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Edited Transcript of HIL earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Hill International Inc Earnings Call

MARLTON Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Hill International Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm 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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* John Glenn Grau

InvestorCom, Inc. - President & CEO

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Presentation

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Operator [1]

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Welcome to the Hill International, Inc.'s Third Quarter Earnings for Fiscal Year 2019 Investor Call. On this call, John Grau of InvestorCom will provide some introductory remarks of 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 expectation for Hill's immediate and long-term future. Mr. Weintraub will detail Hill's third 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, the 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. During this quarter, Hill's progress continued. We are ending strong with an EBITDA of $5.6 million and net earnings of $2.5 million, both up from quarter 2, and new bookings through the end of September at $393 million.

Today, we will follow the same sequence as our previous earnings call, with a brief update on significant achievements during the quarter. Todd will provide details on the financial results. I will go over some of the major awards since our last call. We will open the call for questions and answers, and then I will provide some closing remarks.

To begin, our bookings continued to be strong due to recent wins in the U.S. and in the Middle East, with new bookings of $393 million through September. This trend is continuing with $45 million in new bookings in October alone. Consulting fee revenue has not yet been impacted by our recent wins and is slightly down in comparison to last quarter. This is mainly due to the completion of projects in some of our U.S. regions and in the Middle East that have caused faster demobilization than our ability to mobilize new staff for new wins and several of our new assignments that were in design and procurement phase required limited resources. With the demobilization now mostly completed and more projects in the construction phase, we expect the revenue trend to be stronger in the coming quarters.

We discussed on our last call a robust aviation market is key to Hill's growth plan. Since then, we have positioned ourselves with several key hires. It is expected that global passenger traffic will double in the next 20 years conservatively. And given our track record in this space, we believe that we are well positioned to capitalize on this growth.

The U.S. market continues to improve. And now focus for us is the aviation vertical as airport facilities have been left unattended for decades. New terminal developments alone will produce over $50 billion in the total project cost in the next 3 years. Hill's total qualified addressable project construction management market in the next 3 years in the U.S. is approximately $570 million in fees. Hill has been positioning itself as a qualified firm for key pursuits in 2020, with key project management, construction management aviation pursuits to be procured in the next 12 months, including San Jose, Miami, Fort Lauderdale and Austin terminals, development programs equaling to over $11 billion in total development costs and $330 million in potential project management, construction management fees.

In Europe, Hill is also pursuing key development opportunities, including projects in Poland, Portugal, Greece, France and Italy. Potential airport development in 2020 will equal over $7 billion in total development cost and present over $210 million in potential project management, construction management fees.

In the Middle East and North Africa, over $6 billion in development costs in 2020 and $180 million in potential project management, construction management fees for Hill, including projects in Doha, Cairo and Saudi Arabia. We continue to see a high demand for post-construction services in the international markets as well. We are well positioned for several assignments that will add to the existing post-construction backlog of over $40 million.

Now let me pass the call to Todd to present the financial results.

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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. Our turnaround is about continuing and sequential progress, and I am happy to report our success during the third quarter as we continue to execute our plan.

One, our adjusted EBITDA was $5.6 million for the quarter, surpassing each of the last 5 quarters. Two, we had net income for the quarter of $2.5 million, improving on our last quarter, in which we returned to a net profit for the first time since mid-2016. Three, SG&A was $29 million for the quarter and $87 million for the first 9 months of 2019, well within our guidance of approximately $120 million for the year. Four, our backlog held steady at $822 million, up over 11% from year-end. And five, consulting fee revenue was $76 million for the quarter, slightly down from $77 million last quarter.

Free cash flow is approximately negative $2 million for the first 9 months of 2019 due primarily to capital expenditures, slightly offset by positive cash from operations. CapEx included approximately $1 million of costs related to our consolidating our corporate headquarters into half the former space.

As we communicated last quarter, the restructuring and restatement charges are now behind us. You'll notice in the press release there are no onetime cost adjustments this quarter, only the usual noncash stock comp and unrealized FX items to get to adjusted EBITDA. We believe this now makes our story much clearer and easier to understand and permits us to focus on the core business.

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. We have indicated our belief that Q4 2018 was a trough and we would turn the corner in 2019. We saw evidence of this in our first half results, and we continue to see evidence in Q3.

Let's start with SG&A. I mentioned before that we finally closed the door on our restructuring expenses, and so it's appropriate to summarize the results. To begin, in 2016, the year before the restructuring, SG&A excluding FX was $160 million. Now our 2019 guidance is $120 million. The result is a $40 million or 25% decrease.

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 am thrilled to share that we are on track to deliver on this promise to shareholders. Our SG&A through the first 9 months of the year is $87 million, less than 3/4 of the $120 million guidance. We continue to believe SG&A of around $120 million 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 $5.6 million, the highest level it's been in the past 6 quarters despite the increased backlog not yet fully driving increases in CFR. Likewise, we had net income of $2.5 million in the quarter, our second consecutive quarterly net profit after having not shown a profit since mid-2016, despite those quarters having higher CFR. Converting our successful bookings efforts so far this year into backlog and the nonbacklog 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.

For perspective, our backlog, which is a leading indicator of future CFR, declined over 12% during 2018, leading to our CFR in 2019 declining over 11% from 2018 levels. So far in 2019, however, our backlog has increased over 11%. So despite our consulting fee revenue of approximately $76 million for the quarter being down slightly from $77 million last quarter, we expect CFR in the fourth quarter and beyond will grow over the current level.

Our gross margin on that consulting fee revenue was 40.8% in the third quarter, up slightly from 40.6% in Q2. As I mentioned, our backlog at September 30 is $822 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 for costs 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 will increase from current levels. 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 indicated.

We continue to believe that a 10% EBITDA margin on CFR is achievable as we gain more scale from our growth in backlog. I also mentioned our free cash flow this year is negative. While our operating results continued to improve during the third quarter, CapEx investments and 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 the timing of outgoing payments will fluctuate quarter-to-quarter.

I'll now turn it back over 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, Hill signed an agreement with Greece's Thessaloniki Port Authority as a leader of a consortium including Rogan Associates to provide design and project management services for the planned expansion of the marine works infrastructure of Pier 6. This port is the most important port of Northern Greece and a key transportation hub for Southeast Europe as part of the core network of trans-European transport network.

In the U.S., the U.S. Federal Transit Administration, FTA, selected Hill to continue providing project management oversight services on major transit capital projects nationwide. Hill has been providing PMO services for the FTA continuously for over 3 decades. In addition to our continued work with the FTA, Hill was awarded a contract to provide consulting management services for the Central Florida Expressway, CFX, multi-project construction program. The program involves major roadway and bridge project and other CFX-associated facilities, which will enable CFX to improve conditions in the 4 counties of the greater Orlando area, enhanced travel for residents, business and tourists and improved safety. Hill is providing support, oversight and management of the program as well as oversight over CFX's construction, engineering, inspection consultants.

In Mexico, ACCIONA Parques Reforma and Vertex awarded Hill the fourth tower of their Maranta project. Hill is providing project and construction management services for Tower 4, which will be a 20-story apartment building. Maranta Bosques, located in an exclusive area of Mexico City, is a development of 5 towers distinguished by its immersed design in the nature of 70,000 square meters of green areas.

In the Middle East, Hill continues to have a strong relationship with the Abu Dhabi National Oil Company, ADNOC, providing facility management, project management and site supervision services for multiple facilities and projects. Also in Abu Dhabi, Aldar Properties awarded Hill with the Alreeman project. Hill will provide project management services to supervise the construction of Alreeman through phases 1 and 2. Alreeman is the home to a selection of residential and commercial properties. In Saudi Arabia, Hill as part of a joint venture was awarded a continuation of our contract by the Arriyadh Development Authority, or ADA, to provide project management and construction management services for several design/build contracts for multiple metro lines.

In Asia, the Indian Oil Corporation Limited announced that Hill International is the successful bidder for the provision of project management, consulting services for the construction of the new Indian oil technology development and deployment center. And in Egypt, Al Ahly for Real Estate Development, Sabbour awarded Hill a contract to provide facility management services for their Square compound, which contains more than 2,400 residential units and retail and commercial space. As noted earlier, our continued success in winning work is now resulting in growth and improved profitability throughout the company.

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Operator [6]

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(Operator Instructions) And there are no questions in the queue. I'd like to turn the call over to Raouf Ghali for closing remarks.

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

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In closing, let me reiterate, Hill's net earnings and EBITDA continued to move in the right direction. CFR is expected to grow as new bookings are being converted into revenue. We maintain a strong hold on SG&A costs and the strength on our new bookings trend continues with $45 million in October alone.

Thank you, everyone, for participating on the call, and look forward to our next call.

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Operator [8]

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Thank you, everyone, for participating on the call and look forward to our next call. This concludes today's conference call. You may all disconnect. Everyone, have a great day.