Hill International's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Hill International, (HIL)
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Hill International, Inc. (NYSE:HIL) Q3 2013 Results Earnings Call November 5, 2013 11:00 AM ET

Executives

Devin Sullivan - Vice President, Equity Group

David Richter - President and CEO

John Fanelli - Senior Vice President and CFO

Analysts

Lee Jagoda - CJS Securities

Pete Enderlin - MAZ Partners

Operator

Greetings. And welcome to the Hill International Reports for the Third Quarter 2013 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, Devin Sullivan, Vice President of the Equity Group. Thank you, Mr. Sullivan. You may begin.

Devin Sullivan

Thank you, and 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 maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and it is our intent that any such statements be protected by the Safe Harbor created thereby.

Except for historical information, matters set forth herein including but not limited to any projections of revenues, earnings or other financial items, any statements concerning plans, 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 could 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 Securities and Exchange Commission. We do not intend and undertake no obligation to update any forward-looking statements.

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 today. Yesterday after the market closed, we announced our financial results for the third quarter of 2013. Those results tell that our consulting fee revenue and our total backlog has climbed to new record. Our EBITDA and operating profit have remained strong and our company continues to be profitable. So we had a great third quarter following up on a great first half.

Turning now to our results, total revenue for the third quarter of 2013 was $147.2 million, an increase of 23% from the third quarter of 2012. Consulting fee revenue for the third quarter was a record $130.2 million, a 26% increase from last year’s third quarter. This growth consists of 24% organic growth, plus 1% growth from our acquisition of Binnington Copeland & Associates in South Africa earlier this year.

Our geographical breakdown in the third quarter was as follows. The Middle East was our largest geographic market at 43% of our consulting fees. That is up from 33% for the third quarter of last year. The U.S. and Canada were 24% of our consulting fees in the third quarter down from 29% for the third quarter of last year. Latin America was 9% in the third quarter, down from 11% a year ago. Europe was 14% of our consulting fees, down from 20% in the third quarter of last year. And Africa and Asia-Pacific were both at 5% up from 4% each a year ago.

Every region except Europe grew in absolute dollar terms in the third quarter this year versus last year. Africa which grew by 79% was our fastest growing region due primarily to organic growth, but also as a result of the BCA acquisition.

That was followed by the Middle East which grew 66%, Asia-Pacific which increased by 56%, U.S. and Canada grew by 5%, Latin America was flat and Europe shrink by 12% this quarter versus last year’s third quarter.

Company-wide, our gross profit in the third quarter rose to $54.4 million, up 21% from the third quarter of last year. But our gross margin as a percentage of consulting fees was down by 180 basis points to 41.8% in the third quarter versus the same quarter last year.

This drop was primarily caused by shift in the mix of our business towards Project Management work which was 77% of our consulting fees this quarter versus 75% in last year’s third quarter and also by 190 basis point drop in gross margin for the PM group as we saw a lot more of our work coming from the Middle East which generally has slightly lower gross margin than the domestic PM business.

Our SG&A expenses in the third quarter were $46.2 million, up only 15% despite the 26% jump in consulting fees. This was a big decline on a percentage basis but our SG&A margin down to 35.5%, a 310 basis point drop year-over-year. This was at the low end of our forecasted range of 35% to 30% SG&A margin for the year. So, fairly good quarter regarding overhead costs control.

Given the leverage on our higher revenues, EBITDA for the third quarter increased by 34% year-over-year to $10.6 million. EBITDA margins as a percentage of consulting fees was 8.1% in the third quarter, up 50 basis points from last year’s third quarter.

Our quarterly EBITDA over the first three quarters of this year has averaged nearly $11 million which we think is a fantastic turnaround from 2012 when we achieved less than $16 million of EBITDA for the entire year.

Operating profit in the third quarter was $8.3 million, up 62% from last year’s third quarter. Our operating margin in the third quarter was 6.3%, 140 basis point improvement from last year.

Regarding our bottom line, we generated positive net earnings in the third quarter, a second quarter in the row our company saw profitability. We had net earnings of $2.6 million equivalent to $0.06 per diluted share, up 96% from a year ago.

Regarding cash flow, we had an outstanding quarter. Hill’s operating cash flow during the third quarter was a positive $15.0 million and total cash flow was a positive $4.8 million. This brought our operating cash flow for the year so far to a positive $8.9 million and total cash flow to a positive $9.9 million.

This is the best quarter for operating cash flow in our company’s history and as a result of the full ramp up on several major projects in the Middle East, as well as the decrease in our accounts receivables during the quarter.

Now looking at the third quarter performance of our two operating segments separately. Total revenue of Hill Project Management Group during the third quarter was $115.5 million, a 25% increase from the third quarter of last year. Consultancy revenue for the third quarter of the Projects Group was a record $99.6 million, a 29% increase and entirely as a result of organic growth.

The breakdown of the Projects Group growth and consulting fees were 7% for the U.S. and 39% for international group. The vast majority of increase in consulting fees for the international group came from the Middle East where our consulting fees grew 81% in the third quarter from a year ago.

The single biggest driver of this outstanding growth was our continuing work on the Oman Airports program which started at the beginning of this year and added $14 million in consulting fees for the third quarter. But we also grow our consulting fees in Qatar by $3.1 million versus the year ago and Saudi Arabia by $1.3 million and in Iraq by $1.3 million as well.

So our growth this year in the Middle East has been spread throughout the region. We also saw a big increase in consulting fees of $1.6 million in Afghanistan, which is part of our Asia-Pacific region.

Projects Group was saw 23% increase in gross profit, $37.3 million for the quarter, the gross margin on a percentage basis at 37.5% dropping by 190 basis points from last year.

Despite 29% growth in consulting fees, SG&A expenses of the Projects Group were up by just 16% year-over-year to $26.0 million. As a percentage of consulting fees, SG&A expenses were down significantly to $26.2%, a 280 basis points decrease from last year’s third quarter.

Operating profit for the Projects Group for the third quarter was $11.3 million, a 41% increase from last year. Operating margin as a percent of consulting fees was 11.3%, a 90 basis point improvement from a year ago, overall, another excellent quarter for our Project Management Group.

For Hill’s Construction Claims Group, total revenue this quarter was a record $31.7 million, a 17% increase, consulting fee revenue was a record $30.6 million, a 16% increase from last year’s third quarter.

The breakdown of the Claims Group’s growth and consultant fees was for the U.S. essentially flat and internationally up 21%. The biggest driver of growth for the international claims group was an increase of $1.6 million in the Asia Pacific region which was 52% growth in consulting fees for that region as well as an additional $1.4 million from Africa to entirely to the acquisition of BCA. Also $1.2 million from the Middle East which saw 16% growth in that region in the third quarter versus last year.

Claims Group saw its gross profit rise by 16% to $17.1 million and saw a slight improvement in its gross margins as a percentage of consultant fees to 55.9% up 20 basis points from last year.

SG&A expenses for the Claims Group were up 10%, $13.1 million in the third quarter but the percentage of consulting fees, they were down 220 basis points to 43.5%. As a result operating profit for the Claims Group for the third quarter was $3.8 million, a 44% increase from last year.

As a percentage of consulting fees, this was 240 basis point improvement from last year, with the operating margins for the Claims Group growing to 12.4% in the most recent quarter. With another strong quarter under their belt, the Claims Group appears headed for record year for both operating profit and consulting fees.

In addition to SG&A incurred by our two operating segments, we also incur SG&A expense in our corporate group. With the third quarter, our corporate SG&A expenses were $6.8 million, up 23% from a year ago, but as a percentage of our consulting fees, it was only 5.3% down slightly by 10 basis points from last year’s third quarter and getting closer to our goal of having our corporate expenses under 5%.

Regarding backlog, our company’s total backlog at the end of third quarter was a record $951 million, up 5% from $907 million of total backlog at the end of the second quarter of this year. This backlog consisted of $911 million in Project Management and 40 million for our Construction Claims Group.

12 months backlog at the end of third quarter was $382 million, unchanged at the end of the second quarter. This was broken down into $341 million from our Project Management Group and $41 million for Construction Claims.

Hill had had net bookings during the third quarter of $174 million, a great quarter for new sales and a book-to-bill ratio of 134% which again is a very strong percentage especially for our industry. Some of the major new contracts we announced over the last three months, since our last earnings call include by far the largest, a $265 million contract to our joint venture with the Louis Berger Group, that manage three of the six new lines of the Riyadh Metro system in Saudi Arabia, Hill was a 45% partner in that joint venture.

A $33 million contract to a joint venture of the project control services at Los Angeles International Airport in which Hill was a 70% partner in that joint venture. A $29 million extension of our work managing the Jabal Omar Development in Makkah, Saudi Arabia, a $23 million contract to act as construction manager for the Qatar National Museum in Doha, a $30 million extension of our work providing project management services for the new headquarters complex, the Abu Dhabi National Oil Company, and $8 million contract to provide construction inspection services for renovation of the Ohio Turnpike, contract to provide project management services for the new $150 million headquarters complex for QIMC in Doha, a contract we just announced this morning to provide PLA or Project Labor Agreement services for the new multi-billion dollar Tappan Zee Hudson River Crossing in New York state and quite a few other major wins soon to be announced.

Based on our performance in the third quarter and our current expectations for the fourth quarter, we are narrowing the range of guidance that we gave earlier this year. We now expect that Hill’s consulting fee revenue for 2013 will be between $515 million and $520 million, which equates to approximately 23% to 25% growth, and $418 million in consulting fees we saw in 2012. This compares the guidance we gave a quarter ago which was for consulting fee revenue of between $510 million and $525 million. The 24% growth in consulting fees only focused on first nine months, we are right on target with three more months to go.

And finally we are very happy to announce that our accounts receivable related to work that we did with the Libyan government for 2011, were reduced by approximately $3.1 million over the past several months. This reduction consisted of cash payment by ODAC which is our client, the Organization for Development of Administrative Centres in Libya of approximately 3 million Libyan Dinars equivalent to $2.4 million that was made directly to Hill and a cash payment of approximately 800,000 Libyan Dinars or $700,000 that was made by ODAC to the Libyan tax authorities on our behalf.

At the end of our third quarter, our remaining outstanding accounts receivables related to work in Libya decreased from approximately $60 million to approximately $57 million or reduction of about 5%.

We are obviously very happy about receiving finally some cash from our receivables in Libya. Unfortunately at present there is no agreement and understanding of time table for any further payments from ODAC, although we continue to have an active dialogue with our clients regarding collecting the reminder of our receivables and getting back to work on our existing contracts in Libya.

We do believe that the payments were made in good faith and there are positive indications that ODAC intends to satisfy their obligations to us in due course.

With that, John Fanelli, our CFO and I are happy to take any of your questions.

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.

David Richter

Good morning, Lee.

Lee Jagoda - CJS Securities

So with regard to Libya, why do you think ODAC pay the amount that they did this quarter and were you able to repatriate any other cash and could you just remind us under the rules of your bank agreements and the agreement with Tenenbaum, what are the rules regarding debt paid down using those proceeds?

John Fanelli

First of all, we are very happy that ODAC has begun the payment process. Obviously there is still lot of political impediments to ODAC having for financial government but they recognized that we have been owing a lot of money for a long period of time and we think this is a good face payments by those within ODAC that support us getting back to work and getting pay in full. And this is what we were able to accomplish in the short-term. I don’t think this is -- we don’t think this is anyway near to the end of the process. We think we are just getting started and we hope we will have more payments to report in the near future.

The money was paid entirely in Libyan dinars, which are not convertible into any foreign currencies and remain in our Libyan bank account. And per the agreement that we have with our banks, because they are in dinars and haven’t been repatriated to the U.S. in the form of dollars and we don’t have any pay down obligations with respect to our debt.

Lee Jagoda - CJS Securities

And just pardon my ignorance, but if they are not convertible with any other currencies, how can we convert them to $2.4 million U.S. dollars?

David Richter

We didn’t convert them into $2.4 million. We are just giving you the exchange rate, the equivalent. The funds will stay in our Libyan bank account and as we move forward with work in Libya, we will have payment obligations and expense obligations in Libya that those funds will be used for.

Typically, under our contracts, there was about an 80-20 breakdown of payments. 80% was paid in U.S. dollars or some other foreign currencies, typically in some cases with British pounds and about 20% were paid in Libyan dinars to cover our expenses locally.

Lee Jagoda - CJS Securities

Okay. And then, how should we think about free cash flow seasonally in Q4?

David Richter

I don’t think we can really give any projections going forward on cash flow. We obviously had an excellent quarter in the third quarter. We were ramping up on a lot of major projects in the Middle East during the first half of the year and we are now, yeah, those projects have fully ramped up and we are into a normal collection cycle. And I think you are going to start to see a lot more of our EBITDA drop down into cash on our bank account, which we see as a very positive sign.

Lee Jagoda - CJS Securities

Okay. Great. One more question and I will hop in queue. Were there any large projects that entered in Q3 or expected to end in Q4?

David Richter

No. They were not.

Lee Jagoda - CJS Securities

Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your question.

Pete Enderlin - MAZ Partners

Thank you. Good morning.

David Richter

Good morning.

Pete Enderlin - MAZ Partners

On the Libyan payment again, you had accrued taxes on that business when you did previously, is that correct?

David Richter

That’s correct.

Pete Enderlin - MAZ Partners

Okay.

David Richter

Yeah, we accrued in road to Libya.

Pete Enderlin - MAZ Partners

So this 800,000 dinar payment that ODEC made directly to the government is just in recognition of that, that’s payable to them basically?

David Richter

It was in full recognition of the tax year 2009, so you can see it up in our tax filing for 2008 and 2009.

Pete Enderlin - MAZ Partners

Okay. So what’s the typical rate that you pay on business in Libya?

David Richter

It’s typically 19% of the net profit.

Pete Enderlin - MAZ Partners

And it looks like your overall tax rate is sort of getting normalize now finally. What can you tell us about the outlook for the tax rate in the fourth quarter?

David Richter

Well, in the third quarter as you can see that we had a net tax credit and that was due primarily to reversals of accruals that we had on the books for uncertain tax positions that’s based on settlements of prior year tax positions and which we reverse those and related to a foreign jurisdiction.

Going forward, as what we’ve mentioned in previous quarters, we have U.S. tax losses that at this point we cannot take the tax benefit. So right now we are forecasting that our effected tax rate for the year pending some tax planning affirmatives and other opportunities to be around 60%.

Pete Enderlin - MAZ Partners

Okay. And then the incremental gross margins in the overall project management business for the quarter were about 35%. What would you say is the long-term opportunity for that number? I mean, is that going to be about where it stays or can you improve that and of course it depends on mix and there is lot of pluses and minuses on mix, but what’s the big picture on that?

David Richter

So, I think, you are going to continue to see the project management group expand faster than the construction claims group.

Pete Enderlin - MAZ Partners

Right, I’m just speaking within the PM itself though?

John Fanelli

I think you’re going to continue to see despite the fact that U.S. is growing. You are going to see more of our business overseas and we have slightly lower margins outside the U.S. than we do domestically. So you are going to see that tick down incrementally although certainly not by major leaps and bounds.

Pete Enderlin - MAZ Partners

Okay.

John Fanelli

Despite that, our operating profit typically is higher on the international work.

Pete Enderlin - MAZ Partners

Right.

David Richter

So that might have been that long.

Pete Enderlin - MAZ Partners

Yes, that your win rate was great as you mentioned $174 million in the quarter that’s like a $700 million annualized rate. To what do you attribute that tremendous success, again taking us over the high level view and how sustainable is that, kind of rate of new business?

David Richter

Certainly, about half of that new work came from the Riyadh Metro Project which was, let’s say, a tremendous win for us, a game changer for what we are doing in Saudi Arabia, one of the biggest highest profile projects in the world. And we are very fortunate in managing that project for our clients.

And we have seen more of those types of projects as you can see in the last 18 to 24 months. Projects we’re getting consulting fees $50 million to $100 million or sometimes even more. And those projects because of the staffing required -- because there is a low overhead involved tend to be very, very profitable for us. And we see Riyadh Metro continue to drive our profit really upward in 2014.

Pete Enderlin - MAZ Partners

But you say that it’s likely that a lot of these big projects will continue to be joint venture kind of deals for you?

David Richter

Some of the biggest happened. Certainly, when you’re talking about these big projects, you are saying that the biggest and best firm in the world compete for them. And when two firms came up and excellent prices drawing that. Typically with joint venturing in an effort to win the work, not necessarily perform the work. We can perform any project we get hired on but to taking on a competitor and so you’re improving your chances of winning the project.

Certainly, we would rather had one third of that contract by winning it and get 100% of nothing by losing it. But I think what you’re saying is a lot of big projects moving forward in the world. Last year, year and half, far more so than you saw in four years before that during the recession.

We see the economy getting better for us, the markets getting better. And I think what you’ve seen in the last couple of years is that Hill has broken through the ceiling and it’s competing with the biggest firms in the world on these mega projects far more so than we did in the past and that’s contributing to our success at the top-line and the bottom-line.

Pete Enderlin - MAZ Partners

Just one more and that is, does that mean that you think you’re gaining share or is it more that the whole market is sort of resurgent at this point?

David Richter

I think both the term. I think the market certainly is getting better. We saw about five years of 6% growth in consulting fees. On average, the shares is, as I try to repeat again and again, we’re looking at about 24% growth in consulting fees. I think that’s a combination of more workout to be won and our greater success in winning it.

Pete Enderlin - MAZ Partners

Okay. Great. Thanks a lot.

David Richter

Thank you, Pete.

John Fanelli

Thank you.

Operator

(Operator Instructions) There appear to be no further questions at this time, I'd like to turn the floor back over to management for closing comments.

David Richter

Thank you, very much. I guess, we’ve done excellent job explaining. It was an outstanding quarter for us. We are very pleased with how we performed in the third quarter and throughout all of the three quarters so far in 2013. We look forward improving on its performance as we finish out the year and head into 2014. Thank you all for your continued interest in our company and our stock and to participating in our call this morning. Take care.

Operator

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

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