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Edited Transcript of HIL earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 Hill International Inc Earnings Call

MARLTON Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Hill International Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Raouf S. Ghali

Hill International, Inc. - CEO & Director

* Todd E. Weintraub

Hill International, Inc. - Senior VP & CFO

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Conference Call Participants

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* Peter Enderlin

MAZ Capital Advisors, LLC - Portfolio Manager

* John Glenn Grau

InvestorCom, Inc. - President & CEO

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Presentation

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Operator [1]

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Welcome to Hill International, Inc. Second Quarter Earnings for Fiscal Year 2019 Investor Call.

On this call, John Grau of InvestorCom will provide some introductory remarks on the content of the call.

John will be followed by Hill International's CEO, Raouf Ghali; and Senior Vice President and Chief Financial Officer, Todd Weintraub.

Mr. Ghali will discuss the status of the company and expectations for Hill's immediate and long-term future. Mr. Weintraub will detail Hill's second quarter results for 2019.

As a reminder, this call is being recorded. John, please begin.

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John Glenn Grau, InvestorCom, Inc. - President & CEO [2]

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Thank you. To everyone on this call, please note the following. Certain statements made on this call are 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 and matters set forth herein, including any statements of belief or intent and any statements concerning our future plans and strategies are forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and are subject to risks and uncertainties. We do not intend and undertake no obligation to update any forward-looking statement.

With that, let me turn the call over to Raouf Ghali, Hill International's CEO.

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [3]

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Thank you, John, and thank you to everyone on the call. We are pleased to report that Hill's progress continues. Since the beginning of the year, new bookings are $295 million. Backlog remained strong. Net earnings increased to $1.7 million from a loss of $2.1 million last quarter. And adjusted EBITDA more than doubled to $4.9 million.

Today, we will start with a brief update on the significant developments during the second quarter. Todd will detail our financial results. I will announce some major awards since our last call. And then we will open the call for questions and answers. I will also provide some final closing remarks.

To begin. Our new bookings continued to be strong with a corresponding increase in backlog from the beginning of the year. Our backlog growth is mainly driven by the company's Middle East and United States operations. With more than $150 million in aviation backlog and $400 million in pipeline projects on the horizon, we are focused on strengthening our aviation leadership.

To this end, we're pleased that Steve Morris has joined us to lead our aviation sector globally. Steve has more than 30 years of experience in global practice building and management, business development, professional consulting, operation management and other areas for both commercial and public works aviation projects and programs. In total, he has helped deliver more than $400 billion in airport projects around the world, including leading the aviation work of several major industry firms.

We are confident that with Steve's leadership, our success in the sector will increase exponentially.

While our consulting fee revenue, or CFR, remained within the same range during the second quarter, our net earnings and EBITDA increased sharply as we continued to reap the benefits from the rightsizing of the organization.

The growth in backlog will translate to CFR growth as our new assignments move from early design stages into constructions in the coming quarters.

I will now pass on to Todd to detail our second quarter 2019 performance.

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Todd E. Weintraub, Hill International, Inc. - Senior VP & CFO [4]

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Thank you, Raouf, and thank you to everyone on the call. I know everyone wants to know if we've been able to sustain the progress we made in the first quarter on the agenda we laid out to turn things around. I am thrilled to share that we continue to turn around. One, our adjusted EBITDA was almost $5 million for the quarter, surpassing each of the last 4 quarters. Two, we had net income for the quarter of $1.6 million, marking the first time since mid-2016 we've shown a profit. Three, SG&A was around $27.4 million for the quarter and $59 million for the first half of the year, well within our guidance of approximately $120 million for the 2019 full year. Four, our backlog was $824 million at June 30, roughly level with last quarter and up $84 million or 11% since the year-end trough. Five, consulting fee revenue was $77 million for the quarter, roughly in line with $79 million from last quarter and still above the trough in the fourth quarter of 2018. And six, deposit to free cash flow we had last quarter reversed as continued improvement in operating results was more than offset by reversal of the timing of payments from the first quarter.

I'm happy that my remarks are once again, relatively brief because I don't have to take much time explaining nonrecurring costs and other adjustments. In fact, the restructuring adjustments for the quarter were actually a deduction to get to adjusted EBITDA as we reversed some over-accrued costs as the final amounts came due.

All costs resulting from the restructuring and restatement have now been fully accounted and reflected in the financials. There will be no more charges associated with this.

The final payments related to the restructuring were fully recognized this quarter and were paid out in July. These reversals and over-accrued costs were offset by noncash stock compensation charges in the quarter.

I want to provide you now with more detail on the results for the quarter. Given all the noise in the 2018 results that renders year-over-year comparisons, not very meaningful, I think it makes sense to talk about this quarter's results as a trend from last quarter and relative to our plan from year-end.

We had indicated our belief that Q4 2018 was a trough and we returned the corner in 2019. We saw evidence of this in our Q1 results and we continued to see evidence in Q2.

Let's start with SG&A. I mentioned before, that we finally approached the door on the restructuring expenses and so it's appropriate to summarize the results.

First, in 2016, the year before the restructuring, SG&A excluding FX was $160 million. Next, our 2019 guidance is $120 million. And those together, that's a $40 million decrease or 25%. These are critical points because while macro factors and variations in timing of project awards, funding and construction make it difficult to forecast any particular quarter. Our materially lower cost base now leaves us much better equipped to handle these variations in cycles.

I cannot overemphasize how important this restructuring and the resulting lower cost base is to Hill. And I'm thrilled to share that we are on track to deliver on this promise to shareholders. Our SG&A through the first half of the year is $59 million, less than half the $120 million guidance.

We continued to believe this level of SG&A is sustainable and the increases in CFR and gross profit will mostly fall right through to the bottom line increasing our EBITDA margin over time to approximately 10%.

We're already seeing the results. Our adjusted EBITDA is almost $5 million, the highest level it's been in the past 5 quarters despite the increased backlog not yet fully driving the increases in CFR.

Likewise, we had net income of over $1.5 million in the quarter, our first net profit since mid-2016, despite those prior quarters having higher CFR, converting our successful bookings after so far this year into backlog, which we already started to see in the first half. And then that backlog in the CFR generally has a lag. And due to our sustainable cost base, we are very excited about the financial prospects as that CFR materializes going forward.

Our consulting fee revenue was $77 million for the quarter, roughly level with the $79 million from the first quarter.

We expect CFR in the second half will grow over the first half of the year.

Our gross margin on that consulting fee revenue was 40.6% in the second quarter, up slightly from 39.8% in Q1. Looking at backlog, our backlog at June 30 is $824 million, a significant 11% increase from $740 million at year-end. So this is more evidence that we have turned the corner and have started to grow the backlog again.

As I said last quarter, I understand the desire for us to provide specific guidance beyond SG&A and directional insights. However, the rate of growth of our backlog and the timing of the procurement cycle and mobilization will impact short-term results. Therefore, we will not be giving any further specific guidance other than to reiterate we expect our adjusted EBITDA for 2019 will exceed the 2018 level.

The important points are: One, we are now operating at a sustainable run rate per cost at the level we indicated we would; two, our backlog has grown significantly from year-end as we indicated it would; three, our consulting fee revenue has increased from year-end as we indicated it would; and four, as that increased backlog is being burned into increased CFR, gross profit will mostly fall right through to the bottom line increasing our historical EBITDA margins over time as we've indicated.

We continue to believe that a 10% EBITDA margin and CFR is achievable as we gain more scale 00form our building backlog.

I've also mentioned our free cash flow from the first quarter had reversed. While operating results continued to improve during the second quarter, the timing of outgoing payments more than offset this.

We expect the increased focus on collections and better operating results to continue, while the effect of timing of outgoing payments will fluctuate quarter-to-quarter.

I'll now turn it back to Raouf for some comments.

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [5]

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Thank you, Todd. With that, let's proceed to some of our latest wins.

In Europe, the European Union selected Hill as the leader of a consortium to provide technical assistance to strengthen the capacity for the overall planning, preparation and implementation of infrastructure projects in Albania. This assignment is part of the IPA 2015 action program for Albania and represents a major effort from the EU to further develop the Albanian economy.

In the U.S., Hill was awarded a contract to provide program and construction management services to support the Spokane Public Library's $77 million bond program. This program involves both new facilities and renovations. And Hill will be providing program and project management, GC/CM oversight, cost and schedule control and construction management.

Also in the U.S., the General Services Administration and U.S. Customs and Border Protection selected Hill to provide construction management services for the expansion and modernization project of the Otay Mesa land Port of Entry in San Diego, California. The project is estimated to cost $122 million.

In the Middle East, Hill was awarded a multiyear contract for a major cultural project. At this time, our client prefers that we not publicize this win but the work itself will involve multiple facilities and related infrastructure and will feature the design of a team of black cape architects. Hill was awarded several other assignments in the Middle East this period. However, due to confidentiality requirements from our clients, we are unable to disclose.

As noted earlier, our continued success in winning work is now resulting in growth and improved profitability throughout the company.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I show our first question comes from Pete Enderlin from MAZ Partners.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [2]

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Congratulations on the cost side of the equation. And you do have new business coming in, the book-to-bill was 1.9. But I'm wondering if you can give us some sort of longer-term sense of what the sustainable topline growth rate can be? What are the factors that can influence your ability to gain share or to get into new markets, either vertical markets or geographical areas? And anything else that you can provide that will give us some sense of how you can grow the business and take advantage of the leverage that exists?

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [3]

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Pete, this is Raouf. The top line is going to start growing as our bookings -- we've already made the bookings. And they -- as they transform into from early design -- many of our assignments are in early design. And they're progressing towards construction. That's when we start mobilizing. The bookings trend -- and the strong booking trends continues to be and we are -- in July, we had another month of good bookings. And I'll refer to it during my closing remarks. But we're expecting the strength to continue. We feel we don't need to go and expand geographically and the geography we are in, there's plenty of work, there's plenty of need of our services. We feel by the year-end, we should start seeing the topline grow. The second part of this year, we are looking for a growth in CFR. And 2020, definitely, we're looking at some significant growth. We will not give guidance yet. But maybe towards the end of the year, we're going to be looking at it to see whether it makes sense to start giving.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [4]

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And if not in terms of geography, what about possible -- increased emphasis on markets such as energy and petrochemical work? And also possibly a little bit further afield, nuclear remediation, which one of your large big brother companies does a lot of, AECOM. But I mean are those potential areas of new activity for you or increased activity?

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Todd E. Weintraub, Hill International, Inc. - Senior VP & CFO [5]

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Pete, I mean, we are looking at sector by sector. Yes, definitely all of the sectors you mentioned have a lot of work, and there's a lot of work coming in. But we want to -- we are trying to maximize our efforts in sectors where we already have a good reputation. Aviation is one of them. As you've seen, we are augmenting the aviation sector management with leadership. And we are looking at the power. But power is one of the sectors where there's a lot of EPC and turnkey projects. So we need to see how that's going to transform in the future before we start investing some money in it. Again, we are in the infrastructure sector including transportation, aviation. And we feel that, that sector has a lot of funding that our market share can grow in the coming years.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [6]

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I mean, if you look at that broad constituent of business of infrastructure, I recognize there's going to be some cyclical influences and all that. But what do you think that industry in terms of driver for project management and program management can grow at on a sustained long-term basis? There clearly is a need for lots of infrastructure spending around the world. But is there some kind of a broad ballpark number that you think of as realistic for the industry?

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [7]

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I'm not sure. I think the question is a little too broad because in the industry and worldwide industry, within regions differs quite a lot. The one thing I -- we can tell you is from the -- our experience is, as the infrastructure programs are let go, one, you've got the fact that some of it is going to come up with the PPPs, where there is a need for an independent engineers and construction management to do this as an independent party. Then you have the infrastructure funded by the governments whether it's federal or local governments of each one of those countries. Those have become more and more complex because you have existing infrastructure that still remains while you're upgrading as well as renovating the infrastructure. So it becomes a pretty complicated process. And therefore, you need a lot of management in order to help them implement the program as smoothly as possible.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [8]

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Right. Well...(inaudible)

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [9]

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That is correct.

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Todd E. Weintraub, Hill International, Inc. - Senior VP & CFO [10]

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Pete, this is Todd. So I think the bottom line is that we've set the sales force to focus on the areas that can have the most impact for us using our existing expertise and what you've seen from that so far this year is the successful growth of the backlog, as we said, by 11% from year-end. Because of those focused efforts and you hit the nail on the head, I think, in your -- in the first part of your question which is, we're seeing that mostly fall right through to bottom line because of the leverage we have from the operating cost and the new cost structure we have. So we're really excited about that. We're focused on that. We're growing the backlog, and we're seeing the resulting increase in our margins.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [11]

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Okay. But just one more sort of the area of adding to your long-term growth potential. And that is what about the possibility which you have alluded to of an adjacent market, which would be facilities management? And you to some of that, but is that possible bigger push for you in the future?

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [12]

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Pete, yes, we are. This is one of the markets and one of the sectors that we're growing. And you'll hear more of it as we succeed in it and will be able to tell you a lot more about it. It is, we have found that there's a lot of opportunities in some of the markets we're in. It's a real refinement, and there's a gap. And we're trying to fill it.

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Operator [13]

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I think that is our last question in the queue for today. At this time, I'd like to turn the call back over to Hill International's CEO, Raouf Ghali, for closing remarks. Please go ahead.

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [14]

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Thank you. In closing, let me reiterate. Net earnings and EBITDA are increasing, and we expect them to continue to improve as CFR increases and cost remain in line. Consulting fee revenue will grow as mobilization of the new bookings are realized. We are investing in leadership to execute our sector-focused approach, while continuing to control SG&A cost. We expect the strong bookings trend to continue. In July, we already had around $30 million in new bookings.

Thank you to everyone for your attention and participation. This concludes today's call.

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Operator [15]

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Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.