Hill International, Inc. (NYSE:HIL)
Credit Suisse 2013 Engineering & Construction Conference Call
June 06, 2013, 02:45 pm ET
David Richter - President & COO
Thanks for coming guys. Next up presenting is Hill International and we have David Richter here. He is the President and (NYSE:CEO) [COO] of the company and lets just get right to it. Go ahead David.
Thank you, [Andrew]. And for purposes of full disclosure and so my dad doesn't kick my butt tomorrow, I am the COO, not the CEO. I want to thank you for the promotion, I appreciate it. It’s just not official.
Just to give you a little bit of a background about Hill because we are a fairly unique company within the construction space. We don't design, we don't build. We are professional service firm that's essentially providing two main services to our clients, project management and construction claims services; I'll get into a little more detail in a minute about what they do.
We've been in business for 37 years. My dad founded the company in 1976. We went public in 2006. Today, we are traded on the New York Stock Exchange. We had record consulting fees last year of almost $420 million and we've already forecasted and given guidance to the market that this year we expect about 20% to 25% growth in consulting fees to over $500 million. So we are looking forward to a very positive year.
Our headquarters’ office is in Southern New Jersey, not too far from here; I believe 100 offices around the world with a record number of employees currently 3,800 working for our firm; our newest office right in the middle of the bottom in Johannesburg, South Africa, which I'll talk about a little more in a minute as well as a result of an acquisition.
We are a diverse business by design. One of the ways that we can handle the natural risk that's in the construction sector is a diversification across different geographies, different client types, different project types. We do business all over the world. The US today is only about 27% of our business; our largest single geographic market sector is the Middle East. Last year 32%, this year we are looking at over 40%, possibly even 45% of our business coming from the Middle East which continues to go through a very strong construction boom and demand for our services continues to be very high. Latin America is growing for us as a result of an acquisition two years ago in Brazil and organic growth in to Mexico and some other South American countries. So that’s 12% of our business. Europe at about a fifth of our business is steady to declining in most markets and we also do some business in North Africa and Asia Pacific which was almost (inaudible) but we see as a big part of our future.
Looking our business by client type, most of the work we do is for private sector clients, major developers, Fortune 500 companies, hotel chains, transportation companies, 40% of our business is in the public sector; most of that is foreign governments. A significant amount of our work in the U.S. is for state and local governments and the federal government which is going through some spending problems, actually a 3% is probably the smallest part of our business that’s ever been. You can see some of our clients across the different sectors, some of the best known companies and some of the biggest public agencies involved in construction.
Looking at our business by project type, we're also pretty diverse; 60% of what we do is in the buildings market, which is a pretty broad category. Essentially, includes anything with a roof on it, but across the different sectors within buildings, we do a lot of work in the commercial sector, high rise office buildings, skyscrapers, residential, still a big part of what we do, most of that is multi single family homes. They are a little small for us. We do multi-family and high rise construction all over the world.
Entertainment, governmental hospitals is a market that’s been very strong for us a couple of years and our portfolio continues to do well in that area. Education has been slow on the K to 12 level but we see as very strong at the higher end college, university level and that part of our business its non-buildings and transportation is the biggest and for us over the last couple of years is fastest growing; five years ago it was about 8% of our business, last year it was 21%. We see that continuing to be very strong market; it's our strongest and biggest in the United States. We allow the other areas particularly in private sector building construction have been slow, transportations continue to be strong for us and then we get evolving in other types of projects whether its power, environmental, oil and gas as well.
Just to get a sense of Hill from our size, we’re the largest independent construction management firm for fee, mainly for professional services, not as a builder in the U.S. in fact we’re the largest in the world. We’re the eight largest overall firm among all our competition and we’re the 10th largest that focuses on what we call program management which is simply managing multiple projects for the same client at the same time.
Measured by growth, this (inaudible) puts out a hot firm list every fall; we have been fortunate to make that list 10 out of the last 11 years. Measures the fastest growing firms in our industry in the U.S. and Canada; one year, a few years ago we even finished number one.
And what we do, more than three quarters of our business is project management. We get hired by the owner of a project to manage it for them, to oversee the designers, to oversee the contractors, to try and bring the project in within budget on schedule and with as few claims as possible or hopefully no claims. We do it solely as a professional service for a fee; we take no risk on the projects that we manage. We are not guaranteeing the price, completion day or anything else other than the professionalism of our services, which creates a much lower risk business model in some of the firms that are here today that involve an at risk construction.
The other quarter of our business is construction claims. We are involved in very large complex projects that are troubled, that have disputes; it's essentially an extra witness business, where we will come in and represent one party or another whether it’s the owner, a contractor an architecture engineer, we’re long term representing on those parties or even sometimes like financial party who has money at risk in the outcome of the dispute and represent them from a technical standpoint; access what happen on the project, why did they run into trouble in the first place, whose fault that was, who owes who how much money for the damages and we (inaudible) present a team of extra witnesses to testify the trial or an arbitration hearing on our clients behalf. This was our original business, it will stand as we do and we evolved into more of a project manager, but we are the biggest and probably best known firm in the world in this kind of the business.
We’ve had tremendous amount of success, last year was our best sales here in history of the company, almost $550 million in new net bookings, or work one last year. Six largest contracts that we won over the last 12 months, a $109 million contract to manage the expansion of the two largest airports in Oman and we won the $100 million contract recently from U.S. Department of State to provide them with management services on embassy and consulate projects all over the world, and that is just kicking off. A $59 million contract to be the construction manager for the new green line in Doha they are going on a time metro system from scratch and we got one of the four lines that are being build and partnership with another company here (inaudible) we’re the construction manager for the new Mid Field Terminal at Abu Dhabi International Airport; we’re 51-49 partners on that, if you call it partners. They are on the lead and our contract value is $42 million. We are managing 12 separate hospital projects as part of a hospital construction program for Saudi Arabian Ministry of Health and we received an $80 million contract to manage the nine mile reconstruction of the Pennsylvania Turnpike outside of Pittsburgh.
As I said before, we’re anticipating growth this year of 20% to 25% which will be our strongest growth by far, since the beginning of the recession. But prior to that during the last construction boom and times were a lot better. We actually average over 50% of royalty and consulting fees as a combination of organic growth and acquisitions between ‘04 and ‘08 which leveled off quite a bit. We continue to grow during the last five years of the recession, some of that was acquisition related as that took place of much bigger organic growth. We also had two major projects wind up during this period of time in Iraq and Libya and yet we have to grow through those issues and get about 6% growth in our consulting fees. We think we have turned the corner at the beginning of this year and we’re back to being a fast growth company, we’re hiring left and right and continue to see this to be a very positive year.
You can see that over the last couple of quarters it was roughly a $100 million per year, per quarter in consulting fees and it really dramatically picked in the last couple of quarters and we had record consulting fees in the fourth quarter and exceeded that by a wide margin in the first quarter of this year. We expect this to be, the first quarter to be our worst quarter in 2013. And we’re anticipating our growth to continue and continue pretty dramatically.
Just looking at our numbers over the last five quarters, in the first quarter as well, we had the best EBITDA performance and we’ve had in probably about two years and nearly $10 million of strong operating profit as well. We continue to be hampered a little bit by our debt; it was significant amount of high interest debt that’s our number one priority. So at the bottomline, it’s been a little bit challenged of late but we see ourselves going through that problem this year and work on those issues as we go forward.
Our growth has been driven by a tremendous amount of success in winning new work, versus our competition. Our backlog, nearly a $1 billion at the end of the year, relatively flat after the first quarter, but you can see it’s nearly four times where it was back in 2007 at the end of the last construction boom. So we've got a lot of work on board. We expect that number to continue to grow. Our management knows that their expectation is to have more in sales than they have in performance every quarter and most quarters, the vast majority of quarters we achieved that goal and we've seen pretty steady growth in our backlog.
Our backlog is an important metric for our future growth. We look at it as the strong indicator, not our total backlog necessarily but our 12-month backlog which we also report on a quarterly basis is a very strong indicator of how we are going to perform over the next 12 months.
You can see from this chart, historically there's been a pretty close relationship between what our 12-month backlog was at the beginning of the year and how we actually performed, what net revenue we delivered during that year. Typically, we do about 130% to 140% of that number. And you can see with $382 million of 12-month backlog to start this year, we are sort of right in that target range, so we think the 500 to 520 is more than achievable.
We closed an acquisition less than a week ago. We bought a claims consulting firm based in South Africa, a small acquisition for us but the first one we've done in over two years, about 25 people and $5 million in annual revenue. It was a very good value for us, claims firms will typically sell for a 100% or more of revenue and we’re able to buy Binnington Copeland for about 40% of revenue in all stock deal. That also cleared an earn-out. It’s our expectation they are going to achieve the earn-out because they are very profitable.
The CM market has done very well over the last couple of years, continued to grow like we did through the recession in 2011, which is less full year we had numbers for. The market of the top U.S. firms as measured by Engineering News-Record magazine was up 6%. It's almost $19 billion. That's just a combined revenue of the top 100 firms that are ranked.
Our view of the global market for our services is on the order of about $30 billion to $35 billion a year. We're about 1% player in that market as big and as broad as we're. So we think there is a tremendous opportunity for us to continue growing and gaining market share versus our competition.
As a wrap-up summary, we continue to see PM, CM as a growing market, as with construction industry and the global economy continue to recover, we think that’s going to improve even better. We see a shrinking, a universe of competition.
First of all, we are moving up to food chain and the kinds of projects that we compete for, smaller and more regional firms that really can't the same consolidation among some of the bigger players. So it's actually fewer firms that we’ve been competing with over last couple of years than they were before in a larger market, which we see as very positive for our near future.
We’ve shown that we can grow the company very quickly in good times, 50% net revenue growth is not easy in industry that very really grows at that kind of level and we expect to see that kind of growth again before too long.
As I said, we have a tremendous amount of visibility, it makes a lot easier for us to plan our business based upon our 12-month backlog and a lot easier people like you that are looking at how company is going to perform in the near future to assess what our top line is going to be.
We are fairly unique company within the sector. As I say we are not joint design and we are not a joint contractor. We are probably the only firm and certainly the only firm in the U.S. not just in the world, that is focused on project management as a professional service combined with our level of expertise and claims which we signed a very synergistic services.
They help to sell each other with the people back and forth and have led to lot of growth by us. As I said before, it’s not easy for smaller project management firms to get into the market and compete with us with the level that we are at today and even at any level. Our clients are buying our history, our expertise, our reputation and start-ups really come in and choose this very much in traction against thus or larger competition for quite a while.
As I said, Binnington Copeland was the first acquisition that we have done in the last two years, but we have required about 22 businesses in the last 15 years. We have a pretty good track record of acquiring and consolidation and integrating those firms into Hill successfully. I think we will continue to do that.
Our management team which right now not only includes our senior managers but also myself and my family own about 38% of the company. We have a very strong investor interest and seeing that stock perform well, certainly better than it has performed. Stock right now is about $3 a share. We’ve traded between $2 and $20 since we went public seven years ago and I think we have a lot more room on the upside to go.
Certain the business is turning positive, the economy is getting better from what we are seeing and more and more opportunities out there for us to bring in both work, new clients, new professionals, so we can continue growing our business and making sure that the bottom line and our stock price reflect that well we are doing as a business.
So that being said, I am happy to answer any questions you might have about the Hill or the industry. Yes, sir.
Two questions. First, on a typical project, what would be the percentage that is dedicated, if the capital cost is $100 million, how much would be your business?
Typically certainly on a project of that size, you are talking about probably 3% or 5% would be the cost of project management. For us there really is no typical project and that percentage can vary widely similarly on the multi-billion projects, sometimes our fee will be less than 1% and we have seen our fee in the 8% to 10% range on smaller projects.
A large variant is the client and how much they want to pay for, how much capability they have in-house, such as some of the things that we do and generally we always advocate for more not less. We are not basing our pricing on a percent of construction cost, we are basing it upon the team of people that we're providing, the client to provide services and how long they are involved and what their individual costs are. So, it's essentially a cost reimbursable business.
The other one was the recovery in the non-residential sector in United States especially commercial and I am not sure, industrial if you handle that, but what are you seeing these days?
We are seeing a slow but steady recovery in the U.S. non-residential market. Transportation was strong for us throughout and continues to be strong. We're seeing some pick up in spending by, I think, I addressed some of these before, certainly higher education. Hostel and healthcare market continues to be strong. We're seeing a lot of projects all over the country in that regard, in fact all over the world. Certainly education K-12 has been very slow and we expect that to continue. And all the things you would think would be bad, commercial, retail, multi-family residential in the U.S. are improving but very, very slowly.
Could you just talk about trends in your SG&A cost? What's driving it if you can provide any color on that that would be great?
Yeah, we had a big, big improvement in our SG&A line as a percent of consulting fees, which is how we measured it. It was about 34.6% in the first quarter and our long-term target has been 35% to 37%. So we're also charged positive in that regard. A year early we have been over 40%. Typically the biggest variance we’ve seen SG&A is will be called unemployed labor which is at piece of our direct labor cost that is available.
So far and for example a year ago, first quarter of 2012, our claims group is unusually slow. When they are slow all of sudden their SG&A goes up. That’s just people’s timing shifted. So we had a very solid first quarter. We are seeing those utilization trends continue. Our people on both sides of the house PM and claims have been very busy this year.
We don't see any (inaudible) for that. So we’ve seen the unemployed labor down. We were also very aggressive in 2012 in taking an axe to our overhead cost. We had about a $20 million cost cutting plans that we put in place in the second quarter of 2012. I wish we’ve implemented about 90% of it, and that had a major impact year-over-year.
Do you say 20 mil?
Could you also provide an update on the Libyan cash?
Yes. We are -- give a little bit background for anybody that doesn’t now. We had a very large operation in Libya before the civil war there and a very large (inaudible) we are doing a lot of work. We had long payment terms, unusually long for that client, a branch of the Libyan government and we had to through an order process, like all foreign contracts get in 2010, which we are told is going to be a three to four month process and for us take eight months during which they stopped paying us.
So our receivable in Libya had grown up to about $65 million two months prior to the civil war beginning. We started to get paid again. We talked about $16 million in the two months before February ‘11 when the civil war occurred. Our receivable got down to $59 million. We expect that over next six months would be current and of course the civil war stopped all that. So we are out $59 million by the Libyan government which has obviously had an impact on our liquidity as the primary reason why our debt has blowned up over couple of years.
Every indication that we have seen from Libyan government so they are going to honor their peaceable work contractual commitments. We have not seen one evidence that says that not going to. We have seen some tangible evident this year that they are moving toward getting back to normal, bringing the firms back into Libya to restart the projects that they are working on as included and we are hopeful that in 2013 we are going to see not only a collection on our receivables but also restart to the work that we are doing in Libya which was significant for us.
So, do you have any exposure to Turkey?
We have very little work in Turkey, we like more exposure, but infrastructure in Turkey is more like very solid especially for what we do. We are chasing work in that country and as it's a news, yeah, so we might have been successful on one of them. Any other questions?
What your target utilization at place that you carry? And then also, I know a lot of professional service to improve charges ticker price, but they only like 60% to 80% of that, is maybe could you talk about your actually realization of your pricing?
Sure. Our target realization is 200% and fortunately employee’s families don't like what that happens. We really have never had a target. Our view has always been the higher the better. What we have seen as in the project management our utilization tends to run about 80% to 85% and in claims it tends to run between 60% and 65%. And we may calculate it differently from some firms. We include what we calculated is that the numerator is all billable hours. The denominator is all hours total in the group for billable and non-billable people. So it also reflects how much overhead a group has. So it’s not 60% of our billable people are billable, 60% of all people in the claims group are billable.
Our Project Management group every time contract is a unique negotiated fee, so we don’t have target hourly rates. Typically, those are very rare. Construction claims group does and it's almost not professional by professional basis. We hit those rates a lot of the time and we get discounts from those rates a lot of the time depending upon the size of the work and importance of the client and certainly volume from any particular client makes us much more willing to negotiate lower rates.
Our rates in the claims group tend to be significantly higher. It’s an expert professional service. We can get much higher rates from that service than we do from project management. I think our average rate across all employees and claims is roughly nearly about $250 an hour and project management is closer to about a $120 an hour. It’s about twice as much.
I know geographically just we’re saying you’re interested in Turkey, where else are you looking that you are not, what other areas are you looking in that you’re not already in or are you just going to focus more so on [scenarios of previous] strong as that?
We’ve made a big push and certainly to be more diverse, clearly our growth certainly since going public but even before that was driven by the lowest construction volume. And we look the situation probably about ten years ago, our biggest wealth in the company was to buy and we get 300 people there at a time when the entire company was of 1,000 people. We saw that as too much risk and we want to take advantage of that growth but also diversify in other areas. We’ve done acquisitions in Europe, which probably exactly the wrong time in 2008 like before the economy started crashing and Europe really had its own issues that it had to deal with, but we also expanded in Australia into more acquisitions in the US to expand our breadth domestically as well, and Latin America two years ago with an acquisition in Brazil and South Africa literally a week ago.
The markets that we are not in and we want to continue to grow in, there are certain pockets in the U.S. that we still feel the need that we want to be in. Places like Boston, Chicago, Denver where there's some significant work that we really don't have any physical presence in. Turkey is an area where we are looking at expansion currently. A lot of the former CIS countries where we've gotten some work to-date, Azerbaijan, Georgia, Kazakhstan, places like that.
We've invested significant amount of time and effort in pushing into Asia and I think that effort is still in the first or second inning, although we want some work in China, Afghanistan, India, Vietnam, we are pursuing work right now in South Korea. Those are very good market for what we do. And I think even in Australia, I think we have a very small presence there, relatively to what we could going forward. And I think the acquisition in South Africa is sort of where we view it was sort of a stepping stone into a big market down there. It’s a claims acquisition that didn't cost us very much relative to the overall company. And we have grown historically by having claims presence somewhere in new geography and then using that as a separate stone to offering project management services, more often the same thing is true in South Africa, and not just in the country of South Africa but all throughout Sub-Saharan Africa as well.
Any more questions? Thank you for your time today. Enjoy the conference.
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