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Edited Transcript of HIL earnings conference call or presentation 17-Mar-20 1:00pm GMT

Q4 2019 Hill International Inc Earnings Call

MARLTON Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Hill International Inc earnings conference call or presentation Tuesday, March 17, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elizabeth J. Zipf

Hill International, Inc. - SVP of Global Marketing & Communications

* 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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* Charles W. Neuhauser

Mainwall Investment Management, LLC - Chief Compliance Officer

* 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.'s Fourth Quarter Earnings for Fiscal Year 2019 Investor Call. On this call, John Grau, InvestorCom, will provide some introductory remarks on the content of the call. John will be followed by Hill International's CEO, Raouf Ghali; 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 fourth 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, all 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 acknowledge the world is going through difficult times and hope everyone is healthy and stay strong until this crisis passes. In the midst of all this, we are excited to share with you our fourth quarter and 2019 results and will be filing our annual report on Form 10-K for the fiscal year ending December 31, 2019, within the extended deadline of 15 days following March 16, the regular filing due date. The additional time needed is to complete certain administrative and other procedures related to our ongoing annual audit. Todd will provide more details later on, on the call.

Following the same sequence, as our previous earnings call, I will brief you on significant achievements during this quarter. Todd will provide details on financial results. Ms. Liz Zipf, our Senior Vice President of Global Marketing, will go over some of the major awards since our last call. Then we will open the call for questions and answers. And lastly, I will provide some closing remarks.

Let's proceed with some of our significant accomplishments. To begin, we reached a settlement with the SEC on the investigation concerning our past financial restatements. There has been an increase in our quarter 4 CFR deriving from our growing backlog. We concluded the year with $16.9 million adjusted EBITDA and over $14 million in earnings. Our bookings were strong during the year, with a total of $495 million, ending the year with a backlog of $811 million. We expect this trend to continue in 2020 as we see strong demand for our services in all operations.

Consulting fee revenue in the fourth quarter showed a slight increase as the backlog made its way to CFR. We anticipate CFR will continue to grow throughout 2020, and we estimate CFR will be between $330 million to $350 million for 2020.

We have collected $9.7 million from our long outstanding Libya receivables. This has positively impacted our liquidity and will give us additional flexibility to finance the growth of our business. We expect to collect the entire amount owed to us by our client in Libya as the political situation normalizes in the country.

In addition, we have tightened our controls and have closed out a majority of material weaknesses previously identified and anticipate the remaining weaknesses to be closed out in 2020. Last but not least, we are monitoring closely current world events regarding the coronavirus and oil prices. We are taking precautionary steps to protect our employees and the community they live in.

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. Raouf and I have now completed our first full fiscal year at the helm of Hill. When we took over in the fall of 2018, the business and financials were still in a downward spiral as the company continued to feel the impact of the restructuring and restatement that consumed most of 2017 and 2018. We communicated our business priorities for 2019 as growing the backlog, maintaining our lower cost base, improving liquidity via collections and returning to profitability. We also communicated a commitment to file our financials timely and accurately and to improve our internal controls over financial reporting. I am thrilled to report significant progress on all these initiatives a year later.

Number one, we collected a large payment on our Libya receivable, as Raouf said, $9.7 million, which nets to $7.1 million after subcontractor payments and other fees. Two, our adjusted EBITDA was $4 million for the quarter, marking our fourth consecutive quarter of positive adjusted and unadjusted EBITDA and a $4.5 million year-over-year improvement from the same period last year. Three, we had net income for the quarter of $12.1 million, a significant $19.4 million improvement over the $7.3 million loss from Q4 of 2018. Four, SG&A was $23.1 million for the quarter and $111.1 million for the year, well within our guidance of approximately $120 million for the year. Five, our backlog grew to $811 million, up 10% from the prior year-end. Six, consulting fee revenue was $76.8 million for the quarter, up 2% from Q4 of last year. And seven, we made significant progress in remediating our controls, material weaknesses and strengthening our internal control framework. We eliminated a majority of existing material weaknesses and expect to complete remediation of the others this year.

We generated free cash flow of $8.3 million for the quarter and $6.1 million for the year driven by strong collections, partially offset by capital expenditures. Collections included $9.7 million from Libya, netting the $7.1 million after subcontractor payments and fees, and CapEx included approximately $2 million of costs related to consolidating our corporate headquarters into half former space. Free cash flow was also impacted by payment of a $3.2 million retention bonus in July that was part of the now-complete profit improvement plan.

Our story has been difficult to communicate and understand over the past year, as 2018 results included many nonrecurring costs, the magnitude of which overwhelmed the financials and resulted in adjustments to EBITDA that were larger than the actual EBITDA itself. As we communicated over the course of 2019, these items wrapped up earlier in the year and were not significant to 2019. You'll notice in the press release that the only onetime cost adjustment this quarter is our minus $500,000 SEC settlement, which now completely closes the chapter on the restatement. We believe this now makes our story much clearer, cleaner and easier to understand and permits us to focus on the core business. In fact, the only other EBITDA adjustment we made was the kind we like. We excluded a $7.1 million net receipt from Libya from our adjusted EBITDA.

I want to provide you now with more detail on the results for the quarter. We had indicated our belief that Q4 2018 was a trough, and we returned the quarter in 2019. We've seen evidence of this throughout the year continuing in Q4.

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

In 2016, the year before the restructuring, SG&A, excluding FX, was approximately $160 million. Next, our 2020 guidance is $120 million. That's a $40 million or 25% decrease. These are critical points because while macro factors and variations and 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 and 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 existed quite a bit better finishing the year at $111.1 million. That's 27.9% decrease from 2018. This does include a credit for the Libya net payment, which was fully reserved and the SEC settlement. It also includes noncash items that we exclude from adjusted EBITDA, namely stock compensation and unrealized FX. Adjusting for these items, SG&A was $30.7 million for the quarter and $116.8 million for the year. The run rate for Q4 was slightly higher due to normal seasonal fluctuations, such as increased PTO for holidays and vacation and increased accounting tax fees.

Additionally, the investments we made in our aviation strategy discussed last quarter ramped up in Q4 adding to SG&A. We expect this investment will be profitable as we execute our aviation strategy. We continue to believe SG&A of around $120 million is sustainable for 2020, 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 $4 million for the quarter despite the increased backlog, not yet fully driving increases in CFR. Converting our successful bookings efforts into backlog and then that backlog CFR generally has allowed 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 $76.8 million for the quarter, up 2% over Q4 of 2018. We expect CFR in 2020 to continue growing over the prior year. We've said over the past year, we will provide more detailed guidance when we were more comfortable doing so. I'm happy to provide the following guidance for 2020.

One, we are now operating at a sustainable run rate for costs at the level we indicated we would and expect SG&A for 2020 to remain at approximately $120 million. Two, we expect our consulting fee revenue to increase to $330 million to $350 million in 2020. Three, we expect our gross margin to tighten from slightly over 41% in 2019 to the high 30s for 2020 due to market conditions and the closeout of some higher-margin projects in the Middle East, Asia and U.S. And four, expect adjusted EBITDA margin to be between 5.5% and 7%.

We continue to believe that a 10% EBITDA margin on CFR is ultimately achievable as we gain more scale from our growth in backlog. Our free cash flow, excluding Libya collections, was close to breakeven for the year. Due to collections on other accounts and positive results of operations, offset by certain nonrecurring payments, such as the retention bonus and SEC settlement discussed earlier, timing of payments and receipts and precise timing of start-up and wind down of projects makes forecasting of free cash flow challenging. We do expect to reinvest positive cash flow from operations back into growing the business while using our line of credit to address any temporary working capital requirements.

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. At year-end, we had approximately $16 million of unrestricted cash on hand and $15 million of capacity under revolving credit facilities for a total of $31 million in available liquidity. We believe this level of liquidity is sufficient to support our cash requirements for the foreseeable future.

As Raouf mentioned, we will file our annual report on Form 10-K for the fiscal year ended December 31, 2019 once we complete certain administrative and other procedures relating to our ongoing review of information for our annual audit. The additional time needed arises from our previously disclosed material weaknesses in internal controls over financial reporting. We intend to file our Form 10-K as soon as practicable, but in any event within the extended deadline, which is 15 calendar days following March 16, the regular filing due date of the Form 10-K, provided under rule 12b-25.

I'll now turn the call over to Liz Zipf to highlight some major awards since our last call.

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Elizabeth J. Zipf, Hill International, Inc. - SVP of Global Marketing & Communications [5]

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Thank you, Todd. With that, let's proceed to some of our latest wins. In Europe, movement forward into the European aviation market continues as Hill has been selected as part of an international consortium by Societa Aeroporto Catania to offer design, project management and supervision services for the implementation of the investment plan for the Catania Airport in Italy under a 6-year contract, including a new terminal, airside works and ancillary facilities.

Elsewhere in Europe, Hill has been selected by JP ADESA to provide technical assistance to the project implementation unit for the construction of approximately 5.5 kilometer motorway in the Mediterranean core network located in the Balkan.

Given the challenging geotechnical properties of the region, the new motorway will feature several unique elements, such as a 3.6 kilometer tunnel, 2 bridges, 2 viaducts and overpass and roundabout.

Also in Europe, we continue to grow our outreach to Fortune 100 companies globally. Hill was recently selected by Foot Locker Europe to provide PMCM services under a framework contract for store rollouts in Germany, Switzerland and Austria to comply with company plans to reorganize a global operating model to ensure international growth.

In the Middle East, Hill was recently awarded a contract by Expo Dubai 2020 to provide consultancy services for the Expo 2020. Expo 2020 Dubai is the first world expo to be hosted in the Middle East, Africa and South Asia region. The theme is connecting minds creating the future. More than 200 participants, consisting of nations, organizations, businesses and educational institutions are expected to participate.

Also in the Middle East, Hill with AECOM is continuing its services on the Abu Dhabi Airport Midfield Terminal through the provisions of additional construction management and supervision services for the 700,000 square meter facility --

In North Africa, Hill has been awarded a contract to provide project management consultancy services to Egyptians for health care services for the construction of CAPITAL MED Phase 1 project in Badr City, Egypt. CAPITAL MED will be the largest medical city in the region, spreading over approximately 116 acres. The project has 3 phases, spanning over 7 years and will provide over 2,000 beds, 450 intensive care units and 40 operating rooms to serve over 5 million patients per year. Phase 1, approximately 174,000 square meters, will include an ambulatory and outpatient center of 374-bed healthcare center, an administrative and command center and a central plant.

Also in North Africa, Hill has been awarded a contract to provide project management consultancy services to Al-Futtam for commercial and administrative centers for the design and construction of Cairo Festival City, sports and social club in new Cairo, Egypt. The club intends to serve over 5,000 family members and spans an area of over 53,000 square meters.

In the U.S., Hill was selected to provide construction management services to the Spokane Transit Authority for the Agency City Line project. This project involves the construction of a 6 mile quarter-based bus rapid transit route. The City Line will provide frequent access to some of the city's most significant district, as an electric-powered alternative to driving, this bus route will help cut carbon emissions and reduce traffic in the city. The $92.2 million City Line project is funded by the Federal Transit Administration small start grant, the state and the Spokane Transit Authority.

Also in the U.S., Hill has been awarded 2 investment -- delivery investment quantity contracts by the New York City Metropolitan Transit Authority to provide construction management and inspection services on the city's transit system until 2024. The 2 contracts are split according to their funding, 1 one being a federally funded contract, the other being a stated-funded contract.

In the U.S. Virgin Islands, Hill, with Witt O'Brien, was selected by the U.S. Virgins Islands Department of Health to provide program management services for the disaster recovery project management office. This is a 5-year contract, establishing a disaster recovery project management office to support timely completion of the department's recovery management portfolio. Our services will include management of budget, resources and quality assurance based on industry standards. The proposed team will include public health industry experts, experienced in recovery and reconstruction of public health facilities and programs.

In Brazil, we continue our successful relationship with Casa dos Ventos. Hill was selected to provide owner of engineering and construction management services for the construction of 2 wind farms, Rio do Vento 1 and Babilnia Sul. Rio do Vento 1 will be located in Rio Grande do Norte. The total installed capacity of the $600 million facility will be 504 megawatts, generated through 120 wind turbines each with the 4.2 megawatt capacity.

Babilnia Sul will be located in Bahia. This $420 million wind farm will consist of 80 wind turbines, 4.2 megawatts each.

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

I'll now pass the call back to our operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Charles Neuhauser with Mainwall.

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Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [2]

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You mentioned you had $16 million of cash on the balance sheet. What's the debt situation at the moment?

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

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Todd, do you want to take that?

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

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Yes. So the debt situation is that we used the money that we got from the Libya pay -- the Libya receipt to pay down our debt. So our leverage ratio is a little bit below 2 right now. I believe it's coming in at about 1.89 or so. And that's based on total consolidated debt of somewhere in the mid-$40 million range, Charles.

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Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [5]

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Okay. And since you mentioned it, how much more is there to collect on the Libya receivable?

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [6]

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I believe it's $30 million -- Todd, it's $39 million?

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Todd E. Weintraub, Hill International, Inc. - Senior VP & CFO [7]

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It's approximately $30 million -- a little bit over USD 30 million remaining.

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Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [8]

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The big -- well, there are several big questions at the moment. But one of the big questions, of course, is have you any indication that any of your projects in the Middle East might be delayed or canceled because of the recent sharp decline in the price of oil?

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

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I'll take that. This is Raouf. Very good question. I'm glad you asked it. To date, we have not seen any of our projects being in jeopardy because of the temporary oil price and the crisis that it has created. All of our projects are really long-term and in the midst of construction. So it would be difficult for them to have any disruptions.

We've also not seen any major impacts on pursuits that we have, nor have we seen any delays yet. Granted, it's only a few weeks. So why -- I do caution, we don't know what's out there in the future. But for now we haven't seen any impacts.

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Charles W. Neuhauser, Mainwall Investment Management, LLC - Chief Compliance Officer [10]

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And then another general question. The profit improvement project, I think you indicated earlier that it's finished. And so the margin -- the EBITDA margin improvement that we would all like to see over the next years would come from growing the top line, so that the profitability would improve because of the revenue growth and the cost structure improvements that were encompassed by the profit improvement plan have been finalized. Is that the way to look at the situation?

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [11]

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That is correct. We feel as we grow the top line, the additional SG&A that's required is going to be minimal. To a certain degree, it's going to be none. Obviously, after a certain point, there's going to be a little bit, but the addition is going to way outplay the profitability.

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Operator [12]

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(Operator Instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Raouf Ghali for closing remarks.

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Raouf S. Ghali, Hill International, Inc. - CEO & Director [13]

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Thank you. In closing, let me reiterate, new bookings in 2019 were $495 million. CFR is expected to grow in 2020. We anticipate CFR to be within the range of $330 million to $350 million. We maintained a strong hold on our SG&A costs. We have settled with the SEC and closed out all issues concerning our financial restatements. And our enhanced liquidity facilitates efficient funding of the anticipated growth in 2020 and should there any liquidity requirements be needed for the temporary worldwide crisis that we're facing currently.

Thank you for -- thank you, everyone, for participating on the call, and we look forward to our next one. This concludes our call for today.

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Operator [14]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.