Digging deep: Hill International

Hill International, one of America’s largest project management firms, has secured an enviable pipeline of work in the Middle East. Company founder Irvin Richter, together with his son David, who will take over as CEO later this year, says the opportunities outweigh the challenges
Builders: Hill International’s father and son team, Irvin (right) and David are keen to solidify the company’s presence in the Middle East.
By Beatrice Thomas
Sat 01 Mar 2014 01:56 AM

Like any family business, father and son executive team Irvin and David Richter often drive each other mad — in a good way.

“It’s a necessary evil in a family business, but you get through that,” David, the president and chief operating officer of US construction consulting firm Hill International jokes.

“I prefer to see him there,” Irvin, the company’s founder, chairman and CEO, adds. “When he’s not there it’s just a different kind of day.”

As the pair prepare for a changing of the guard at the end of this year, with Irvin to step down and into semi-retirement and David to become CEO, there is no doubting the dynamics between them have produced results.

The company surpassed the $1bn mark for total backlog worldwide for the first time in its 38-year history at the end of 2013, with its share price skyrocketing 66 percent in six months to $5.03 at the end of January.

There is also no doubt that the Middle East is playing a big part in Hill’s recent success. Even by its own impressive track record in the region — the company has worked on major projects such as the Palm Jumeirah, The World islands, the Palm Jebel Ali and the Sheikh Zayed Grand Mosque — the numbers are big.

In its third-quarter financial results, the Middle East was responsible for 43 percent of the company’s global consulting fees, making it Hill’s biggest geographical market. In dollar terms revenue increased by 66 percent in the region — a result topped only by Hill’s African operations, which have been bolstered by the acquisition of consulting firm Binnington Copeland & Associates (BCA).

“The growth has always been phenomenal in the Middle East,” Irvin tells Arabian Business during a sit-down interview in Dubai.

“There’s a tremendous amount of work that needs to be done infrastructure-wise. We’ve moved from tall buildings into flat buildings. We see infrastructure in the Middle East growing.”

As a result some of Hill’s biggest projects in the region are in transportation, aviation and public infrastructure. With a strategy developed last year on winning work across the three areas, Irvin predicts the company, which now has more than 4,000 employees in 100 offices worldwide, will continue to target those areas for the foreseeable future. After all, as Irvin points out, unlike tall buildings, a lot of public infrastructure projects do not have end dates, with roads requiring extensions and more stations added to rail networks — all adding up to ongoing work for companies such as Hill.

“We’ve seen a real transformation of our business in the Middle East in the last five years,” David, 47, says. “What was a business then that was entirely private sector — commercial buildings, hotels, residential towers — has changed into infrastructure and public works and the biggest projects that we’ve been winning in the last couple of years are airports, rail, hospitals, education.”

“You have to be where the market is,” Irvin adds. “There’s no sense in building up a lot of project managers on tall buildings when everything you’re bidding on is an infrastructure project.”

Hill’s biggest market sector remains buildings, at half of its business, but transportation such as rail has grown from 9 percent to 30 percent of all its work.

Hill’s $265m joint contract with the Louis Berger Group to manage three of six lines on the Riyadh Metro in Saudi Arabia and the $108.5m contract for the new Muscat International and Salalah airports in Oman are among its biggest recent project wins in the Middle East, with the former expected to continue to drive profit upward in 2014, according to Hill’s comments during an earnings call in November.

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However, Hill has also just signed a BD6.9m ($18.3m) deal with the Bahrain government to project manage its airport upgrade, while it is also working on the $2.9bn Midfield Terminal in Abu Dhabi and has worked on the new Al Maktoum International Airport in Dubai and the ongoing Doha light rail project.

Irvin says the success of the company he started 38 years ago, aged 31, out of a single office and that had 20 people at the first company picnic — “that includes the wives and kids” — is down to building relationships and a reputation based on its work.

During this week-long visit, one of about two a year the pair try to make to the Middle East, where Hill has a regional headquarters in Dubai, they travel to the UAE, Oman and South Africa. India was also on the cards, but postponed because of visa problems.

“It’s always a good thing to network with your client,” Irvin says. “Someone said to me yesterday… ‘it’s a better thing to build a relationship with your client, because the client won’t hurt you if he likes you and there’s nothing he will do to help you if he doesn’t like you’.”

As well the airport, Hill is hoping its networking in Oman, where the airport marked the start of its work in the sultanate and is now its biggest project with 360 people on site — extends to the contract to manage the $15bn Oman rail network, which is expected to be announced in March.

“Are we confident? No. We think we’re the best firm,” Irvin says of the company’s chances of securing the lucrative deal. “There are a lot of reasons why somebody gets hired.” However, if it does win it expects the project will overtake the airport in terms of required manpower, with at least 500 workers.

However, win or lose, Hill’s books are finally looking solid. On a global scale, Hill International posted net earnings of $2.6m in the third quarter, the second quarter in a row it saw profitability and up 96 percent on the previous year.

Of its total revenue of $147.2m, consulting fees made up a record $130.2m, up 26 percent on the same quarter in 2012. Of this, 43 percent was from Middle East activity, which experienced overall growth of 81 percent for the quarter.

“The single biggest driver of this outstanding growth was our continuing work on the Oman Airports programme, which started at the beginning of this year and added $14m in consulting fees for the third quarter,” David said in the company’s earnings call. It also grew $3.1m year on year in Qatar, $1.3m in Saudi and $1.3m in Iraq, while the UAE accounted for 11.9 percent of total business — the only country except the US (which accounts for 26 percent of Hill’s business) that generated more than 10 percent of earnings.

“We go where projects are, because they’re the ones looking for project managers,” Irvin says of its growing portfolio in the UAE. “If we’ve had a lot of growth in Abu Dhabi and Dubai and the Emirates, it’s because there have been a lot of projects built in that area — it’s a reflection of the market.”

David says unlike Libya where it halted work when the Arab Spring uprisings began in 2011, it had never left Iraq. In November Hill signed a $54m consultancy contract relating to the Governorate of Basra 2040 Strategic Plan — taking to ten the number of contracts it has won in the past three to four years following a six-year contract working for the US Army Corps of Engineers.

“We see a lot of upside for us in Iraq. We see a growing economy, we see a lot of money being invested in construction growing forward and we’re going to be part of it,” David says.

However, its success in Iraq has been mixed after two contracts with South Korean developer TRAC Development Group signed by Hill and its majority-owned subsidiary HillStone International (the minority share is owned by a group of partners including US Vice President Joe Biden’s brother James, an executive with Hill’s housing division) related to 100,000 housing units in the country ultimately collapsed, forcing Hill to concede an estimated $1.5bn from its backlog in 2013.

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Until now, not much has been publicly said by Hill about the failed deal, though at the time it was announced in 2011Hill said it was contingent on TRAC obtaining financing and government approvals.

“There were not a lot of people on the board, David included, that agreed with my view of the housing market [in Iraq],” Irvin concedes. “I thought we had a good chance during a downturn in that market to become a player and I was wrong, so we closed it down.”

He says the project had three major problems. “Number one we had a development partner that wasn’t as experienced in housing as it needed to be. Secondly, we had a partner — the government — that didn’t have the money at the time… and thirdly we were inexperienced.”

Asked if the company would embark on a similar project under different circumstances, Irvin says he personally would consider it but David all but rules it out, saying the company’s success is largely because it has “stuck to our knitting” and focused on its two key service lines of project management and construction claims. The Construction Claims Group posted a 17 percent increase in revenue in Q3 to $31.7m, with 16 percent growth in the Middle East to $1.2m.

“When you get distracted and you try to become a jack of all trades, like a lot of our competitors have become, you don’t stay world class. So we’re going to probably stay focused, but at the same time look for opportunistic ways to expand our client base and our service lines,” David says.

“So, I think the answer is no,” Irvin adds. He later admits that he is more of a risk taker than his son, who as well as being a qualified civil engineer is an attorney and at one point was Hill’s general counsel.

However, David is optimistic about Libya, where Hill is still owed $57m of a $60m invoice from work it did with the then-Libyan government in 2011.

The company finally received a cash payment in the third quarter from the Organisation for Development of Administrative Centres (ODAC) comprising 3 million Libyan dinars ($2.4m) to Hill and 800,000 Libyan dinars ($700,000) to tax authorities on Hill’s behalf. However, with the Libyan dinar currently unable to be converted to foreign currency, it remains sitting in Hill’s bank account in that country.

“We’ve been patient and I think that patience has been rewarded,” David says. “We’ve begun to collect money… we’re in the process of negotiating further payments and a return to work, a new contract. We expect that this is the year that we will see most if not all of our money.”

Irvin adds that despite evacuating 225 people from Libya when the conflict began, the company has kept Libyan and some Iraqi staff, who offered to stay, on the payroll, in anticipation for when work will resume “in the next two to three months” on projects such as the University of Tripoli and the reconstruction effort.

“You’re dealing with a country that has political instability. You want to get those people off the street — how do you get them off the street? You get them back to work. So, as they get back to work there’ll be less instability, there’ll be less protesting on the streets,” he argues.

In Egypt, another Middle Eastern state marred by recent troubles, Irvin says Hill’s work includes the Grand Egyptian Museum, and it continues to be a good market. Syria, on the other hand, is “too risky and dangerous”.

However, David says that as Qatar gears up for the World Cup, its current work on residential and commercial towers and hotels, the Doha metro green line and the National Museum of Qatar will only intensify.

“They have money, they’re smart, they know how to spend it and we like it in Qatar, people are willing to go,” Irvin adds. “There’s no sense in working to get a project when you can’t staff it or you staff it with secondary skills — we don’t want to do that, that’s the way to lose your reputation quickly.”

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In the meantime, Hill is also moving further into Europe, with Irvin confirming it was eyeing an acquisition in Greece, which would unlock more of Western and Southern Europe. “We have Eastern Europe covered better than we have Europe covered — if you took out Spain we wouldn’t be doing a lot of business in Europe,” Irvin says.

David rules out any short-term moves for acquisitions in the Middle East, saying it was balancing out its geographic concentration in the region with acquisitions elsewhere in Europe, Australia, South America and Africa.

However, the sentiment of banks, which have for a numbers of years been reluctant to fund development projects, is also a factor in the shift in direction from real estate to public works.

“The biggest problem in the construction industry worldwide… is banks,” Irvin says bluntly. “They have to be willing to fund and if they’re not willing to fund you can’t get projects started, so you have to depend on the government.”

He says when banks again start lending to the private sector “the economy will pick up”.

With the company’s full-year results expected in March, David says it “had a very strong 2013”, growing its consulting fees about 24 percent.

“We expect 2014 to be another year of strong growth. It probably won’t be that much, but we’re certainly expecting double-digit growth this year,” he says.

He cautions, though, that the Middle East’s growth is also expected to be more moderate. “There’s no chance that’s going to continue next year,” David says of the sky-high numbers seen in the third quarter. “That kind of growth is just unsustainable and it was really the result of four mega-projects that we won in 2012. We’ve had a great 2013 as well, but certainly the growth had gone down just because the denominator has gotten so big.”

However, having reached $1bn in backlog, Hill could quite rightly estimate this to grow to $1.3bn in 2014 based on historical figures of 30 percent growth in backlog a year.

It’s not a bad achievement on which to retire, though with Irvin staying on as chairman after 2014 does he know how to swap the boardroom for the golf course?

“I turn 70 at the end of this year and it’s time to give my son the opportunity to be in the CEO role and I think he’ll do a great job,” he says, adding that his own health and a recent bad run of illness in the family has also put things in perspective.

“I have an agreement with the company, so I can put in as many hours as I want as a retired person. If I find that I’m being a pain in the neck to him he’ll tell me ‘back off, I don’t need you involved in that, go play golf’. Likewise, he’s happy to help out on projects as needed.

“We’ll work our way through it, see how it works out.”

Judging by their recent run, it no doubt will be a positive result.

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