Hill Int'l Q4 Earnings Conference Call: Full Transcript

Operator: Greetings and welcome to the Hill International Reports 2015 Fourth Quarter and Full Year Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. If anyone should require operator assistance during the conference please press star, zero on your telephone keypad. As a reminder this conference is being recorded and I will turn the conference over to your host Mr. Caley Owl of The Equity Group. Please go ahead. Corporate Participant: Thank you Matt. Good morning everyone, thank you for joining us today. Our speakers for today's call will be David Richter, President and Chief Executive Officer of Hill International and John Fanelli, the Company's Senior Vice President and Chief Financial Officer. Before we begin I'd like to remind everyone that certain statements made during this call maybe consider 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 traded there by. Except for a historical information the matter set forth herein including but not limited to any projections of revenues, earnings or other financial items any statements concerning our plans strategies and objectives for future operations and statements regarding future economic conditions or performance are forward-looking statements. These forward-looking statements are based on our current expectations estimates and assumptions and are subject to certain risks and uncertainties. Although we believe that the expectations estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumes in any of our forward-looking statements. Important factors that could cause actual results performance and achievements or industry results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the risks factor section and elsewhere in the reports we have filed with the Securities and Exchange Commission. We do not intent and undertake no obligation to update any forward-looking statement. That said I now like turn the call over to David Richter. David, please go ahead. David L. Richter: President and Chief Executive Officer: Thank you Caley and Good morning to everyone joining us for today's earnings conference call. On Thursday last week we announced finally our financial results for the fourth quarter and full year of 2015. Before I get to the quarterly numbers first an explanation for the delay in releasing our earnings and filing our 10-K. The delay was caused by ongoing discussions that we had with our independent accountants regarding their audit of our financial statement as it related to certain accountants receivable owed to us by a major client in the Middle East. There has been a significant delay in payment from this client as we were negotiating an extension of our original contract, among other issues. Over the past three weeks we were able to collect overdue payments in excess of $15 million and also to provide documentation acceptable to our auditors, evidencing our planned extension of that contract. Thus we've now completed our audit and we'll shortly file our 10-K which we expect to file tomorrow. Now jumping to the fourth quarter results. Total revenue in the fourth quarter was a record $189.8 million, an 11% increase from the fourth quarter of 2014. Consulting fee revenue or CFR for the fourth quarter was a record $161.5 million, an 8% increase from the prior year's fourth quarter. This growth consisted of 6% organic growth plus 1% growth as a result of our acquisitions of Cadogans and IMS over the prior year. With respect to the geographic breakdown of our growth, our operations in Africa were our fastest growing business during the fourth quarter with consulting fees up 14% year-over-year followed by the Middle-East which was up 13%, the US was up 12%, our European operations were down 1%, Latin America was down 4% and our Asia Pacific operation was down 16%. Company-wide our gross profit in the fourth quarter rose to $67.3 million, up 4% from the fourth quarter of 2014. Our gross margin as a percentage of consulting fees was down 150 basis points to 41.7% versus the fourth quarter of the prior year. Our SG&A expenses in the fourth quarter were $64.4 million, up 4% from the year earlier quarter. Our SG&A margin as a percent of CFR was down 130 basis points year-over-year to 39.9% in the fourth quarter. Extraordinary one-time SG&A expenses which adversely impacted our results in the fourth quarter totaled $5 million and included the following items: $2.2 million of increased bad debt expense, primarily related to certain accounts receivable in the Middle-East; $1 million related to a write-down and the value of a note receivable; $0.8 million of legal and other fees related to the shareholders proxy contest held last year; $0.6 million of severances costs related to our cost optimization program; and $0.4 million of legal and other fees related to the restatement of our consolidated financial statements last year related to our Libyan receivable. As a result of these charges, our EBITDA for the fourth quarter was only $5.5 million, up just 2% from the fourth quarter of 2014. EBITDA margin as a percentage of consulting fees was 3.4% in the fourth quarter, down by 20 basis points from the year earlier quarter. Operating profit for the fourth quarter was $2.9 million, a 5% decline from the prior year and our operating margin in the fourth quarter was 1.8%, a 20 basis point decline from the fourth quarter of 2014. Our interest expense for the quarter was $3.4 million, down 7% from a year ago, and as a result of all the above, Hill had a net loss for the quarter of $1.1 million or $0.02 per diluted share, which compares to a net loss of $4 million or $0.08 per diluted share in the last quarter of 2014. Absent the impact of the above listed one-time expenses, adjusted EBITDA in the fourth quarter would have been $10.5 million, adjusted operating profit would have been $7.9 million and adjusted net earnings would been $3.6 million or $0.07 per diluted share. Now looking at the fourth quarter performance of our two operating segments separately, total revenue at Hills Project Management Group during the fourth quarter was a record $150 million, a 15% increase. Consulting fee revenue for the quarter at the Project Group was a record $122.8 million, a 10% increase from the prior year's fourth quarter. This growth breaks down as 9% organic and 1% from the acquisition of IMS. Projects Group saw a 7% increase in gross profit to $46.5 million for the quarter. The gross margin on a percentage basis at 37.9% was down 110 basis points from the fourth quarter of 2014. SG&A expenses at the PM Group were up just 4% during the quarter to $33.6 million, or as the percentage of consulting fees, SG&A margin was down by 160 basis points from the prior year to 27.4%. Operating profit for the Projects Group was $12.9 million, up 16% versus the fourth quarter of the prior year and operating margin as a percentage of consulting fees was 10.5%, a 50 basis point improvement from the prior year. For Hills Construction Claims Group, total revenue during the fourth quarter was $39.8 million, a slight increase from the fourth quarter of the prior year. Consulting fee revenue for the Claims Group was $38.7 million, a 1% increase from the prior year. This growth in consulting fees was primarily related to the acquisition of Cadogans made early in the fourth quarter of 2014. The Claims Group saw its gross profit drop by 2% to $20.8 million and gross margin as a percentage of consulting fees declined to 53.8%, down 150 basis points from the prior year. SG&A expenses for the Claims Group were also down 2% to $20.8 million during the fourth quarter and as a percentage of consulting fees they were down by 160 basis points to 53.6%. Operating profit for the Claims Group during the fourth quarter was $0.1 million, unchanged from the fourth quarter of 2014 and operating margin as a percent of consulting fees was also unchanged at the 0.1%. In addition to the SG&A incurred by our two operating segments, we also incur SG&A in our Corporate Group. For the fourth quarter our corporate SG&A expenses were $10 million, up 24% from the prior year quarter, primarily as a result of the extraordinary expenses referred to earlier. As a percentage of CFR, they were 6.2%, up 80 basis points from 2014's last quarter. With respect to backlog, our total backlog at the end of 2015 was $860 million, down 2% during the fourth quarter. This backlog consisted of $807 million from our Project Management Group and $53 million from our Construction Claims Group. Twelve-month backlog at the end of last year was $388 million, also down 2% during the quarter. This breaks down into $340 million from our Projects Group and $48 million from our Claims Group. Hills sold new work during the fourth quarter of $181 million, which equates to a book-to-bill ratio of 112%, slightly better than our minimum quarterly goal of 110%. We also had several major terminations and a major stock production reduction, which collectively had a $38 million adverse impact on backlog during the quarter. Based on current marketing conditions and backlog I just mentioned we estimate that our consulting fees in 2016 will be between $630 million and $660 million for the year. This guidance reflects between 0% and 5% growth in consulting fees for 2016. We also estimate that our EBITDA margin in 2016 as a percentage of consulting fees will be between 8% and 10%, up from 6.5% in 2015. Thank you all very much. Our CFO, John Fanelli and I are now more than happy to take any and all of your questions. Question & Answer Operator: Thank you [Operator Instructions] Our first question comes from Chase Jacobson from William Blair. Please go ahead. Chase Jacobson: William Blair & Company, LL Hi, David. Good morning. David L. Richter: Good morning, Chase. John Fanelli: Good morning, Chase. Chase Jacobson: So, how are you? So the bad debt expense in the quarter, is that really in anyway, I know it should be collected on the receivable that was mentioned in the release a couple of weeks ago. But is there any relation between those two, and I think you said there is some more or less to be collected there. Can you quantify that at all? David L. Richter: Yes, happy to Chase. There is a small amount of receivables related to that client, in the bad debt expense. But the reason we put off the earnings announcement for three weeks was to satisfy auditors. They were initially looking to take a 100% reserve against receivables from that client which was in the tens of millions of dollars and we knew that money was coming, we had negotiations with the client over finalizing an extension to that contract and it was worth for us to delay the numbers, which we hated doing, but we had to satisfy our client. As I said over the past three weeks since the numbers were due to be out, we collected in excess $15 million from that client. The year-end receivables from that client was $35 million. So we're still owed money, but as I said we think everything on track and we except to collect all or nearly all of that money. Chase Jacobson: Okay and is that receivable from a -- is that a receivable related to one project for that client and what other large receivables should we be aware of in your -- that are outstanding? David L. Richter: Yes, the $35 million I just mentioned was from one client. It was the client we delayed the earnings release for. We hadn't been paid and those receivables go back about 7 or 8 months which is why our auditors were concerned about the collection and certainly given the post-restatement, I think that was reasonable. And we knew that everything was on track, the client was working extensions of our contract through their bureaucracies, it's a public client in the Middle-East and we had our expectation that he money was coming in quickly and as it turned out, that was accurate and we pushed hard to make sure that money came in as quickly as possible. We have big receivables all over the world, so nothing from one client, it's close to $35 million. But we've obviously build work over the course of the first quarter and we collected the $15 million that we just got in. So it's certainly down from the 35 as of year-end. Chase Jacobson: Okay, and then I guess looking at the revenue guidance for next year compared to where the backlog, 12 months backlog end of the year. I mean the guidance assumes -- it seems there is considerable increase in work that comes in and gets booked throughout the year. So can you just help bridge that based on your -- and I guess that really includes giving color on the market environment in the Middle-East because from our seat it seems like that market is still going to be under pressure and your guidance assumes that a pretty significant increase in that book and burn throughout the year? David L. Richter: Well a couple of different things, one is yes, we expect to continue to see headwinds in the Middle-East market related to the price of oil. We expect sales to be up this year in 2016 versus 2015. In 2015 they were significantly below what we are burning off although we had a very strong year. Our sales, our revenue in the Middle-East last year was up nearly 12%, our consulting fee revenues. But we are expecting stronger sales this year. Rumors of the demise of the Middle-East market, construction market, are vastly overrated and continues to be a lot of work coming out of that market, we've got some very large contracts that we are expecting to hear on positively over the next couple of months. And while we are not expecting growth out of the Middle-East this year, we are only expecting a very slight decline. We are expecting that to be more than offset by growth elsewhere, the US and Africa we are expecting to be big growth markets like they were last year. And we are expecting that to drive us to positive growth in 2016. Chase Jacobson: Okay. I will get back in queue. Thank you. David L. Richter: Thanks, Chase. Operator: Our next question comes from Michael Shlisky from Seaport Global. Please go ahead. Michael Shlisky: Seaport Global Securities LL Good morning, Dave and John. How are you doing? John Fanelli: Very good. Thank you. David L. Richter: Good morning, Mike. Michael Shlisky: Good morning. I just wanted to touch on your EBITDA margin guidance for 2015 as well here, after those great comments on the previous question. So much of the business is based on leveraging a lot of your fixed costs. So I am curious if you could just kind of outline for us how much of the cost cuts you've done are going to contribute to the, let's say, 20 basis points increase in EBITDA guidance or so for 2016, how much might be from cost leverage and how much might be from some additional new costs that might come in the couple of quarters here? David L. Richter: Well, we had a couple things that are going to be helping us in 2016 that's led EBITDA margin range that we gave. One is the cost cutting program that we did in 2015. We have took out about $21 million of annualized overhead costs out of the business and while we realized about $15 million of that during 2015, obviously we got a full four quarters benefit of those costs, most of them on average the cost took place in the early part of the second quarter of last year. So we will see us benefit from that, to improve margins and we also had an unusually high number of one-time expenses, high enough and large enough that they will worth mentioning in the press release and today on the call that we don't expect to repeat in 2016. So if you take out all the one-time charges, or if we talk about annualized and the overhead cuts, if you just take out the one-time charges, our EBITDA margin would have been 7.9% in 2015. So we're going to continue to be aggressive on overhead. We expect to get the full year benefit, we're expecting to have a lot fewer one-time issues and getting to 8% to 10% we don't think is going to be that difficult even on slower growth. Michael Shlisky: Excellent, great. Can you also give us a sense of your debt repayment goals for 2016, would it may be on the order of your EBITDA termination in dollars or somewhere around that level? David L. Richter: We are expecting record cash flow this year and our number one, number two and number three priorities for that cash is debt reduction. We continue feel that the amount of leverage that we have on our balance sheet is too high for our Company, for our market cap and we want to get our debt down as quickly as possible Michael Shlisky: Okay, and at the end, that has to do with collecting receivables or is that a big piece of it and is that -- there? David L. Richter: It all has to do with collecting receivables. Michael Shlisky: But are there any individual one-time chunks like Libya et cetera that might be a big piece of that or is that all just your everyday course of business? David L. Richter: No, not playing with any money coming out of Libya. We've had the delay in payments from that one-time, that major client in the Middle East that we expect will caught up in 2016 and that certainly will add to it, but slowing growth is actually an aid in pushing our cash flow higher. The faster we grow, the more of a negative impact there is on cash flow. So even though we're expecting to go from 9% CFR growth to between 0% and 5%, that's actually a positive thing for our number one priority which as I said before is cash flow. Michael Shlisky: Sure. Thanks. I'd like to squeeze in one last one here; I mean, it's already March 28. So, I mean can you give us some sense of that how you think the first quarter has gone for you versus plan versus the prior year or prior quarter. David L. Richter: No, I can't do that. We generally haven't done that. Until we have the full results for the other quarter, we don't want to give any nods, wings or any other kind of guidance as to how it's going. I can tell you that we were heard in the fourth quarter in addition to the one-time things by a relatively weak December, but January and December are typically our two weakest months of the year. So that was nothing unusual. Michael Shlisky: Alright, I will try, thanks guys, appreciate it. David L. Richter: Thanks Mike. Operator: Our next question comes from Tahira Afzal from KeyBanc. Please go ahead. Tahira Afzal: KeyBanc: Hey David. David L. Richter: Good morning Tahira. Tahira Afzal: David, the project management side, I know that's where you guys put a of effort and it's showing and it's doing really well now. Could you elaborate a bit more on the construction claims side, as we look at the year there have been good quarters, there have been bad quarters, if I look at the your implied guidance as well on the revenue side kind of shows a mixed year for construction claims. Any help over there would be useful. David L. Richter: John, you've got a better hang on those numbers. Do you want to take the first crack at that. John Fanelli: I think your first question is the projections going forward or the claims business in general? Tahira Afzal: Yes, if you recall when you were sitting here last year, the fourth quarter was kind of a bit all over the place for construction claims and you guys were right in saying it will pick up again. But the fourth quarter gain was a little light on the revenue side, but more importantly on a profitability side. So maybe something first on that John? David L. Richter: Before John answers that, I am sorry John -- John Fanelli: Yes, David. David L. Richter: As I said December tends to be a pretty bad quarter, just because of holidays and vacations and things like that. The claims business because it's more of a pure consulting practice dips in utilization which they certainly had in December, can really dramatically impact the bottom line and we saw that as usual this quarter, the one-time expenses didn't impact the claims group. Tahira Afzal: Right. David L. Richter: But they were slower than expected over the course of the quarter and December was even worse than the quarter as a whole. Tahira Afzal: Got. Okay. Go ahead. John Fanelli: Yes, just to add the overall year because there is some lot of ups and downs in the claims business, overall the revenues increased almost 10%, and as well as our operating profit. So that's a nature of the business, quarter-to-quarter it might be higher and lower than the other quarters. But generally over a 12 month period there is growth in both top line and operating profit. Tahira Afzal: Okay, and if I look at your guidance and maybe the mid-point of it, right now it assumes at that sort of flattish for claims on the revenue side. Would that be correct and if so what color, what are the assumptions behind that? David L. Richter: No, exactly opposite, we are anticipating that claims is going to be the faster grower in 2016. Tahira Afzal: Oh, sorry, so the claims is actually the one that's growing 0 to 5%. 19# David L. Richter: No, no, the entire business we expect will grow 0% to 5% in consulting fees this year. So we are expecting the claims group to grow faster than the project management group. Certainly the less impacted by our capital spending in the Middle-East in our PM Group and it's very tough to model any kind of going forward performance based on one quarter. Despite the fourth quarter, we are expecting 2016 to be a very strong year, in fact the record year for the Claims Group revenue and profitability. Tahira Afzal: Fair enough. The second question, I really had was on the profitability side David. You did have a record revenue quarter which is pretty admirable, but if you look at the margin side and I'm stripping all those one-time charges out to begin with, would you see it was kind of in line with what you thought or expected for the fourth quarter and I know the claims business and project management might have some holidays seasonality in it. David L. Richter: Well, certainly December was probably a little worse than we expected, which dragged quarter down. If you take the one-times out, it was -- this is not atypical, it was a little below the average for the year, 10.5% adjusted, I am sorry $10.5 million in operating profit on an adjusted basis was a little down from what we anticipate the average quarter for the year to be. But the second and third quarters are almost always are two best quarters of the year and the first and the last get impacted by January and December numbers, which are always two of the worst months of the year. So that I am happy with, certainly like to be making more money. We gave earnings guidance, we gave EBITDA guidance of between $50 million and $58 million for the year and on adjusted basis we did $49.7 million. So, a little on the down side we had an unusually high number of one-time events this year and distractions to our business we're hoping won't be there this year and we are expecting this year to do significantly better profit-wise than we did last year. Tahira Afzal: Got it. Okay. Thank you very much. And David, just one last question and I will hop back in the queue. In line with what you said, project record does show the Middle East has probably more resilience than people are thinking and there is some pretty large projects going forward. Are those going to be important in terms of really driving your revenue assumptions on the project management side or is it just a broader based momentum on the growth side, may be perhaps in the US.? David L. Richter: Yes, it's really a mix of things, but certainly we're expecting strong growth in the U.S. again this year. We are expecting a slight decline in revenues in the Middle East and that's based upon a combination of some of the older projects that we already have continue to ramp up, especially some of the rail projects over there that are longer term and are continuing, but also bringing in some significant new wins in this year and I don't like to ever go in any specificity about that until we actually have an official win, but we've got some very, very big projects that we think we are closing in on and we'll be in a position to announce before mid-year. Tahira Afzal: Got it. So could you see a book-to-bill potentially up over one-time see through what you're seeing right now David for your entire business? David L. Richter: Absolutely. Tahira Afzal: Okay, great. Thank you. Operator: [Operator Instructions] And our next question comes from Pete Enderlin from MAZ Partners. Please go ahead. Peter Enderlin: MAZ Partners: Good morning guys. David L. Richter: Good morning Pete. John Fanelli: Good morning Pete. Peter Enderlin: Following up a little bit on the construction claims business, I understand that it's not exactly lumpy, but it kind of goes in sports, you might say. Is there any indication that it is or should be somewhat contra cyclical in the sense that when the project management business on a macroeconomic basis starts to run into problems that you get more claims and more controversy and therefore a boost in the construction claims business? David L. Richter: Our view historically has been that that was the case. But I think the reality has shown that the claims tends to do very well really in all times. Construction is one of the most challenging and complicated things that we do. It is perfect for generating lots and lots of legal disputes between all the different parties who touch a project, but don't want to take responsibility when there is a problem and we're seeing an increasing number of those not being resolved amicably, but going through to litigation or typically more so in the international construction market to arbitration. And I think we become, no question over the last 7, 8 years, the premier firm in the world in that business and I think clients are turning to us more and more. The international disputes are bigger and more complex and you've got parties from different counties and we've seen a very strong claims business certainly looking at the century in good times and in bad times. But we're expecting them to have a very good 2016. It's really independent of whether PM business is up or down, they have been doing selected strategic hiring and bringing in some very strong players domestically and internationally and we are expecting to reap the benefit that this year. Peter Enderlin: Does the fact that the fourth quarter revenues CFR in that business came in basically flat reflect just simply projects, I mean, programs that were at the completion or was there something else structural going on there? David L. Richter: There is always the thousand different reasons why it's up or down. It's a business with full time assignments, but have no predictability to them. They can start on a dime and they can settle just as quickly. So you've got to consult and juggle multiple assignments to keep billable and stay busy and profitable. And depending on when those starts and stops, it kind of have major impact on the performance of that group in any given month or any given quarter. Peter Enderlin: And then David looking at SG&A overall and I recognize there are lots of different ways that can be sliced, but it was up $24 million and maybe $9 million of that was due to the unusual items. Does that not indicate for the need for more stringent additional cost cutting, especially on the basic level of salaries and benefits? David L. Richter: We are -- no, we've never looked at cutting people's pay. There was great quarter in 2008 when the recession hit and a CEO in the UK was asked about forcing his employees to take pay cuts and he said the perfect answer, I agree with him 100%, which was that I have rather piss off 5% of my employees by firing them and piss off a 100% of my employees by forcing them all to take 5% pay cuts . Peter Enderlin: Okay. David L. Richter: So, we need to keep our overhead costs down as low as we possibly can. I think we had a tremendous amount of success last year in doing that. And we also saw less revenue than we were anticipating primarily because of the drop in new work from the Middle East and those things tended to largely offset each other. But we're going to continue to look aggressively at keeping our overhead costs down, certainly in a slower growth environment we need to do that and we need to keep pushing our EBITDA and our operating profit margins higher and that's what we are focused on. Peter Enderlin: Around this time last year you were beginning to implement a cost cutting program in terms of headcount. Is there a possibility you'll do some more of that again going into the second quarter.? David L. Richter: We will do what we always do which is at beginning of the second quarter take a look at how the first quarter performed relative to our budget and our internal expectations and to the extent that we need to make adjustments to achieve the profitability that we need to show to our Board and our shareholder, then we will do so. But we haven't started that process yet and don't know if we are going to need to, but that's certainly the plan every year. Peter Enderlin: Okay and then speaking on distractions to your business, which you are hoping not to have, has the full text of the letter that were sent on March 10th by Full Value Partners been made available in the public filing? I'm trying to find them and I can't. I see reference to it, but I don't actually see anything that shows the full text of that letter. David L. Richter: The Full Value, which is part of Bulldog gave us nominations of several candidates to the Board this year. We had been anticipating another proxy contest this year. We have been planning for it and they sent us a. I don't believe their nomination letter is public. I could be wrong, they don't generally file everything that they send to us with the SEC, but I don't recall whether that specifically was or was not. But... Peter Enderlin: Okay, well, if they don't file, do you have any obligation to file it? David L. Richter: I don't believe that we have any intent to make that public if they haven't, but we will review that with our legal counsel, the negative termination. Peter Enderlin: Okay, thanks a lot. David L. Richter: Thanks, Pete. Operator: Thank you. There are no further questions, I'd like to turn the floor back over to management for any closing remarks. David L. Richter: Great. Thank you everybody. We are glad to have finalized our year numbers and we apologize for the delay in releasing them, and hosting our quarterly conference call. We are looking forward now to getting back to business and making 2016 the best year for revenue and profitability in the history of our Company which is what we fully expect. Thank you all for your interest in our Company and for participating in our call this morning. Take care. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.