Hill International's Management Presents at 2014 Credit Suisse Engineering & Construction Conference (Transcript)

| About: Hill International, (HIL)
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Hill International, Inc. (NYSE:HIL) 2014 Credit Suisse Engineering & Construction Conference Call June 5, 2014 1:40 PM ET


David L. Richter – President and Chief Operating Officer

Unidentified Analyst

All right. next up, we have Hill International. Hill is a leading provider of program, project and construction management, along with construction claims and consulting services. Hill primarily services the buildings, transportation, environmental, energy, and industrial end markets. Presenting for Hill today, we have David Richter, President and Chief Operating Officer and Devin Sullivan, the Senior Vice President of Investor Relations.

With that, take it away.

David L. Richter

Thank you, Andrew. Let me get, right started into the presentation. We’re a fairly unique company, we’re here in engineering and construction conference, but we really don’t do any engineering or construction. But we’re in the construction sector; we provide project management and construction claim services, on projects all over the world. We’ve been in business for 38 years, founded in 1976 by my father, who is Chairman and CEO. We’ve been a public company for the last eight years and trading under the New York Stock Exchange for the last six.

We had record consulting fees in 2013 of $512 million. and we have projected; we have forecast consulting fees this year of $575 million to $600 million, and our guidance we gave to the market a few months ago, which equates to about 12% to 17% growth for this year, after 22% growth last year. We are headquartered nearby in Southern New Jersey, in Marlton, and we have a record number of people, we have 4,200 professionals now in 100 offices throughout the world, as you can see from this map.

We’re a diverse company by design. one of the ways that we deal with the inherent cyclicality and risk of the construction sector is to be across a lot of different geographies, market sectors, client types. Our largest market in the world is now the Middle East at about 46% of our consulting fees so far this year. the second largest is the U.S. at about 20%. We have major operations in Europe, Latin America and small but growing operations in Africa, Asia and Australia.

Our clients, about half are public sector and half are private sector. Our client base is some of the biggest companies in the world, Fortune 500 companies, hotel developers, real estate developers, industrial companies, pharmaceuticals companies, et cetera. We do work in every level of government, the U.S. federal government, just about every major federal agency, the bills and funds construction is a client of ours. we do a lot of work at the state and local level across the United States, working for airport authorities, state DOTs, school construction authorities et cetera. And we do a lot of work for foreign governments when they are building for their own account.

By project type, about half of our business is in the buildings market, which we define as essentially ending with a roof on it. Our second largest market and our fastest growing of late has been transportation. at 30% of business, that’s up from about 10% five years ago, that’s been very fast-growing for us. About 13% of our business today is in energy, is both power, and oil and gas and the balance.

As far as rankings, we are the largest independent project management firm in the world. we define independent as not part of a bigger design, construction and real estate company. we are the ninth largest, overall, headquartered in the U.S. and the tenth largest, that’s focused on the program management market, which is just simply managing multiple projects for the same client at the same time.

With respective to growth, we were named recently by The Zweig Letter Hot Firm List as the 77th fastest growing firm in the industry. We made that list 11 times in the past 12 years. So growth has been a part of our corporate culture.

Getting back to our operations in project management. we essentially act as the owner’s agent in managing construction projects. We do this as a professional service for a fee. we don’t take any project risk, compared to our contractors do, which is guaranteeing the price, guaranteeing the completion date, guaranteeing the quality of the project; we don’t do any of that.

So it’s a fairly low risk business model, compared to a lot of the other companies here today do. That business for us as you can see from these charts has been growing, and our profitability is up significantly as of last year. The other 25% of our business is construction claims consulting, it was our regional business when my dad founded the company.

We are the largest claims practice in the world by far, more than double the size of our number two competitor. And in this business, we provide expert witness, advisory services, litigation consulting on big disputes on major complex construction projects all over the world.

Our client base in project management is almost always the owner. In claims, it can be the owner, it can be the contractor or subcontractors, the architectural engineers, their lawyers, their insurance companies, whoever has money, it’s taken the outcome of the dispute that business also a record consulting fees and record operating profit last year.

To give you a sense of some of the projects we’re involved in, typically very major complex projects very often the billions of dollars. Now these are the six largest wins that we’ve had in the last two years, as measured by our contract value. we are part of a joint venture that’s managing the new Riyadh Metro system in Saudi Arabia.

We are managing a new Greenfield airport in the capital city of Oman in the Middle East and Muscat, are managing one or four new lines of the Doha Metro system, which is being built in that country. We’re helping the Basra region of Iraq. we build their facilities and infrastructure. we are in partnership with AECOM, also here today, managing the new Midfield Terminal at Abu Dhabi International Airport, about a $6 billion project. and we’re managing right now, the construction of 12 hospitals throughout Saudi Arabia.

With that consumable amount of growth in the last couple of years, following the end of the recession, you can see here our quarterly consulting fees. We’ve had now I think seven quarters in a row of record consulting fees. And if you look at our growth over the past 10 years or so, in the five years, before the recession began, we were a very fast-growing company, we were able to grow over 50% a year on average, which was about an equal amount of acquisition growth and organic growth.

Even after recession began in 2008, when a lot of companies in our industry were shrinking. we were still growing. We averaged 6% growth over the next four years. And then in 2013, we got back to a double-digit growth, and they sell before 22% growth in consulting fees that year and again, projecting double-digit growth in 2014.

We’ve had a significant turnaround in our earnings performance over the last couple of years. This chart shows EBITDA, operating profit and net earnings, in response to two of our largest and most profitable contracts ending at essentially the beginning of 2011, which had a major impact on our profitability.

We responded in two ways, one was by taking an actual or corporate overhead. I think that was a significant cost about $20 million to $25 million per year of SG&A expense, and also investing in growth. A combination of our 22% growth last year and those overhead cuts took our EBITDA in 2012 from $16 million to $41 million in 2013, some significant improvement that was record EBITDA for our company and record operating profit, as well going from $5 million to nearly $33 million just in one year.

Our bottom line continues to be hampered a little bit, because of the significant amount of debt that we took on during the recession for a variety of reasons. Last year, our interest expense was about $23 million. we have some very expensive debt about $135 million to $140 million of bank debt right now on our balance sheet.

We announced on our last earnings call, and it remains two today. we are in the middle of negotiating a debt restructuring for our company. and we expect we’ll see our annual interest expense declined by about half to two thirds and that’s a transaction that we expect will close within the next few months, if all goes according to plan.

Now this chart just gives you a quick sort of financial snapshot of our operating performance over the last five quarters. You can see in the first quarter, which we announced a couple weeks ago, a record total revenue of $150 million; consulting fees, a record of $137 million, our EBITDA has been fairly consistent in the $8 million to $10 million – $8 million to $12 million range over the last several quarters. and we are profitable in the first quarter. we expect the debt restructuring that we’re going through is going to add about $0.30 to $0.35 a share to our bottom line annually.

And so it has been relatively marginal profitability with that restructuring in place, and with our continued growth should be much, much better. Our growth has been driven by our backlog. our increase in backlog over the last seven years has been dramatic. At the beginning of 2007, at the height of the construction boom, we had only about $0.25 billion in backlog.

Today, we have nearly $1 billion, so four full growth during a fairly difficult time to achieve that. we think our backlog positions us now well for continued growth. the 12-month backlog that we also report, which is simply that component of our backlog that we expect to convert to net revenue over the next four quarters is a fairly strong indicator of our performance over the next year.

We started the second quarter of this year with a record 12-month backlog of $400 million, and that number historically converts to net revenue at a fairly consistent rate and about 1.3x to 1.4x that number. so we have a fairly strong level of confidence with the consultancy forecast that we gave earlier in the year is going to hold.

Despite over the last couple years slowing down our acquisitions, a quite a bit, because of our balance sheet issues. we have done two small acquisitions in the past year. we bought a small claims firm in South Africa in May of last year, and in December, we closed on a relatively small project management acquisition in Boston.

Two key markets for us that we wanted to get into. these were all stock deals, as we wanted to minimize any cash going out of the company. but two acquisitions that we consider already to be successes for us. Engineering News-Record, if you follow our industry, you know them they are the business and bible of the construction industry. every June, they report on the top 100 U.S. based construction management firms. we’ve been number nine out, listed for the last couple of years.

They aggregate the revenue from those 100 firms, and it’s a pretty good indicator, in fact, it’s the best one that we can find. the global construction management industry, those numbers continued to grow even during the recession, project management, construction management or services that aren’t growing demand in the U.S. throughout the world, and we expect that these will continue to grow as the market gets even stronger, and as we head into the next construction firm.

You see a total of about $19 billion in 2012. That’s just those 100 firms. Our best gets with the global construction management market is probably at least doubled that number. We’re following the order of $40 million, maybe to $50 billion a year. We are less than a 1% player in the global construction management market. So we think we have a lot of room to grow in an improving economy.

Just taking a look at the investment considerations for anyone looking to buy our stock. as they just talked about, we think project management is a growing part of a growing industry. We have as a company, a record of being able to grow very quickly when times are well, or times are good, as we saw in the 2003 to 2008 time period.

it’s very easy for us to be able to ramp up our staff in regions they’re growing, when they’re growing. And we think we can grow considerably faster than the mid-teen growth that we’re projecting for this year, because of our backlog and our – specifically our 12-month backlog, we have a tremendous amount of visibility into our performance going forward, based upon the long-term nature of our contracts in project management.

There are significant high barriers to entry in the project management market. certainly, there are firms that are started from time-to-time. We’re generally not competing against those firms for work, we’re competing against a core, probably about 20 to 30 major global firms on a regular basis, and that pool of competitors has been shrinking, with acquisitions across the construction sector that we expect will continue led by the biggest firms, including us.

So, we actually see a shrinking universe of competition in a growing market, which is exactly the right place to be. We’ve shown that we can acquire firms, and integrate them successfully across this industry on a global basis. Our next point, our management team, which is primarily including my family, owns more than one-third of the business.

We have a very strong lessons taken, seeing our stock appreciate and having an allied interest with our outside shareholders. It was announced in January of this year that I will be moving up to the CEO role beginning December 31. My dad will transition to Chairman of the Board.

We had one CEO in the last 38 years, I’ll be the second one. and I don’t know if I have 38 years indeed left, but only give it my best shot. We are not just among the two of us, but among our management team. We’ve been in place for long time, we understand this business, we understand our people, our senior leadership team, I’ve also been with our company for long times most measured in decade and we have a lot of confidence in their ability to execute on our plan.

Finally, with some major work that we had in Libya, coming to an abrupt halt in February of 2011. we would denote a significant amount of money by the Libyan government that have been held up for several years. That was the one of the question marks, regarding our stock that has begun to lift. over the last nine months, we’ve collected about $10 million, of the $16 million that were owed. And I think that combined with our improving operating performance last year and improving economy overall have put us in a position.

As I said before, we restructure our debt of much more attractive terms to us. And a large part is what has driven our stock back to reasonable levels. Our stock is up over 100% in the past 12 months. And this is a big part of that. We’re expecting additional payments from Libya in the near future. We’re expecting to get most if not all of our money within the next year.

And I think that going forward with that result, with our debt issue result, we are a very strong company in an improving market, and an interactive investment for anybody that looking to invest in this sector.

So that being said, that’s it. I’m happy to take any questions you might have about our company, or anything else you might want to inquire about.

Question-and-Answer Session

Unidentified Analyst

On your last earnings call, it sounded like there were a number of projects. they were on press release, but it sounds like there were some pretty decent wins. can you characterize those, or talk about them a little more. I don’t know if you can give a ballpark size, or just doing with their markets you’re playing into?

David L. Richter

Yes, of course, Andrew. It’s hard to talk about projects until we’ve announced them. press releases are always sort of a trailing indicator. So to speak, as we always speak, there’s always some kind of lag between winning a project and being able to announce it.

And I think we’re seeing probably more so than the past clients that want us to delay, and announcing projects for their own reasons, where the contracting process is taking longer, but it’s just typically not a matter of days, it’s now becoming a matter of months. We have some major wins in 2014. I’d say the biggest wins have been in the U.S., in the Middle East and in Asia Pacific region.

So far this year, we probably have a good dozen major press releases that where we need to get on. And that’s always going to be the case, because as I said, there’s always a lag. But what we want today gives us even more confidence that the forecast we gave consulting fees for the year is going to be right on target. Any other questions?

Unidentified Analyst

The situation in Libya, could you just walk through that just to try a little bit of history on that and of the remaining $50 million, how much do you think you could realistically get?

David L. Richter

Yes. Libya is a long story, but I’ll answer the second part first. We have always expected that we’re going to equate to 100% of our money from Libya. We’re more confident today than we’ve been in the last three years. so we’ve been getting significant cash out already. It gives us that confidence, but we’ve been in regular contact with our client, and other parts of Libyan government throughout this period of time.

So we are highly confident. we’ve never had a reserve or write-down any of the receivables, so that carried a full value on our books. In a snapshot what happens, we’re doing a tremendous amount of work in Libya. Once they opened up relations to U.S. companies, and let us to do work in that country. We were doing at the peak about $6 million a month in revenue and normal payment terms were 120 days.

So we were $20 million to $25 million in terms of the Libyan government at any point in time. They went through an anti-corruption review process, where they looked at all foreign contractors and essentially said, how did you get your contract, what are you doing, how are you building, are you delivering the services and products you’re supposed to be doing, and we had to go through that process like everybody else, did in beginning in early 2010.

We were told it was a three-month process, during which we wouldn’t be paid until we got through it. The three months became eight months, and by that point in time, we owned $65 million. We were happy to get through the process, we got through with a 100% clean that would help.

We began collecting funds again, about $15 million worth in December of 2010, January of 2011 and in February of 2011 the revolution began. So it was almost a perfect storm of a whole bunch of bad things occurring and exactly the wrong point history for us. We are very rarely and by very rarely I mean once on our receivables on that kind of an order, typically receivables $2 million, $3 million, $4 million I think get us nervous.

We have a very active role in managing our receivables and our cash collection. and we view this as a unique one-off event. we’ve been patient with the Libyan government. we haven’t done anything as far as litigation or anything else. I think that patience has been, and is going to be rewarded, and we’ll see the balance of our money over the course of the next year or so.

And probably as importantly, if not more so, Libya is a country where we think we have a great future. it’s an oil-rich country with a terrible infrastructure, not just from the civil war, but from 40 years of Gaddafi rule. and it’s a country, it’s going to see a lot of, not only internal, but also outside foreign investment.

And we hope to be a major project management competitor in that country. we’ve negotiated new contracts with the government to go back to work on our existing projects. we see new opportunities there as well, and we’re very optimistic about the future of Libya. Any more questions?

Unidentified Analyst

Just thinking about where your revenues come from. it looks like internationally, in 2013, they’re about 35%, they’ve grown from about the mid-20s, 2012 looks like. But can you just talk a little bit about what your strategy is there, do you want to diversify more so, it sounds like some of the recent project wins are in the U.S. do you want more revenues coming from internationally versus U.S., or also do you see any risk, more risk similar to the Libya situation by having higher percentage of revenues coming from foreign governments?

David L. Richter

Certainly, concentration of risk works against us, and one of our strategies has been for long time to diversify that risk. We’ve seen the greatest organic growth in the Middle East from most of the last 15 years, within our company. and that’s why it has made us nervous, probably more nervous 10 years ago than we are today, but a big part of our acquisition strategy has been diversification, geographic diversification to minimize that kind of potential risk.

We don’t see any particular area that we’re in right now, being politically unstable, or risky, any more so than unusual. but that’s the nature of those kinds of events. they don’t pre-announce themselves. Certainly, the U.S. with 20% of our business is the smallest percent that’s ever been. 20 years ago when I joined the company, it was about 95%. So it’s coming down significantly as we’ve grown elsewhere in the world.

Our goal has been to be across a lot of different geographies, and we made acquisitions just since going public years ago. In Europe, in Latin America, in Africa, in Australia and many in the U.S. as well. and it is definitely one of our goals to have the U.S. be a major component of our business. it’s an important market for us. there’s a lot of opportunity here, and we see a lot of potential growth and probably, the most security here of any country in the world.

So a big part of our acquisition program is going to be acquisitions in the U.S. It also happens to be where there are a lot of opportunities, because there’s a lot of small regional firms that do what we do that we think we can acquire and acquire successfully. And at the same time, we’re also looking at other geographic regions, because certainly the Middle East, if you combine the Middle East with North Africa, it’s more than half of our business.

And this construction happening everywhere in the globe, every project of size need somebody like us managing them, or dealing with disputes. and we wanted to be everywhere we can be. so I think we’ll see a lot more effort in Africa, and in Asia, and in Latin America going forward, possibly even Europe, as we start to see that market bottom out, as we’re starting to see that it’s doing and turning the corner, as well as North America, as always be a big market for us.

Any more questions? If not, thank you for coming today. I appreciate your time, and interest in our company and enjoy the conference. Thank you.

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