Hill International's Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Hill International, (HIL)

Hill International, Inc. (NYSE:HIL)

Q2 2013 Results Earnings Call

August 6 2013 11:00 AM ET

Executives

Devin Sullivan - Senior Vice President, The Equity Group

David Richter - President and COO

John Fanelli - Senior Vice President and CFO

Analysts

Lee Jagoda - CJS Securities

Pete Enderlin - MAZ Partners

Operator

Greetings. And welcome to the Hill International Second Quarter 2013 Financial Results. 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, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Devin Sullivan

Thank you, Brenda. Good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind everyone that certain statements made during this call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is our intent that any such statements to 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 plans, and strategies and objectives for future operations, statements regarding future economic conditions or performance are forward-looking statements.

Forward-looking statements are based on 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 forward-looking statements are set forth in the Risk Factors section and elsewhere in the reports 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 all of you joining us today. Yesterday, after the market closed, we announced our financial results for the second quarter of 2013. Those results show that our revenues have continued to climb to new records, our EBITDA and operating profit has continued to grow to new records as well and our company has returned to profitability. So we had a great second quarter falling up on a great first quarter.

And turning now to those results, total revenue for the second quarter of 2013 was $148.5 million, an increase of 24% from the second quarter of 2012. Consulting Fee revenue for the second quarter was $128.4 million, an increase of 23% from last year’s second quarter. Both of these amounts were record for our company driven by strong growth in both of our two operating segments, Project Management and Construction Claims.

Our geographic breakdown in the second quarter was as follows, the Middle East was our largest and fastest growing geographic market at 42% of our Consulting Fees. That is up from 31% for the second quarter of last year.

The U.S. was 24% of our Consulting Fees in the second quarter, down from 29% for the second quarter of 2012. Latin America was 9% in the first quarter, down from 12% for last year’s second quarter. Europe was 16% of our Consulting Fees in the second quarter, down from 21% in the second quarter of last year. Africa was at 4%, up from 3% last year and Asia-Pacific was at 5%, up from 4% a year ago.

Every region, except Europe and Latin America, grew in absolute dollar terms versus the second quarter of 2012. Latin America was down 8% and Europe shrink by 7% this quarter versus last year’s second quarter. The Middle East was the best growing by 66%. For our other regions, the U.S. grew by 5%, Africa grew by 56% and Asia-Pacific increased by 60%.

Company-wide, our gross profit in the first quarter rose to $53.1 million, up 20% from the second quarter of last year. But our gross margin as a percentage of CFI dropped slightly by 120 basis points to 41.3% in the second quarter versus the same quarter last year.

This drop was caused by a shift in the mix of our business towards more project management work, which was 77% of our Consulting Fees this quarter versus 74% in last year’s second quarter. And also by a small drop in gross margin within the PM Group as we saw a lot more of our work coming from the Middle East which historically has slightly lower gross margin than the rest of the business.

As a result of our continuing attention to our overhead cost, our SG&A expenses in the second quarter were $43.2 million, up only 5%, despite the 23% jump in Consulting Fees. But this was a big decline on a percentage basis with our SG&A margin down to 33.7%, a 580 basis point drop year-over-year. This is Hill’s lowest SG&A margin ever as a public company and a terrific sign of our management team’s efforts to improve the efficiency of our operations is succeeding.

Our long-term goal for overhead expense is 35%. So this was a great quarter, but our expectations for SG&A percentage for the full year remain in the range of 35% to 37%.

Given the leverage of our higher revenues, Hill’s earnings before interest taxes depreciation and amortization or EBITDA, for the second quarter increased by 122% year-over-year to a record $11.9 million.

EBITDA margin as a percentage of Consulting Fees was 9.3% in the second quarter, up 410 basis points from last year’s second quarter and our best performance since before the recession began five years ago.

Operating profit in the second quarter was a record $9.8 million, up 208% from the second quarter of last year.

Our operating margin in the second quarter was 7.7%, a 460 basis point improvement from last year. And most importantly, we returned to profitability in the second quarter earning $719,000 or $0.02 per diluted share, compared to a net loss of $324,000 or $0.01 per diluted share in the second quarter of 2012. We are very pleased to have returned to profitability, although we continue to be burdened by a high level of interest expense and a high effective income tax rate.

Regarding cash flow, we had a much improved quarter this past quarter. Sales operating cash flow in the second quarter was a positive $1.7 million, compared to a negative $7.9 million during both of first quarter of this year and the second quarter of last year.

Now looking at the second quarter performance of our two operating segments separately. Total revenue at Hills Project Management Group during the second quarter was a record $117.6 million, a 28% increase. Consulting Fee revenue for the second quarter at the Projects Group was a record $99 million, also a 20% increase from the year earlier quarter.

The breakdown of the Projects Group’s growth in Consulting Fees was 5% in the U.S. and 39% internationally. The vast majority of the increased Consulting Fees at the International Projects Group came from the Middle East, while Consulting Fees grew 87% in the second quarter versus a year ago.

The single biggest driver of this outstanding growth was our work on the Oman airports program which started at the beginning of this year and added $12 million in Consulting Fees for the quarter. But, we also grew our Consulting Fees in Qatar by $3.5 million versus a year ago, in Saudi Arabia by $2.3 million, in Iraq by $1.5 million, in the UAE by $1.2 million and in Afghanistan by $1.1 million. So our growth this year in the Middle East has been spread throughout the region.

The Projects Group saw a 24% increase in gross profit to $36.8 million for the quarter, with gross margin on a percentage basis at 36.8%, dropping slightly by 120 basis points from last year’s second quarter.

Despite the big jump in Consulting Fees, SG&A expenses at the Projects Group were up less than 4% year-over-year to $23.1 million. As a percentage of Consulting Fees, SG&A expenses were down significantly to 23.3%, a 560 basis point decrease from a year ago.

Operating profit for the Projects Group for the second quarter was $13.3 million, 88% increase from the second quarter of last year. And operating margin as a percent of consulting fees was 13.5% in the second quarter, a 430 basis point improvement from a year ago. Overall, another outstanding quarter for our Project Management Group.

Our Construction Claims Group, total revenue during the second quarter was a record $30.9 million, a 12% increase from a year ago. Consulting fees revenue for the Claims Group was a record $29.4 million, a 10% increase from the second quarter of last year.

The breakdown of the Claims Group’s growth in consulting fees was 5% in the U.S. and 11% internationally. The biggest driver of growth for the International Claims Group was an increase of $1.4 million, from our Asia Pacific region which was 43% growth in consulting fees for that region.

The Claims Group saw its gross profit rise by 12% to $16.7 million in the quarter and saw an improvement in its gross margin as a percent of consulting fees to 56.6%, up a 110 basis points from a year ago.

SG&A expenses for the Claims Group were up 7% to $13.3 million in the second quarter but as a percent of consulting fees, they were down 90 basis points to 45.2%. As a result, operating profit for the Claims Group for the second quarter was $3.4 million, a 34% rise from the second quarter of 2012. As a percent of consulting fees, this was a 190 basis point improvement with operating margin for the Claims Group growing to 11.5% in the second quarter of this year versus last year.

During the second quarter, we acquired in all stock transaction, Binnington Copeland & Associates, the consulting firm that provides contractual claims and training services in South Africa. BCA has 25 professionals and annual revenue of approximately $5 million. As we acquired BCA at the end of May, it was only one month of their results included in the Claims Group’s second quarter results and as a result BCA had no real material effect on the Claims Group’s performance in the second quarter.

In addition to the SG&A incurred by our two operating segments, we also incurred SG&A in our corporate group. For the second quarter, our corporate SG&A expenses were $6.9 million, up 7% from the year earlier quarter, but as a percentage of consulting fees, it was 5.4 % down 80 basis points from last year’s second quarter.

Regarding our backlog, our company’s total backlog at the end of the second quarter was $907 million, down from backlog of $921 million at the end of the first quarter. This backlog consisted of $865 million from our Project Management Group and $42 million from our Construction Claims Group.

12-month backlog at the end of the first quarter was $382 million, up slightly from $381 million at the end of the first quarter. This was broken down into $341 million from our Project Management Group and $41 million from Construction Claims.

Hill had net bookings during the second quarter of $140 million, a solid quarter for new sales but not quite enough to increase our backlog relative to the first quarter. Some of the major new contracts we’ve announced over the past three months, since our last earnings call have included a $100 million maximum amount contract to U.S. department of state to provide on call program management services for their facilities around the world.

A $36 million contract for our JV to access program manager at Phoenix Sky Harbor International Airport. A $70 million contract to provide construction management services for a reconstruction of a 15-Mile segment of the Pennsylvania Turnpike. A $10 million contract to provide facilities management services for the Saudi Embassy Complex in Cairo. A $10 million contract for our JV to provide operation and management consulting services on the Grand Egyptian Museum. A $4 million expansion of our work providing project management services for the Viva Bahriya and Porto Arabia skyscraper development in Qatar.

A $4 million contract provide on-call CM and consulting services statewide to Caltrans. A $4 million contract from New Jersey transit to provide on- call CM services. A $2 million contract to provide project management services on the Julian Adame residential development in Mexico. A contract we just announced this morning to provide on-call program management services in connection with the terminal redevelopment program at Salt Lake City International Airport. And quite a few other major wins soon to be announced.

Based on our performance in the second quarter, we are adjusting upwards the guidance that we gave earlier this year. We now expect the Hill’s consulting fee revenue for 2013 will be between $510 million and $525 million which equates to 22% to 26% growth from the $418 million in consulting fees we achieved in 2012. This is up slightly from guidance we gave earlier in the year, which was for consulting fee revenue between $500 million and $520 million.

A 24% growth in consulting fees already booked for the first half. We believe we are well on our way to hitting this higher target range.

With that, our CFO, John Fanelli and I are happy to take any questions you may have.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from the line of Lee Jagoda with CJS Securities. Please proceed with your question.

Lee Jagoda - CJS Securities

Hi. Good morning.

Dave Richter

Good morning, Lee.

Lee Jagoda - CJS Securities

So since no one has asked about Libya in our call two, I figured I would get your update. So if you could provide the progress of the payments and your updated expectations regarding a potential payment schedule?

Dave Richter

Yeah. There really is no news report on that. And as we’ve said before, I don’t think we’re going to have anything to say really until we’ve announced that we’ve been paid or started to get paid. I can tell you that they were some public statement literally about a week ago by Prime Minister of Libya where he was essentially parading his own government for not having paid foreign contractors and anticipating that if they don’t do that soon, he is going to waive a litigation that’s going to start against the government and recommending against that.

So we saw that is a very positive sign latest among many. And we literally have not seen anything said by the government publicly or privately other than that contractors are going to get paid including us. So we’re waiting just like everybody else is, for the government to start taking some action. And as soon as they go and we have something material to announce, we’ll announce it.

Lee Jagoda - CJS Securities

Okay. Great. And then just shifting gears a little bit, can you just breakout the acquisition related expense that was incurred in the SG&A line as well as any fees, any interest expense line related to the credit amendment?

John Fanelli

Yeah. I’ll take that Lee. The additional expenses relating to the fourth amendment aggregated over $500,000.

Lee Jagoda - CJS Securities

I’m sorry, did you say the acquisition or the amendment to the credit agreement?

John Fanelli

Both.

Lee Jagoda - CJS Securities

Both.

John Fanelli

And the expenses relating to that and the SG&A was around $160,000, it was very minimal for our quarter.

Lee Jagoda - CJS Securities

Okay. And just one more question, I will hop back in the queue. What’s your expectation for free cash flow in Q3 and Q4. And I guess, attached to that your CapEx assumptions, I mean, how should we think about interest expense for the remainder of this year?

John Fanelli

I’ll take them from the bottom. Interest expense we’re projecting to be around $22 million for the year, of which around 48% of that, less than 50% of that is actual cash paid interest, the rest of the accretion related to the term loan. And the CapEx for our full year -- for the quarter be around $1 million and for the full year we’re projecting around $6 million and free cash flow, I think we’re going to be positive like we were in the second quarter for the balance of the year. As result of our cash collection and our improvement in our days and AR.

Dave Richter

Yeah. We had significant negative cash flows, as your recall in the first quarter. As we were wrapping up not just the Oman airports project but some other major projects in the Middle East that impacted our ability to be cash flow positive. In the second quarter, we got that turnaround. We’re on normal payment schedule on that -- on all those projects and we expect cash flow continue to be positive.

Lee Jagoda - CJS Securities

Okay. Thanks very much.

Operator

(Operator Instructions) Our next question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your question.

Pete Enderlin - MAZ Partners

Good morning and congratulations on the solid operating results.

Dave Richter

Thank you. Pete.

Pete Enderlin - MAZ Partners

As you indicated the backlog was down in the quarter, total backlog and that shows the bookings for the quarter down roughly a third from a year ago which was a very, very strong quarter. So is there just inherent lumpiness or were there some significant contracts that were deferred? You mentioned that there are some that you expect to announce shortly. Is there some reason why you couldn't announce those prior to the end of the quarter?

Dave Richter

Yeah, Pete. First of all, certainly backlog is lumpy. It depends upon when we get the official notice of awards from our clients, which is when they go into backlog and certainly there can be a lag of weeks or months, one we actually announce those to the marketplace based upon getting client approval or a signed contract.

Our second quarter this year was actually better than the net bookings I announced. The number I gave was $114 million where we had two major but one cancellation and one downward revision totaling about -- I think, it was up $17 million. So, our actual sale in the quarter is about $131 million, which was certainly a little more than our Consulting Fees were for the quarter, which we view as positive, any book-to-bill of one or better is a good quarter. And those were just two contracts won that we lowered our scope and another we just -- we canceled because there was no work coming from that client.

Pete Enderlin - MAZ Partners

And raising your revenue guidance for the full year, does that based primarily on some of these contracts flowing in shortly that you already have more or less high visibility on or is it also a function of some of the long-term backlog shifting into the 12-month backlog?

David Richter

It’s a combination thing, it’s…

Pete Enderlin - MAZ Partners

Okay.

David Richter

All performance that we had in the first half which we see continuing. We don’t see any softness in either of our two groups. In fact we see the PM group both domestically and internationally continue to ramp up. We see the claims group continue to have high utilization and be very strong on billability. And what a claims group can have very unpredictable performance, they’ve had a great first half and we see no signs of that ending any time soon. And we have some wins that we’re going to be announcing very soon, that -- and some significant wins that are going to, I think, help propel us in the second half to even better performance.

Pete Enderlin - MAZ Partners

Okay. David, on the amended credit agreement, one of the provisions was to have the financial advisor by late June. Did you get one?

David Richter

Yes. We did. We hired a firm…

Pete Enderlin - MAZ Partners

Okay.

David Richter

… Houlihan Lokey.

Pete Enderlin - MAZ Partners

Okay.

David Richter

So, some reviews of our projections and forecast over the next couple of years, as well as at some point helping us work our way out of our current balance sheet situation.

Pete Enderlin - MAZ Partners

And then, Saudi Arabia announced three very large contracts with different groups, totaling $22.5 billion for the Riyadh metro line construction. Are you potentially going to have some role in that?

David Richter

You very well may see a press release about that in the next couple weeks about that.

Pete Enderlin - MAZ Partners

Okay. Thanks.

Operator

Thank you. It seems there are no further questions at this time. I'd like to turn the floor back over for any closing comment.

David Richter

Great. Thank you everybody. We are very pleased with our financial performance in the first half of 2013 and we expect this performance to continue into the second half of the year and into 2014 as well. John, I and our entire management team appreciate your continued interest in our company and our stock, and we thank you all for participating in our call this morning.

Operator

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

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Hill International (HIL): Q2 EPS of $0.02 misses by $0.04. Revenue of $148.5M (+24.3% Y/Y) beats by $19.15M. (PR)