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9th annual Spring value investing congress

April 4, 2014 Las Vegas, NV Investing in Change


Arnaud Ajdler, Engine Capital

www.ValueInvestingCongress.com

Investing in Change
Value Investing Congress Las Vegas April 2014

ENGINE CAPITAL LP 1370 Broadway, 5th Floor New York, NY 10018 (212) 321 0048 aajdler@enginecap.com
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Disclaimer
The analyses and conclusions of Engine Capital, L.P. (Engine Capital") contained in this presentation are based on publicly available information. Engine recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Engines conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Engine concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. Funds managed by Engine and its affiliates have invested in common stock of Hill International Inc. (HIL). Engine manages funds that are in the business of trading buying and selling securities and financial instruments. It is possible that there will be developments in the future that cause Engine to change its position regarding HIL. Engine may buy, sell, cover or otherwise change the form of its investment in HIL for any reason. Engine hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Engine investment.

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Executive Summary
Engine Capital is a value-oriented special situations fund that invests both actively and passively (long and short) in companies undergoing change.
DIFFERENTIATED INVESTMENT STRATEGY Focus on change as the mechanism to close the value gap and lower risk of value traps Proactive through Engines activism - private or public communications with boards and/or board representation. Activism is a tool in select situations. Particular experience in US & Canadian activism Anticipatory situations where changes are likely to happen (13D filings, hidden assets, consolidation, new management incentives) Reactive situations where changes have been announced but not yet priced in Special situations search process focused on situations prone to market dislocations important to understand why the security is mispriced Time arbitrage willing to take a longer term perspective than most market participants not looking for the obvious (and most likely priced) short-term catalyst
PORTFOLIO MANAGER 10 years of investment experience in this strategy including significant board and operating experience. Adjunct professor at Columbia Business School (value investing program)

RISK MANAGEMENT - portfolio of diversified high conviction, well-researched ideas with attractive risk-reward profiles, limited leverage, short positions, & cash if no attractive investments

ALIGNMENT OF INCENTIVES - majority of liquid net-worth invested along with limited partners

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MANAGING PARTNER ARNAUD AJDLER


UNIQUE EXPERIENCE INVESTING IN COMPANIES UNDERGOING CHANGES
INVESTMENT EXPERIENCE Former partner at Crescendo Partners, a successful value-oriented activist fund, from 2003 to 2013 Adjunct Professor, Heilbrunn Center for Graham & Dodd investing at Columbia Business School (since 2007)

STRATEGIC AND OPERATIONAL EXPERIENCE Significant experience working with portfolio companies on strategic and operational initiatives Significant M&A involvement (entire companies & non-core assets)

Involved with 2 large cost cutting initiatives leading to cumulative $150 million+ of cost savings Former management consultant at Mercer Management Consulting and Boston Consulting Group

CORPORATE GOVERNANCE EXPERIENCE Chairman of Destination Maternity, a Nasdaq-listed company since January 2011 Prior board experience includes Charming Shoppes (Nasdaq: CHRS) (sold to Ascena Retail Group in 2012), OCharleys (Nasdaq: CHUX) (sold to Fidelity National Financial in 2012), Topps Corp. (Nasdaq: TOPP) (sold to Madison Dearborn Partners in 2008), Hill International (NYSE: HIL), Primoris (Nasdaq: PRIM) and Computer Horizons (Nasdaq: CHRZ)

EDUCATION Harvard Business School, MBA, 2003 Massachusetts Institute of Technology, Masters Degree, Aeronautics & Astronautics, 2000 Free University of Brussels, B.S., Mechanical Engineering, 1998

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CHANGE
CRITICAL FOR ENGINE TO UNDERSTAND HOW THE VALUE GAP WILL CLOSE SIGNIFICANTLY INCREASE THE ODDS OF AVOIDING VALUE TRAPS ABILITY TO BE OUR OWN CATALYST THROUGH ACTIVISM

Engines unique activist and board experience Varying level of involvement ranging from behind the scene
PROACTIVE

communications with board and management, public communications, board representation to proxy contest Accelerate value realization and lower odds of value traps Focus on adding strategic, operational, financial or governance expertise

ANTICIPATORY

Market trends / capital allocation / M&A landscape Management incentives Third-party activism (13D filing) Analyzing situations where changes have been announced but

REACTIVE

may not yet be priced in Examples include significant cost cutting initiative, strategic review process, REIT conversion, dividend initiation
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OPPORTUNITY CHANGE IS ON THE HORIZON


The flexibility to invest across value and event silos provides for a robust mandate to source misunderstood, less trafficked investment opportunities that will be exposed to corporate change over the upcoming years Corporations under pressure to unlock value in a slow-growth environment Increased focus on core competencies, leading to divestitures and spinoffs of non-core assets Record levels of cash on corporate balance sheets, leading to M&A and/or return of cash to shareholders Pent-up private equity demand Significant pressure to put capital to work before fund expiration Cheap financing available Favorable sentiment toward shareholder activism Institutional investors increasingly receptive Growing number of companies settling instead of fighting

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What changes are we talking about?


Operational Capital Allocation Capital Structure Strategy Governance
Sales growth Margins (cost cutting, restructuring) Management Return of cash to shareholders (buyback, dividend) Acquisitions (consolidation) Use of capex towards highest risk-adjusted returns Optimizing balance sheet Refinancing

Separating assets with different financial characteristics Sale of entire company / sale of non-core assets Changes in industry competitive dynamics
Adding experienced directors Separating role of CEO and Chairman Executive compensation (alignment of interests)

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Activism: the art of influence

Proxy fight

Negotiated settlement

Public letters

Private letters

Informal communication

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Security selection
High free cash flow yield
Multiple ways to win Operating margins are too low Poor capital allocation Lazy balance sheet Conglomerate discount Takeout candidate

Change (proactive, anticipatory or reactive)


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Hill International, Inc. (NYSE: HIL)

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Hill International, Inc. (NYSE: HIL)


Global project management firm with 4,100 professionals in 100 offices worldwide

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Hill International, Inc. (NYSE: HIL)


Run by Irv Richter (founder) and David Richter (next CEO) - combined ownership around 30% of HIL

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Hill International, Inc. (NYSE: HIL)


Guidance of $575 to $600 million $512 million

CAGR 14%
$399 million

$418 million

Project Management

Construction Claims
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Diversified Revenue Base by Region

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Diversified Revenue Base by Client Type

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Diversified Revenue Base by Project Type

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Backlog
$1,027 million $923 million $795 million $675 million $620 million

CAGR 13.4%

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Why do we like the business?


High barriers to entry experience and reputation more important than price Expense for Hills services is a small component of total project expense (2-3%) High revenue visibility from long-term contracts Agency model (low risk) vs. contractor model (higher risk) Low capex requirements (although relatively high working capital requirements) High ROIC Fast revenue growth + leverage lead to even faster bottom line growth

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Valuation

Stock price # Shares Market Cap Cash Debt EV

5.40 40.2 217.08 54.8 150 312.28

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Financials
Revenue
Growth rate

2012 417.6
4.7%

2013 512.1
22.6%

2014E 587.5
14.7%

2015E 620.0
5.5%

EBITDA
EBITDA margin

17.7
4.2%

39.6
7.7%

50.3
8.6%

58.0
9.4%

EBIT
EBIT margin

5.2
1.2%

28.9
5.6%

40.1
6.8%

48.5
7.8%

EV/EBITDA EV/EBIT

6.2 7.8

5.4 6.4

Source: Companys filings, CapitalIQ, Engines analysis

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Peers
Company Stantec WSP Global Arcadis NV WS Atkins Tetra Tech Ticker STN.TO WSP.TO ARCAD.NA ATK.LN TTEK Market Cap ($ millions) 3,181 1,877 2,023 1,368 1,957 EV ($ millions) 3,254 1,986 2,233 1,250 2,004 Median Average Hill International HIL 217.08 312.28 EV/ 2014 EBITDA 11.0x 10.3x 9.8x 8.1x 8.1x 9.8x 9.5x 6.2x EV/2014 EV/ 2015 2012-2015 EBIT EBITDA Rev CAGR 13.1x 9.8x 13.9% 13.5x 9.2x 14.4% 12.3x 8.8x 2.7% 10.0x 7.8x 2.8% 10.8x 7.3x 4.0% 12.3x 11.9x 7.8x 8.8x 8.6x 5.4x 14.1%

Source: CapitalIQ, Engines analysis

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Why is the stock undervalued?


Most analysts dont use an appropriate peer group (no good US peer)
Consulting firms FTI Navigant Huron CRA International Engineering/construction firms URS Emcor Jacobs Engineering Aecom Project management firms Stantec WSP Global Arcadis NV WS Atkins Tetra Tech

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Why is the stock undervalued?


Libyan receivables
In February 2011, HIL suspended its operations in Libya. At that time, Libya owed $60 million to HIL. Over the last few months, HIL has been paid $9.2 million, leaving a receivable outstanding of $50.8 million. HIL is currently negotiating and is hopeful to receive the remaining amount in 2014. HIL is also currently engaged in active discussions with Libya over several new contracts that would see HIL return to Libya later in 2014. Other companies in HIL situation have resumed work in Libya and have been paid a significant amount of their Libyan receivables.

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Why is the stock undervalued?


Leverage
Due in large part to the Libya receivable situation, HIL broke the covenants on its debt in 2012. HIL had to refinance using expensive debt which is now choking the company (interest expense of more than $20 million). We expect HIL to refinance its debt in 2014 which should be a major catalyst for the stock. Upside of that situation is that the company has been laserfocused on operations (cost cutting, utilization rate ).

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Why is the stock undervalued?


Leverage
Balance Sheet ($ millions) Cash 55 Term loan 100 Revolving credit line 39 Other 11 Net debt 95 Gross debt 150 Net Debt/EBITDA Gross Debt/EBITDA 2013 2.4 3.8 2014E 1.9 3.0

Source: CapitalIQ, Engines analysis

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Catalyst time value arbitrage


Over the next 12-18 months, we expect: HIL will be paid most if not all its Libyan receivables. HIL will refinance its debt at a much lower interest rate. HIL will further deleverage as result of FCF generation and EBITDA growth.

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How much could HIL be worth in early 2015?


2015E EBITDA ($ millions) 55 57.5 60 $7.96 $8.39 $8.83 $8.64 $9.11 $9.57 $9.32 $9.82 $10.32 $10.01 $10.54 $11.06 $10.69 $11.25 $11.81

7.0x 7.5x 8.0x 8.5x 9.0x

52.5 $7.52 $8.17 $8.83 $9.48 $10.13

62.5 $9.26 $10.04 $10.82 $11.59 $12.37

Multiple

Potential return around 80%


Source: CapitalIQ, Engines analysis

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EV/EBITDA historical multiple


HIL trades toward the low end of its historical multiple range. Not unreasonable to assume a 7 to 9x multiple.

Source: CapitalIQ

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If this happens how much free cash flow maintenance would HIL generate?

EBITDA (2015) Capex Interest Taxes FCF maintenance

55 4 10.5 6.9 33.6

Multiple 10x 11x 12x

Stock price $ 8.36 $ 9.19 $ 10.03

Source: CapitalIQ, Engines analysis

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The negative
Company is not being sold anytime soon would fetch a very high price given the quality of the business and the scarcity value of the asset. Management team too focused on acquisitions. We wish they would be more focused on closing the profitability gap with peers and achieve their 10% EBIT margin goal.

Leverage thats part of the opportunity and should be a temporary issue.


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The negative
Insiders (especially the Richters) are regularly selling some of their shares, although we dont believe it is for reasons related to the outlook of the business or its valuation and the amounts are small compared to total holdings.

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Idea Generation

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Idea generation
Typical multiple based search low EV to EBITDA, FCF multiples Special situations spinoff, management change, restructuring announcement Contested situations / 13D filings Public letters and presentations from activists 13D from private equity firms or strategic buyers Companies delaying their annual meetings
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13D from Strategic Buyer - OCharleys (Nasdaq: CHUX)


$11.0

$10.0

FNF buys CHUX for $9.85 per share

$9.0

$8.0

Fidelity National Financial files a 13D

$7.0

$6.0

$5.0

$4.0 Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

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13D from Private Equity - Michael Baker (Nasdaq: BKR)


$40.00

DC Capital buys BKR for $40.50 per share

$35.00

Nov 8, 2012: BKR announces Q3 results, $20 million cost reduction program, focus on organic growth and initiates a dividend

$30.00

DC Capital files a 13D


$25.00

Dec 13, 2012: CEO steps down

$20.00

Mr. Ajdler sends public letter to the Board requesting the initiation of a sale process

$15.00 Aug-11

DC Capital offers $24.25 per share


Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13

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Annual Meeting Delay J. Alexander (Nasdaq: JAX)


$16.00

$14.00

FNF buys JAX for $14.50 per share

$12.00

$10.00

$8.00

$6.00

Privet Fund files a 13D/A with a letter to JAX board regarding timing of the annual meeting
May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12

$4.00 Apr-12

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Letter from Privet Fund on May 22, 2012:


We understand that the J. Alexanders Corporation (J. Alexanders or the Company) has set yesterday, May 21, 2012, as the record date for its 2012 Annual Meeting of Shareholders (the Annual Meeting). Since the Company has yet to file its preliminary proxy materials, we eagerly await the scheduling of the Annual Meeting. Given the requirements of the Companys bylaws, we are perplexed that a date has not yet been set. Section 2 (a) of the Companys Amended and Restated Bylaws provides as follows: The [annual] meeting shall be held on a date set by the Board of Directors during the third, fourth, or fifth month following the end of the Corporations fiscal year. Since the Companys fiscal year ended on January 1, 2012, the most liberal reading of the Companys bylaws would require that the Annual Meeting be held no later than June 30, 2012 -- the end of the fifth month following January 2012. We also note that Tennessee law clearly mandates that the Company hold the Annual Meeting on or before July 1, 2012. We believe that upon application, a Tennessee court would promptly order compliance with Tennessee law (not to mention the Companys own bylaws).

Should the Company endeavor to schedule its 2012 Annual Meeting for a date subsequent to June 30, 2012, by amending its bylaws or otherwise, Privet would interpret this action as yet another entrenchment tactic employed by the Companys Board and management team to further disenfranchise Company shareholders. We believe that such action would also constitute an unreasonable response to the possibility of a contested election with respect to less than a majority of the seats on the Companys Board of Directors.

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Case study 3: J. Alexander (Nasdaq: JAX)


# shares Stock price Market cap Cash Debt EV 6 8.0 48 9.3 18.3 57.0 2010 149 8.4 5.6% 6.8 2011 157.2 9.7 6.2% 5.9 LTM 159.1 11 6.9% 5.2

Revenue EBITDA EBITDA Margin EV/EBITDA

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Whats the downside?


# unit 15 12 value/unit 2.5 1 value 37.5 12 49.5

Owns land & building Owns building Total

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Whats the upside?


Scenario A - sale of the company M&A Multiple 7 8 9 Stock price 11.3 13.2 15.0

LTM EBITDA 11 11 11

EV 77 88 99

Equity value 68 79 90

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Whats the upside?


Scenario B - Activists win/operational improvements/sale and leaseback Trading Multiple 6 6.5 7

LTM EBITDA 13.2 13.2 13.2

EV 79.2 85.8 92.4

Equity value 107.7 114.3 120.9

Stock price 18.0 19.1 20.2

Assumptions Sale of 12 owned units for $37.5 million cap rate of 7.5% Implied EBITDA reduction (rents) 2.8125 EBITDA margin pre S&L at 10% Trading multiple 6 to 7
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Is this a good risk-reward situation?

$13 today in a sale that is likely

JAX $8 per share

If no sale, $19 in a couple of years

Limited downside through real estate

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Third-party activism
(hidden real estate assets, restructuring candidate, takeout optionality) J. Alexanders (Nasdaq: JAX) operates high-end casual dining restaurants in the South East.
Idea Generation 13D filing and letter from another activist fund
$16.00

Investment Thesis Based on a review of JAX historical performance and shareholder base, we became convinced that the activist would win board control JAX was delaying filing its proxy statement and could not have its annual meeting within the legally required timeframe leading us to suspect JAX was shopping itself Significant operational improvement potential as evidenced by depressed EBITDA margins compared to peers Hidden real estate assets Low valuation Multiple ways to win (takeout, change in board composition, sale and leaseback, operational improvement) Exit/Results JAX was sold to Fidelity National for $14.50 per share

$14.00

$12.00

$10.00

$8.00
Average purchase price of $8.3 per share

$6.00

$4.00 Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

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