EBITDA margin as a percent of consulting fees was 8.4% of the second quarter, up a 110 basis points from the year ago. Operating profits for the quarter was $10.7 million, up 23% year-over-year. Our operating margin in the second quarter was 6.7% an increase of 70 basis points from the second quarter of 2014. But our increased operating profit at significantly lower interest expense this year. Hill's net earnings in the second quarter jumped a 190% to $4.4 million or $0.09 per diluted share, the effects of double digit revenue growth combined with our cost optimization program had a significant impact on our bottom line performance during the second quarter. Our profitability would been even higher -- one time charges incurred in connection with our ongoing proxy site, our recent headquarter's relocation to Philadelphia and a litigation with the former executive and his new employer that was recently settled. These onetime charges totaled about $1.4 million during the second quarter. Now looking at the second quarter performance of our two operating segments separately, total revenue as as well as project management rev during the second quarter was a record $137.1 million, a 12% increase from the second quarter of last year. Our fees for the quarter of the projects group was also a record at a $116.5 million, a 7% increase from a year ago. This growth I am sorry this growth breaks down at 6% organic and 1% from the acquisition of IMS during the second quarter. The project groups saw a 5% increase in gross profit to $43.1 million for the second quarter, with gross margin on a percentage basis at 37.0% down 100 basis points from a year ago. SG&A expenses with the projects group were unchanged during the quarter at $28.0 million but as a percentage of consulting fees our SG&A margin was down 170 basis points from last year to 21. I am sorry 24.1%, operating profit for the projects group was $15 million, up 14% versus the prior year second quarter. Operating margin as a percentage of consulting fees was 12.9% a 70 basis point improvement from last year. In summary, a solid quarter for the projects group with overhead costs controls driving improved profitability. For Hill’s Construction Claims Group, however, it was a phenomenal quarter. Total revenue for the Claims Group, during the second quarter of this year was a record $44.6 million, a19% increase from the second quarter of last year. Consulting fees for the Claims Group was also a record $43.3 million, a 20% increase from last year's second quarter. This growth in consulting fees was comprised of 17% organic growth plus 3% growth from the acquisition of Cadogan late last year. The Claims Group saw its gross profit rise by 21% to $24.2 million with the slight improvement in its gross margin to 56.0% up 30 basis points from last year. SG&A expenses for the Claims Group were up 15% to $19.5 million in the second quarter. But as a percentage of consulting fees, they were down by 220 basis points to 45.0%. As a result second quarter operating profit for the Claims Group was up 56% to $4.8 million, operating margin as a percentage of consulting fees was 11.0% a 250 basis points jump from last year's second quarter. In addition, that SG&A incurred by our two operating segments, we also incurred SG&A expense in our corporate group. For the second quarter our corporate SG&A expenses were $9.1 million, up 20% from the year earlier quarter, as a percentage consulting fees it was 5.7%, up 40 basis points from last year. This increase was primarily due to my promotion late last year to CEO, the move of [Rolf Gali] out of the project management group and into the corporate group, the hiring of a new CIO last summer the cost of our ongoing proxy site and the relocation of our headquarters into Philadelphia earlier this quarter. We expect this percentage to decline over the last two quarters of the year. With respect to backlog, our total backlog at June 30 was $983 million, down 5% during the quarter. This backlog consisted of $934 million from our Project Management Group and $49 million from our Construction Claims Group. 12 months backlog at June 30 was $431 million, down 3% during the quarter. This break down into $382 million from our Projects Group and $49 million from our Claims Group. Hill had net bookings during the second quarter of $104 million which equates to a book-to-bill ratio of to 65%, well under our quarterly goal which is at least 110%. Based on Hill's financial performance during the first half, current market condition and the backlog amounts I just mentioned. We reiterate our prior guidance and consulting fee revenue in 2015 is expected to be between $650 million and $675 million which equates to approximately 13% to 17% growth for the year. Also based upon our financial performance during the first half and Hill's cost optimization program, we reiterate our prior guidance of EBITDA margin as a percentage of consulting fees is expected to be in the range of 8% to 10% for the year, up from 6.6% last year. Based on our consulting fee guidance this will be in the range of $52 million to $68 million to the year up from $38 million in 2014. As I mentioned earlier our EBITDA margin was 8.4% in the second quarter and we are anticipating higher profitability in the third and fourth quarters, so we're well on our way to achieving our EBITDA goal for the year. Finally, our 2015 annual stockholders meeting is being held this Friday, August 7th in Philadelphia. As I'm sure you all now this year we've had a contested election. Activist Bulldog investors has nominated two of its principals to Hill's board has offered up two shareholders proposals one of which recommends that the board hire an investor banker to put the company up for sale, which we think is not in the interest for the company or its stockholders. And the other recommends that our board rescind the shareholders rights plan or poison pill which was now a moot issue since the board already rescinded that plan back in June. We firmly believe that Hill is on course to deliver record revenue and record profitability this year and there is no reason to change the strategic direction of the company or put it up for sale at this point of time. Although I was nominated we made actually no suggestions whatsoever to improve the performance of our company, but since we take the force of sale so you can maximize their short-term return in spite of the fact that most of our stockholders are long-term investors and the company's financial performance is anticipated to improve markedly this year and next. We're urging all of our stockholders to vote their shares on a white plastic card that has been mailed out by the company for the reelection of Camille Andrews and Brian Clymer to our board and vote against both of Bulldog's proposals. If you have been already voted please do so as soon as possible. If you've already voted on both on Bulldog's green plastic card, please revote on your white plastic card as early as possible. We believe that yesterday's positive earnings announcement is more enough of a reason to stay the course with our current board of directors. Thank you all very much. John Fanelli our CFO and I are happy to take any and all of your questions.

[Operator:]

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Shlisky with Global Hunter Securities. Please go ahead with your question.

[Mike Shlisky:]

So one to start quickly with -- what you've got your outlook for the back half your, you've got a probably good thing like $30 million or so EBITDA get to that lower end of the range, without asking for a 2015 guidance here but -- is what you might get if you get to that range at least in the back half of 2015. Is that the kind of run rate which we're looking at in 2016 or do you have additional cost cuts plans for next year as well?

[David Richter:]

No. We don’t have any additional cost-cuts plans for next year. Obviously to get to our range it implies a significant step up in the second half of this year on our EBITDA and that’s exactly what we're expecting. And we expect that run rate to continue into 2016 and further growth in revenues next year to improve profitability from there.

[Mike Shlisky:]

Okay. Great. I also wanted to touch on the global oil and gas I know it's not your key exposure here but I was curious to see if you can give us any commentary. First, are customers out there, in that space getting any stingier with you as far as how many hours they book with you or conversely are they actually engaging you more and trying to solve some of their contract issues or ensure that current contracts in that sector again done in a cost effective way perhaps bit more than we saw about a year or two ago ago?

[David Richter:]

Yes Mike. We haven't seen any impact to our existing work because of a lower price of oil. Certainly we're reading a lot of things and I've seen evidenced by market place, that some public sector client -- yes maybe trimming back budgets or delaying projects we're seeing a little bit of that in our pipeline at work. Nothing real major this point.

[Mike Shlisky:]

Okay. Then just squeeze more in here. Could you give us the FX impact on your revenues and on your backlog for the quarter?

[David Richter:]

The impact on our backlog was minimal because most of the backlog is the U.S and Middle East and the Middle East the currencies are pretty stable with the US and the FX expense for the quarter was around 400,000 which is somewhere to what it was in the first quarter.

[David Richter:]

Yes keep in mind we've been having this growth over the last couple of years and an improvement of profitability at a time of a strengthening dollar. 75% of our business is outside the US and so we've had from significant headwinds in our financial results because of weakening overseas currencies where we do business. But that still delivered pretty good results.

[Mike Shlisky:]

Okay got it great. I will hop back in queue. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc. Please, go ahead with your question.

[Tahira Afzal:]

Good morning gentleman and congratulations on a good quarter.

[David Richter:]

Thank you, Tahira.

[Tahira Afzal:]

First question David if you look at the topline you know growth you're expecting in second half you're very comfortable around that. How do we reconcile that, backlogs being a little flattish? So how do we take the two and reconcile them and get comfortable around the topline performance?

[David Richter:]

Well we're on a pretty good run rate coming out of the second quarter we have a significant number of projects in hand that are ramping up in the second half of the year that we expect will continue. There was a little bit of a drop about $20 million in the backlog as a result of cancellations or lowered expectations on existing projects. We also took about $5 million out of the backlog that we were reporting for Libya during the second quarter, we negotiated a new contract with our client that we have executed it we're waiting for execution by ODECK our client in Libya so that we are prepared when work restarts there. That new contract is $39 million which is less than the $44 we had up on our backlog. So five million came out of Libya. We continue see challenges in Iraq and we've booked a lot of work there over the last several years most of which now looks like it's either not going to happen or not going to happen in the short-term. So the sales, the quarter was a little better than the backlog would indicate but we have some big opportunities in the second half of the year that we're expecting to win and we have work in hand that we're in the process of ramping up on. Certainly our performance in the US markets in the second quarter was fantastic 27% growth leading the entire company. We have a lot of work if you noticed the press releases that’s being starting more sales than usual slightly toward the US market. And utilization's being getting up everyone's getting busy so we expect that trend to continue into the second half and into 2016.

[Tahira Afzal:]

Got it okay. Thank you. And David I guess the follow-up question I had was -- if you see the transportation bill that's being proposed in the US going through and I know it's been many years and we haven't seen it go through. But could you talk about -- what kind of opportunity would it present for you, you guys already have a pretty transportation is still a pretty big piece of your pie in the US. Is there capacity for you guys to even grow it further?

[David Richter:]

Yes there certainly is -- we don’t track that whole transportation bill, every year it's discussed and debated and every year they catch something. The federal government's going to continue to fund highway spending by state local governments of that I have no doubt. Our transportation practice in the US is more diverse than just highways though, it's rail, significant component is rail and air ports. But we don’t see any slowdown in transportation in general or the highway market specifically.

[Tahira Afzal:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Chase Jacobson with William Blair. Please, go ahead with your question.

[Chase Jacobson:]

Hi good morning. Nice to see some of the cost savings come through in the margin. I guess with that the margin performance has been good here in the second quarter especially but the guidance assumes a pretty significant pick up in the second half. I guess is more of that going to come from corporate SG&A or is that going to come in the segments? It seems like the magnitude is so high compared to where we are just any color would be really helpful?

[John Fanelli:]

Yes what you got to keep in mind Chase is really two things. One is the broader cost cutting happened in the second quarter. We actually saw very little impact from it, we are expecting a much greater impact during the third quarter because most of the cuts happened in late May and in June, so we didn't get a full quarter benefit, there was severance cost attached to the cost cutting, that was probably about $400,000 during the quarter. The level are expected to [indiscernible] factored in with the numbers I talked about before. You see that gone in that third quarter. We had about 1.4 million expenses I summed up before that were onetime charges. Those won't continue into the third quarter. So we are expecting a big ramp up, I think Mike has mentioned we need to do 30 million or so in the second half to get into the range and we are expecting to do more than that so. I think that's going to be too much of a challenge given that the trend that we are on, that the cost cutting will have more of an impact on us than the fact that those onetime charges will be gone.

[Chase Jacobson:]

Okay, so I guess kind of as relates to this, on the -- in project management the gross margin was down a little bit, is there a mix shift there or is it pricing -- any color there?

[David Richter:]

No, the drop-ins in PM gross margin was relatively minor, that numbers bounces around all the time. It might have been slightly negatively impacted by our acquisition in Turkey, I know their gross margin is lower than the overall PM group at Hill. And that might have a slight lower impact on the gross margin for the entire group.

[Chase Jacobson:]

Okay and my last question is related to the balance sheet, I noticed the receivables were up quite a bit and the DSO was up as well, what drove that in the quarter is it temporary based on timing as it expected to come back down in the second half?

[David Richter:]

Yes and yes, it was temporary based on timing. We had a very large client in the Middle East, where our receivable got caught up as we are in the process of getting a contract extension approved, it's working its way slight through the bureaucracy of that client which is a public agency. As a result we weren't paid for that four or five months in the first half, in July we collected half of that money and in August we're expecting the other half.

[Chase Jacobson:]

Okay great thank you.

[Operator:]

Thank you our next question come from the line of Michael Conti with Sidoti & Company. Please go ahead with your question.

[Michael Conti:]

Hey good morning thanks for taking my question.

[John Fanelli:]

Morning.

[Michael Conti:]

Yes Dave, on the last conference call you mentioned with the interest expense pacification on letter of credit cost, has that been resolved or should we anticipate future benefits going into the second half?

[David Richter:]

Yes, we had some duplication of letter of credit cost as we rebuss Society General in and we're getting Bank of America out. There was some overlap there, we have gotten rid of 98% of those LCs the last 2% should be gotten this quarter. We have been also trying to get the matter of the stock camp facility and into local banks primarily in the Middle East where the cost of the LCs and the cash letter requirements are significantly lower and even on existing facilities that we already have in the Middle East we have been moving down from more expensive higher collateral banks to less expensive lower collateral banks. We freed up I think it was number's about $8 million of cash collateral that was being held by just changing banks on one facility.

[Michael Conti:]

I don't think that alludes to third quarter right?

[David Richter:]

The first week in July, so it’s the beginning of the third quarter it'll show up on the cash numbers on our balance sheet for the year for June 30, but that’s got a little bit more to continue in the third quarter, our interest expense overall in the second quarter was down 37% from a year ago, so that’s heading in the right direction, it was down 30% in the first quarter, so we are seeing improvement there and we expect the number to be about that between 35 and 40 in the second half of the year?

[Michael Conti:]

So, I guess would this number be a good run rate given the increase in your debt into the second quarter for the second half this year?

[David Richter:]

The run rate for the interest expense?

[Michael Conti:]

Yes.

[David Richter:]

Yes, that’s the second quarter's a good run rate for the balance of the year.

[Michael Conti:]

Okay great and I think I missed it, did you mention 400,000 in severance cost, I might have missed that part.

[John Fanelli:]

Yes, in the second quarter 400,000 of severance cost.

[Michael Conti:]

Okay so, total 1.8 in onetime charges would be 1.4 with the proxy?

[John Fanelli:]

Correct.

[Michael Conti:]

Okay and I guess last of my last question just from the expected tax rate, can you just walk how the cost cuts will normalize your tax rate, is there any reason for I guess the 30, I guess mid 30% to 40%, why this will not continue for 2016?

[David Richter:]

Yes, Mike our effective tax rate for the quarter was down, though we expected and it was due to a few things, we had lower loss, net losses in US due primarily to the profitability in our domestic operations and also lower interest cost and we expect for the balance in the year or for the full year could be anywhere between 40% and 45% and again that's all relative to where the profitability is coming from which countries and if continues to lower that net loss in the US.

[Michael Conti:]

Okay. Great. Thank you.

[Operator:]

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

[Pete Enderlin:]

Good morning. Thanks for taking my questions. Most of them have been answered actually but I have one that might be very difficult to answer off the top of your head unless you have the information right there and that is, you made probably eight or nine acquisitions since 2009, most of them pretty small, engineering I say was a big one, so the basic question looking at overall topline growth is what were the revenues of all those acquisitions in the previous 12 months before you made them and then what was the result and how much have they contributed since then. I'm trying to get the idea of basically how successful you been at integrating and driving the acquisitions after you complete them?

[David Richter:]

Yes. Pete -- you were right at the beginning that’s not a number we have off the top of our head.

[Pete Enderlin:]

Okay.

[David Richter:]

I can tell you though that 2009 and since the acquisitions that we made with one exception -- which I'll talk about in a second -- have been very positive for us, they have been integrated well and they performed better, post acquisition than they did before, one of the driving forces behind us doing acquisitions is that we believe we can drive topline revenue growth by bringing a small firm within the Hill Umbrella. The one exception was Brazil -- obviously that’s been a very challenged market over the last four and half years since we bought Engineering SA, had a significant drop in revenue this year -- The Real is dropping quite a bit versus the dollar. There's been a huge corruption scandal involving the national government there and the construction industry, a lot of projects have been put on hold and it's impacting the overall national economy. So we saw Brazil as a positive macro market for us, we went into it in early 2011. Today that’s not the case whether it's going be next year I have no idea but we're certainly reacting to that. A significant amount of the cost cutting that we’ve done has been in Brazil. We're going through a corporate restructuring of that operation. Rebranding to Hill International and a change in the management team down there with a lot of the original partners retiring and we'll be naming a new CEO for that business probably in early September.

[Pete Enderlin:]

Okay thanks. And then looking at the small drop off in bookings in the second quarter versus the first quarter and also versus the year ago, you mentioned there wasn’t much of a foreign currency effect and you also mentioned by 20 million of cancellations or adjustments I think you said and then 5 million from the adjustment in Libya so -- is that 25 million that the total of those adjustments or is there something else in addition to that?

[John Fanelli:]

Yes. When we calculated our backlog [indiscernible] so vis a vis contract by contract, project-by-project and every month we are making positive and negative adjustments to each one of those but 20 million I broke out was the major raw material adjustments that were down in revisions in the backlog, either because the project is smaller than we expected it to be. Renegotiations with our clients over how much work we're going to have such as in Libya or projects that just are no longer moving forward.

[Pete Enderlin:]

And does that include Iraq as you mentioned some changes in Iraq but sounded like -- that business was delayed rather than really adjusted or cancelled?

[John Fanelli:]

Yes another 20 million included some cancellations in Iraq.

[Pete Enderlin:]

Okay. All right thanks.

[Operator:]

Our next question is a follow up from the line of Tahira Afzal with KeyBanc. Please go ahead with your follow-up.

[Tahira Afzal:]

Hi David. So I had a couple of follow-ups. Number one and this might be more for John -- given the US is one of your fast improving area how should we think about the tax rate directionally for the longer term? I know you have some losses perhaps they can offset because of the way your tax rate is structured and your costs are structured, is that -- is it a positive if you start to see more revenues come to the US or should we assume that your tax rate will eventually start to move higher?

[David Richter:]

Well if we can get more profitability into the US, that profitability would really drop to the bottomline.

[David Richter:]

We don’t expect to pay US income taxes for a very long time. So obviously the more of our eggs we can push into the US the better that is for our shareholders and our earnings per share.

[Tahira Afzal:]

That’s what I figured and David just wanted to ask you very preliminary thoughts on Iran is that an opportunity for yourselves or you're just keeping away from any kind of troubled areas in the region you know given your past experience there.

[David Richter:]

You know we've had internal conversations about both Iran and Cuba as potential markets for us. I think in the short-term Cuba is more likely, obviously the Iran bill hasn't made its way to the Congress yet. Don't know whether that's going to even pass or not so I think it's very, very early to be talking about Iran.

[Tahira Afzal:]

Got it David. And another just sort of nuance kind of thought process. If you guys end up being let me put it another way. Can you hit the midpoint of your EBITDA margin guidance even if you're at the lower end of your revenue guidance?

[David Richter:]

Yes we can. Obviously on both ranges there's a significant amount of room. So we don’t know exactly where we're going to fall on consulting fees yet, we still have six months to go. The EBITDA is highly contingent upon where our consulting fees are. So we'll have the better idea during the next earnings call in November.

[Tahira Afzal:]

And the last question from me you have reported two profitable quarters and hopefully seems the second half is shaping up well. When will you be at a position to go back and really see if you can bring your interest expense down even further through a refinancing?

[David Richter:]

We've had compensations with [Sochen] about our improving financial performance the topic is come up that we may even though we've made a significant improvement a year ago in what we have been saying to our old bank and the hedge fund that was a lender to us. We think and they think that we can improve our interest expense even further as we continue to improve our profitability. So I think we'll have more of those conversations in the second half of the year and to the extent that we can get our debt to be even cheaper than it is now I think we'll take advantage of that opportunity.

[Tahira Afzal:]

Thank you very much folks and congrats again.

[David Richter:]

Thank you, Tahira.

[Operator:]

Thank you. Ladies and gentleman there are no further questions at this time; I would like to turn the call back over to David Richter for closing remarks.

[David Richter:]

Thank you Mike. We had very strong results in the second quarter and we expect that our financial performance will continue to improve in the second half of this year. Thank you all for interest in our company and for participating in our call this morning. We look forward to seeing as many of you as possible at our annual stockholder's meeting this Friday, and we also look forward to our next earnings call scheduled for early November. Thank you.

[Operator:]

Thank you ladies and gentleman this does concludes our teleconference for today. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.