Hill International, Inc.
Q4 2015 Earnings Call Transcript

Published: 28 Mar 2016

[Operator:]

Greetings, and welcome to the Hill International reports 2015 fourth quarter and full year financial results conference call. 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. I'd like to turn the conference over to your host Mr. Kaly Uhl [ph] of the Equity Group. Please go ahead.

[Unidentified Company Representative:]

Thank you, Matt. Good morning, everyone. Thank you for joining us today. Our speakers for today's call will be David Richter, President and Chief Executive Officer of Hill International and John Fanelli, the company’s Senior Vice President and Chief Financial Officer. Before we begin, I’d like to remind everyone that certain statements made during this call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it is our intent that any such statements be protected by the Safe Harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings or other financial items; any statements concerning our plans, strategies and objectives for future operations; and statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Important factors that could cause actual results, performance and achievements or industry results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the risk factor section and elsewhere in the reports we have filed with the Securities and Exchange Commission. We do not intend and undertake no obligation to update any forward-looking statement. With that said, I would now like to turn the call over to David Richter. David, please go ahead.

[David Richter:]

Thank you, Kaly, and good morning to everyone joining us for today's earnings conference call. On Thursday last week, we announced finally our financial results for the fourth quarter and full year of 2015. Before I get to that quarterly numbers first an explanation to the delay in releasing our earnings and filing our 10-K. The delay was caused by ongoing discussions that we’ve had with our independent accountants regarding their audit of our financial statement as it related to certain accounts receivable owed to us by a major client in the Middle East. There have been a significant delay in payments from this client as we were negotiating an extension of our original contract among other issues. Over the past three weeks we were able to collect overdue payments in excess of $ 15 million and also to provide documentation acceptable to our auditors evidencing our planned extension of that contract. Whilst we have not completed our audit and we will surely file our 10-K which we expect to file tomorrow. Now jumping to the fourth quarter results, total revenue in the fourth quarter was a record $189.8 million, 11% increase from the fourth quarter of 2015. Consulting fee revenue or CFR for the fourth quarter was a record $161.5 million, an 8% increase from the prior year’s fourth quarter. This growth consisted of 6% organic growth, plus 1% growth as a result of our acquisitions of Cadogans and IMS over the prior year. With respect to the geographic breakdown of our growth, our operations in Africa were our fastest growing business during the fourth quarter with consulting fees up 14% year-over-year followed by Middle East which was up 13%. The US was up 12%. Our European operations were down 1%. Latin America was 4% and our Asia-Pacific operation was down 16%. Companywide, our gross profit in the fourth quarter rose to $67.3 million, up 4% from the fourth quarter of 2014. Our gross margin as a percentage of consulting fees was down 150 basis points to 41.7% versus the fourth quarter of the prior year. Our SG&A expenses in the fourth quarter were $64.4 million, up 4% from the year earlier quarter. Our SG&A margin as a percent of CFR was down 130 basis points year-over-year, 39.9% in the fourth quarter. Extraordinary one-time SG&A expenses which adversely impacted our results in the fourth quarter totaled $5 million and include the following items; $2.2 million of increased net debt expense, primarily related to certain accounts receivable in the Middle East; $1 million related to our write-down of the value of a note receivable; $0.8 million of legal and other fees related to the shareholder proxy contest held last year; $0.6 million of severance costs related to our cost optimization program; and $0.4 million of legal and other fees related to the restatement of our consolidated financial statements last year related to our Libyan receivable. As a result of these charges, Hill’s EBITDA for the fourth quarter was only $5.5 million, up just 2% from the fourth quarter of 2014. EBITDA margin as a percentage of consulting fees was 3.4% in the fourth quarter down by 20 basis points from the year-earlier quarter. Operating profit for the fourth quarter was $2.9 million, a 5% decline from the prior year and our operating margin in the fourth quarter was 1.8%, a 20 basis point decline from the fourth quarter of 2014. Our interest expense for the quarter was $3.4 million, down 7% from the year ago and as a result of all the above, Hill had a net loss for the fourth quarter of $1.1 million or $0.02 per diluted share which compares to a net loss of $4 million of $0.08 per diluted share in the last quarter of 2014. Absent the impact of the above listed one-time expenses, adjusted EBITDA in the fourth quarter would have been $10.5 million, adjusted operating profit would have been $7.9 million, and adjusted net earnings would have been $3.6 million or $0.07 per diluted share. Now looking at the fourth quarter performance of our two operating segments separately, total revenue at Hills Project Management Group during the fourth quarter was a record $150 million, a 15% increase. Consulting fee revenue for the quarter at the Projects Group was a record $122.8 million, a 10% increase from the prior year’s fourth quarter. This growth breaks down as 9% organic and 1% from the acquisition of IMS. The Projects Group saw a 7% increase in gross profit to $46.5 million in the quarter. The gross margin on a percentage basis of 37.9% was down 110 basis points from the fourth quarter of 2014. SG&A expenses at the PM Group were up just 4% during the quarter, $33.6 million or as a percentage of consulting fees, SG&A margin was down by 160 basis points from the prior year to 27.4%. Operating profit for the Projects Group was $12.9 million, up 16% versus the fourth quarter of the prior year and operating margin as a percentage of consulting fees was 10.5%, a 50 basis point improvement from the prior year. For Hill’s Construction Claims Group, total revenue during the fourth quarter was $39.8 million, a slight increase from the fourth quarter of the prior year. Consulting fee revenue for the Claims Group was $38.7 million, a 1% increase from the prior year. This growth in consulting fees was primarily related to the acquisition of Cadogans made early in the fourth quarter of 2014. The Claims Group saw its gross profit drop by 2% to $20.8 million and gross margin as a percentage of consulting fees declined to 53.8%, down 150 basis points from the prior year. SG&A expenses for the Claims Group were also down 2%, $20.8 million during the fourth quarter and as a percentage of consulting fees, they were down by 160 basis points, 53.6%. Operating profit for the Claims Group during the fourth quarter was $0.1 million, unchanged from the fourth quarter of 2014 and operating margin as a percent of consulting fees was also unchanged at 0.1%. In addition to the SG&A incurred by our two operating segments, we also incurred SG&A in our corporate group. For the fourth quarter our corporate SG&A expenses were $10 million, up 24% from the prior year quarter primarily as a result of the extraordinary expenses referred to earlier. As a percentage of CFR, they were 6.2%, up 80 basis points from 2014 last quarter. With respect to backlog, our total backlog at the end of 2015 was $860 million, down 2% during the fourth quarter. This backlog consisted of $807 million from our Project Management Group and $53 million from our Construction Claims Group. 12-month backlog at the end of the last year was $388 million, also down 2% during the quarter. This breaks down into $340 million from our Projects Group and $48 million from our Claims Group. Hill sold new work during the fourth quarter of $181 million, which equates to a book-to-bill ratio of 112%, slightly better than our minimum quarterly goal of 110%. We also had several major terminations in the major stock reduction which collectively had a $38 million adverse impact on backlog during the quarter. Based on current market conditions in the backlog I just mentioned, we estimate that our consulting fees in 2016 will be between $630 million and $660 million for the year. This guidance reflects between zero and 5% growth in consulting fees for 2016. We also estimate that our EBITDA margin in 2016 as a percentage of consulting fees will be between 8% and 10%, up from 6.5% in 2015. Thank you all very much. Our CFO, John Fanelli and I are now more than happy to take any and all of your questions.

[Operator:]

[Operator Instructions] Our first question comes from Chase Jacobson from William Blair. Please go ahead.

[Chase Jacobson:]

So the bad debt expense in the quarter is that related in any way, I know you said you collected on the receivable that was mentioned in the release a couple of weeks ago but is there any relation between those two and I think you said there is some more left to be collected there, can you quantify that at all?

[David Richter:]

Yeah, happy to Chase, there is a small amount of receivables related to that client in the bad debt expense but the reason we put off the earnings announcement for three weeks was to satisfy auditors, they were initially looking to take 100% reserve against the receivables from that client, which was in the tens of millions of dollars and we knew that money was coming, we were in negotiations with the client over finalizing an extension to that contract and it was worth it to us to delay the numbers which we hated doing but we felt we had to satisfy our client. As I said, over the past three weeks since the numbers were due to be out, they collected an excess of $15 million from the client. The year-end receivables from that client was $35 million. So we are still owed money but as I said we think everything is on track and we expect to collect all and nearly all of that money.

[Chase Jacobson:]

Is that receivable related to one project for that client and what other large receivables should we be aware of in your -- that are outstanding?

[David Richter:]

Yeah the $35 million I just mentioned was from one client, it was the client we delayed the earnings release for. We hadn't been paid in those receivables go back about seven or eight months which is why our auditors were concerned about the collection. And certainly given the post restatement world we now live in, I think that was reasonable. And we knew that everything was on track, the client was working extensions of the contracts through their bureaucracies, it is a public client in the Middle East and we had every expectation that the money was coming in and quickly. And as it turned out that was accurate and then we pushed hard to make sure that money came in as quickly as possible.

[John Fanelli:]

We have big receivables all over the world. So, nothing from one client that's close to $35 million but we’ve obviously build work over the course of first quarter and we collected $15 million that we just got in. So it certainly down from the $35 million as of year-end.

[Chase Jacobson:]

And then, I guess looking at the revenue guidance for next year compared to where the backlog and 12 month backlog ended the year, I mean the guidance assumes a considerable increase in work that comes in and gets booked throughout the year. So can you just help bridge that based on exit, and I guess this really includes giving color the market environment in the Middle East because from our seat, it seems like that market is going to be under pressure and your guidance assumes a pretty significant increase in that book and burn throughout the year?

[David Richter:]

Well, a couple of different things, one is yes we expect to continue to see headwinds in the Middle East market related to the price of oil. We expect sales to be up this year in 2016 versus 2015. In 2015, they were significantly below what we were burning off, although we had a very strong year. Our sales – our revenue in the Middle East last year was up nearly 12%, our consulting fee revenue. But we’re expecting stronger sales this year, rumors of the demise of the Middle East market - construction market are vastly overrated. There continues to be a lot of work coming out of that market, we’ve got some very large contracts that we’re expecting to hear on positively over the next couple of months. And while we're not expecting growth out of the Middle East this year, we are only expecting a very slight decline. We are expecting that to be more than offset by growth elsewhere, spread the US and Africa where we are expecting to be big growth markets like they were last year and we are expecting that to drive us to positive growth in 2016.

[Chase Jacobson:]

I'll get back in queue, thank you.

[Operator:]

Our next question comes from Michael Shlisky from Seaport Global, please go ahead.

[Michael Shlisky:]

I also want to touch on your EBITDA margin guidance for 2015 as well here after those great comments of the previous question. So much of the business is based on leveraging a lot of your fixed costs. So I'm curious if you could outline for us how much some of the cost cuts you've done are going to contribute to the let’s say 200 basis points increase in EBITDA guidance or so for 2016, how much might be from cost leverage, and how much might be from some additional new costs that might come in the next couple of quarters here?

[David Richter:]

We’ve got a couple of things they are going to be helping us in 2016 to get to that EBITDA margin range that we gave. One is the cost-cutting program that we did in 2015, we took out about $21 million of annualized overhead costs out of the business and while we realized about $50 million of that during 2015, obviously we’ll get a full four quarters benefit of those costs, most of them on average the cost took place in the early part of the second quarter of last year. So we'll see a benefit from that that should improve margins and we also had an unusually high number of one-time expenses. High enough and large enough that they were worth mentioning in the press release and today on the call that we don't expect to repeat in 2016. So if you take out all the one-time charges, just before we talk about annualizing the overhead cuts. If you just take out the one-time charges, our EBITDA margin would have been 7.9% in 2015. So we're going to continue to be aggressive on overhead, we expect to get the full-year benefit, we’re expecting to have a lot fewer one-time issues and getting to 8% to 10% we don't think is going to be that difficult even on slower growth.

[Michael Shlisky:]

Can you also give us a sense of your debt repayment goals for 2016? Would it be maybe on the order of your EBITDA generation in dollars or somewhere around that level?

[David Richter:]

We are expecting record cash flow this year and our number one, number two, and number three priorities for that cash is debt reduction. We continue to feel that the amount of leverage that we have on our balance sheet is too high for our company, for our market cap and we want to get our debt down as quickly as possible.

[Michael Shlisky:]

And is any of that have to do with collecting receivables or is that a big piece of it? And is that --.

[David Richter:]

It all has to do with collecting receivables.

[Michael Shlisky:]

No, but are there any individual one-time chunks like Libya et cetera that might be a big piece of that or is it all just your everyday course of business?

[David Richter:]

Not playing on any money coming out of Libya, we’ve had the delay in payments from that one-time - from that major client in the Middle East that we expect give get caught up in 2016 and then certainly will add to it. But slowing growth is actually an aid in pushing our cash flow higher. Usually the faster we grow the more of a negative impact there is on cash flow. So, even though we’re expecting to go from 9% CFR growth between zero and 5% that’s actually a positive thing for our number one priority which as I’ve said before is cash flow.

[Michael Shlisky:]

If I can squeeze in one last one here, I men its already March 28, so I mean, could you maybe give us some sense as to how you think the first quarter has gone for you versus plan or versus the prior year or prior quarter?

[David Richter:]

No, I can't do that. We generally haven't done that until we have the full results for the quarter, we don't want to give any nods and winks or any other kind of guidance as to how it's going. I can tell you that we were hurt in the fourth quarter and in addition to the one-time things by a relatively weak December but January and December are typically our two weakest months of the year so that was nothing unusual.

[Michael Shlisky:]

Alright, I tried thanks guys, I appreciate it.

[Operator:]

Our next question comes from Tahira Afzal from KeyBanc, please go ahead.

[Tahira Afzal:]

David, the project management side, I know that's where you guys have put a lot of effort and its showing and it's doing really well now. Could you elaborate a bit more on the construction claims side, as we look at the year, there have been good quarters, there have been bad quarters, you know if I look at your implied guidance as well on the revenue side kind of shows a mixed year for construction claims, any help over there would be useful.

[David Richter:]

John, you've got a better handle on those numbers do you want to take the first crack at that?

[John Fanelli:]

I think on your first question is the projections going forward or the claims business in general?

[Tahira Afzal:]

Yeah, if you recall when you were sitting here last year, the fourth quarter was kind of a bit all over the place for construction claims and you guys were right in saying it would pick up again but the fourth quarter gain was a little light on the revenue side but more importantly on a profitability side, so maybe something first on that John?

[David Richter:]

Before John answers that, I'm sorry John. [indiscernible]. As I said, December tends to be a pretty bad quarter just because of holidays and vacations and things like that. The claims business because it's more of a pure consulting practice, dips in the utilization which they certainly had in December can really dramatically impact the bottom line. And we saw that as usual this quarter, the one-time expenses didn't impact the claims group but they were slower than expected over the course of the quarter and December was even worse than the quarter as a whole.

[John Fanelli:]

Just to add, the overall year and because there is some lot of ups and downs in the claims business, overall the revenue has increased almost 10% and as well as our operating profit. So that's a nature of the business. Quarter-to-quarter, it may be higher and lower than other quarters, but generally over a 12-month period, there is growth in both top line and operating profit.

[Tahira Afzal:]

Okay. And if I look at your guidance and maybe the midpoint of it, right now, it assumes it’s, at best, sort of flattish for claims on the revenue side, would that be correct? And if so, what color, what are the assumptions behind that?

[David Richter:]

No. Exactly the opposite. We’re anticipating that claims is going to be the faster grower in 2016.

[Tahira Afzal:]

Sorry, so the claims has actually the best growing period of 5%?

[David Richter:]

No, no. The entire business we expect will grow 0 to 5% in consulting fees this year. So we’re expecting the claims group to grow faster than the project management group. Certainly, they’re less impacted by capital spending in the Middle East in our PM group, and it’s very tough to model any kind of going forward performance based on one quarter. Despite the fourth quarter, we’re expecting 2016 to be a very strong year, in fact a record year for the claims group, revenue and profitability.

[Tahira Afzal:]

Fair enough. The second question I really had was on the profitability side, David. You did have a record revenue quarter, which is pretty admirable, but if you look at the margin side and I’m stripping all those one-time charges out to begin with, would you say it was kind of in line with what you thought or expected for the fourth quarter and I know the claims business and project management might have some holiday seasonality in there?

[David Richter:]

Well, certainly December was probably a little worse than we expected, which dragged the quarter down. If you take the one times out, it was, and this is not atypical. It was a little below the average for the year, 10.5% adjusted, I’m sorry, $10.5 million in operating profit on an adjusted basis, was a little down from what we anticipated the average quarter for the year to be, but the second and third quarters are almost always our two best quarters of the year. And the first and the last get impacted by January and December numbers, which are always two of the worst months of the year. So no, we’re not unhappy, we certainly like to be making more money. We gave earnings guidance, we gave EBITDA guidance of between $50 million and $58 million for the year on an adjusted basis. We did $49.7 million. So we’re little in the downside, we had an unusually high number of one-time events this year and distractions to our business, we’re hoping won’t be there this year and we’re expecting this year to do significantly better profit wise than we did last year.

[Tahira Afzal:]

Got it. Okay. Thank you very much. And David, just one last question and I’ll hop back in the queue. In line with what you said, on the project track, it does show the Middle East has probably more resilience than people are thinking and there are some pretty large projects going forward. Are those going to be important in terms of really driving your revenue assumptions on the project management side or is it just a broader based momentum on the growth side, maybe perhaps in the US?

[David Richter:]

It’s really a mix of things, but certainly we’re expecting strong growth in the US again this year. We’re expecting a slight decline in revenues in the Middle East and that’s based upon a combination of some of the older projects that we already have continuing to ramp up, especially some of the rail projects over there that are longer term and are continuing. But also bringing in some significant new wins this year and I don’t like to ever go into any specificity about that until we actually have an official win, though we’ve got some very, very big projects that we think we’re closing in on and we’ll be in a position to announce before mid-year.

[Tahira Afzal:]

Got it. So could you see a book-to-bill potentially of over one times based on what you’re seeing right now, David, for your entire business?

[David Richter:]

Absolutely.

[Tahira Afzal:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Pete Enderlin from MAZ Partners. Please go ahead.

[Pete Enderlin:]

Good morning, guys. Following up a little bit on the construction claims business, I understand that it’s not exactly lumpy, but it kind of goes in sports you might say, is there any indication that it is or should be somewhat countercyclical in the sense that when the project management business, on a macroeconomic basis, starts to run into problems, and as you get more claims and more controversy and therefore, a boost in the construction claims business?

[David Richter:]

Our view historically had been that that was the case, but I think the reality is shown that the claims business tends to do very well, really in all times. Construction is one of the most challenging and complicated things that we do. It is just perfect for generating lots and lots of legal disputes between all the different parties who touch a project, but don’t want to take responsibility when there is a problem and we’re seeing an increasing number of those not being resolved amicably, but going through to litigation or typically more so in the international construction market through arbitration. And I think we’ve become, no question, over the last so call 7 or 8 years, the premier firm in the world in that business and I think clients are turning to us more and more. The international disputes are bigger and more complex and we’ve got parties from different countries and we’ve seen a very strong claims business, certainly looking at this century in good times and in bad times. But we’re expecting them to have a very good 2016. It’s really independent of whether PM businesses is up or down. They’ve been doing selective strategic hiring and bringing in some very strong players domestically and internationally and we’re expecting to reap the benefit of that this year.

[Pete Enderlin:]

Well, the fact that the fourth quarter revenues, CFR in that business came in basically flat, reflect just simply projects, I mean programs that ran to completion or was there something else structural going on there?

[David Richter:]

There is always a thousand different reasons why it’s up or down. It’s a business in short term assignment that have no predictability to them. They can start on a dime and they can settle just as quickly. So you’ve got -- consultants have to juggle multiple assignments to keep billable and to stay busy and profitable. And depending on when those start and stop, it can have a major impact on the performance of that group in any given month or any given quarter.

[Pete Enderlin:]

And then David, looking at SG&A overall, and I recognize there are lots of different ways that that can be sliced, but was that $24 million and maybe $9 million of that was due to the unusual items, does that not indicate some need for more stringent additional cost cutting, especially on the basic level of salaries and benefits?

[David Richter:]

We are -- we’ve never looked at cutting people’s pay. It was a great quarter I read in 2008 when the recession hit and a CEO in the UK was asked about forcing his employees to take pay cuts and he said the perfect answer, I agree with it 100%, which was that I’d rather piss off 5% of my employees by firing them and piss off 100% of my employees by forcing them all to take 5% pay cuts. Yeah. We need to keep our overhead costs down as well as we possibly can. I think we had a tremendous amount of success last year in doing that. We also saw less revenue that we’re anticipating, primarily because of the drop in new work from the Middle East and those things tend to largely offset each other. But we’re going to continue to look aggressively at keeping our overhead costs down. Normally, in a slower growth environment, we need to do that and we need to keep pushing our EBITDA and our operating profit margins higher and that can help us.

[Pete Enderlin:]

So around this time last year, you were beginning to implement a cost cutting program in terms of headcount. Is there a possibility you’ll do some more of that again going into the second quarter?

[David Richter:]

Yeah. We’ll do what we always do, which is beginning of the second quarter, take a look at how the first quarter performed relative to our budget, our internal expectations and to the extent that we need to make adjustments to achieve the profitability that we need to show to our board and to our shareholders, then we’ll do so. But we haven’t started that process yet and we don’t know we’re going to need to, but that’s certainly the plan every year.

[Pete Enderlin:]

Okay. And then speaking of distractions to your business, which you’re hoping not to have, has the full text of the letter that was sent on March 10 by Full Value Partners been made available in any public filing? I’ve tried to find that and I can’t, I see reference to it, but I don’t actually see anything that shows the full text of that letter.

[David Richter:]

The full value which is part of Bulldog gave us nominations of several candidates to the board this year. We had been anticipating another proxy contest this year. We’ve been planning for it and lo and behold, they sent us a letter. I don’t believe their nomination letter is public, I could be wrong. They generally have filed everything that they’ve sent to us with the SEC, but I don’t recall whether that specifically was or was not. But…

[Pete Enderlin:]

Okay. Well if they don’t file it, do you have any obligation to file it?

[David Richter:]

I don’t believe that we have any intent to make that public if they haven’t, but we’ll review that with our legal counsel and make a determination.

[Pete Enderlin:]

Okay. Thanks a lot.

[Operator:]

Thank you. If there are no further questions, I’d like to turn the floor back over to management for any closing remarks.

[David Richter:]

Great. Thank you everybody. We’re glad to have finalized our year end numbers and we apologize for the delay in releasing them and hosting our quarterly conference call. We’re looking forward now to getting back to business and making 2016 the best year for revenue and profitability in the history of the company, which is what we fully expect. Thank you all for your interest in our company and for participating in our call this morning. Take care.

[Operator:]

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