Hill International, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Greetings, and welcome to Hill International's Second Quarter 2020 Financial Results Conference Call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Devin Sullivan, Senior Vice President at The Equity Group.

[Devin Sullivan:]

Thank you, Brock, and good day, everyone. Thank you for joining us for Hill International's second quarter 2020 financial results. Our speakers today will be Raouf Ghali, Chief Executive Officer; and Todd Weintraub, Hill's Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made during this call may be 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, but not limited to, any statements of belief or intent any statements concerning financial projections, our plans, strategies and objectives for future operations are forward-looking statements. These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, the willingness and ability of governments and other clients to undertake and complete infrastructure projects and our ability to maintain and support business development activities. Although we believe that the expectations, estimates and assumptions reflected in forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Important factors that could cause our results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the Risk Factors section and elsewhere in the reports we have filed with the Securities and Exchange Commission, including that unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realized as revenue and our expenses may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statements. Before I turn things over to Raouf Ghali, I would like to make you aware of the safe harbor statement regarding forward-looking statements and GAAP financial measures, which will apply not only to the presentation but to the remarks made today. And with that said, I'd now like to turn the call over to Raouf Ghali, Hill's Chief Executive Officer. Raouf, please go ahead.

[Raouf Ghali:]

Thank you, Devin. Good morning, everyone, and thank you for joining us today to discuss our second quarter financial results. On behalf of everyone at Hill, I hope you and your families are safe and well. I'm happy to say that Hill is continuing to serve our global clients with industry benchmark project management, construction management and related services. Our work has been deemed essential by many governmental authorities and substantially all our billable employees are serving ongoing projects in 34 countries. As you can see on Slide 4, we had a good 2020 second quarter, rebounding to a large degree from the impact of COVID-19 that had on operations earlier in the year, although the effects of the pandemic still linger. We attribute this rebound to several factors, including our low-risk professional service model, our geographic, end market and client diversity, the evolving nature of our projects and of course, the continuing professionalism and commitment of all our employees. As you can see on the slide, we produced $75.8 million in CFR, are maintaining our SG&A on track with our revised annual guidance, had an adjusted EBITDA of $5.3 million, return to generating positive free cash flow and improved our liquidity profile. We also secured approximately $70 million of new awards in the second quarter despite sluggish activity due to COVID. We anticipate that new awards will accelerate in the second half of the year. Todd will discuss our results in greater detail shortly. If you could please turn to Slide 5. As you can see, our revenue profile reflects very geographic, end market and client exposure and allows us to quickly adapt to changing market environments. The bulk of project work continues to be in the U.S., followed by the Middle East. Our Middle East exposure, while still a very important part of our business, has declined by design as we focus our efforts more and more on the U.S. infrastructure market. To this end, I'm happy to announce that following Mike Griffin's retirement, Drew Jeter has joined us as President of the Americas. Drew brings over 30 years of experience in program management of mega programs in the federal, environmental and infrastructure space. Prior to joining CH2M and Jacobs, he retired with the rank of Colonel from the US Air Force. Drew will oversee the operations of Hill's Northeast, Mid-Atlantic, Southeast, Southern, Western and Latin America regions, and we look forward to leveraging his experience to help drive our growth. Our fee-based model mitigates threats typically associated with at-risk construction services. It provides us, though, with the flexibility to pursue complex, dynamic long-term projects, along with added benefit of providing us with repeat business. Historically, Hill has had approximately 70% of its CFR from repeat clients, both U.S. and international. We have shut down our operation in Brazil due to the continuous economic downturn that has worsened due to the COVID-19 pandemic. We do not see the short to mid-term market favorable to our business model. This caused a nonrecurring expense in the second quarter but protects the remaining business from continuous losses. Todd will provide more detail in his presentation. Moving on to Slide 6. We have made a deliberate pivot to global infrastructure projects, which we believe are resilient, sustainable and a potential catalyst for domestic and international economic growth as we emerge from this pandemic. We are currently supporting infrastructure projects that include highway upgrade and reconstruction in Pennsylvania and Ohio, expansions on the Port of Long Beach in California, redevelopment of the Salt Lake City International airport, an extension of the Metro Gold Line in Los Angeles and natural gas transport for Europe's Trans Adriatic Pipeline. Given our 44-year track record of successful project completion, we believe that Hill is well positioned to capture COVID-19 stimulus-related global infrastructure project opportunities. In the U.S. alone, there's an estimated $2 trillion of underinvestment in infrastructure, and we are closely monitoring congressional legislation activity related to infrastructure spending. Now moving on to Slide 7. As we have stated in the past, Hill's emerging facility management business provides us with the opportunity to extend our client relationships beyond the completion of a project and create a recurring revenue stream. By applying our project management expertise to a network of experienced subcontractors, we can offer multiple solutions based on facility complexity, purpose, client requirements, installed equipment and budget. This relationship can begin at project kickoff with the long-term management services integrated into the scope. At present, this is a small part of our total operations. However, it has become a renewed focus to Hill. We are currently providing facility management services in 3 countries with blue chip clients, including the Abu Dhabi National Oil Company, ADNOC, for its entire portfolio of ADNOC facilities. We believe that opportunities exist in all markets in which we are currently conducting business and are in various stages of negotiation to provide these services to other entities, some of which our existing Hill clients and some of which are not. Thank you for your attention, and I will now turn things over to Todd Weintraub, Hill's Chief Financial Officer. Todd, please go ahead.

[Todd Weintraub:]

Thank you, Raouf. I'll pick things up from Slide 8. This slide provides an overview of our GAAP results for the second quarter of 2020. CFR for the second quarter of 2020 was $75.8 million compared to $77 million in the second quarter of 2019, reflecting delayed project starts from the first half of 2020 to the second half of the year and into 2021. These delays were due in large part to uncertainties driven by COVID-19. Selling, general and administrative expenses were $26.9 million or 35.5% of CFR. As many of you are aware, we achieved a $43.2 million decline in the annual SG&A from 2016 to 2019. As previously announced, we have also undertaken several initiatives designed to reduce corporate costs by $10 million in 2020, which we are on track to achieve. Operating profit for Q2 2020 was $3.3 million compared to operating profit of $4.6 million in Q2 2019. As Raouf noted, during Q2 2020, we shut down our operations in Brazil, which have become increasingly challenged due to that country's ongoing economic crisis and more recently, the impact of COVID-19. These market forces combined to produce a negative impact on Hill's total operations. In connection with the closure, Hill recorded a nonrecurring noncash loss of $4.1 million, which, in turn, produced a second quarter net loss of $2 million. We are confident that the shutdown of our operations in Brazil is the proper decision for our company given the negative financial impact that these were having on our overall financial results. The expected cost savings to improved cash flow associated with this closure in combination with those generated by our cost reduction initiatives and ongoing business development should allow us to build scale in promising market geographies and sharpen our focus on opportunities that deliver better returns. Moving on to Slide 9, which presents our results on an adjusted basis. On an adjusted basis, operating profit increased to $4.8 million for the 2020 second quarter, which adds back $802,000 of share-based compensation, $56,000 of FX and $636,000 of non-recurring activity in SG&A, including the settlement of a tax liability. Last year's second quarter included a nonrecurring credit of $1.1 million related to true-up of restructuring costs. Adjusted net income was $3.6 million in the 2020 second quarter, nearly triple that of $1.2 million in last year's second quarter. Lower SG&A adjusted for the just discussed items as well as lower tax expense in 2020 was partially offset by lower gross profit in 2020 due to the impact of lower CFR from COVID, as discussed. We reported EBITDA of $5.3 million in the 2020 second quarter. This compared to $4.9 million in last year's second quarter. Moving on to Slide 10. We continue to maintain a strong focus on liquidity management. Cash collections during Q2 2020 normalized after being delayed due to the pandemic in Q1 2020, producing a $7.1 million increase in unrestricted cash at June 30 as compared to March 31, 2020. And that was up -- liquidity, up $8.9 million from March 31, 2020. Free cash flow in Q2 2020 was $6.2 million, a nearly $18 million improvement from the first quarter of 2020. We believe a portion of this was due to some catch-up on delayed first quarter collections. We expect the second half of the year to continue to be cash positive, albeit at a lower rate than Q2. It is worth noting that cash flow generation and the increases in cash and liquidity during the quarter were achieved primarily from organic growth. We are currently evaluating the recently opened main street lending programs to determine our eligibility. Now if you'll turn your attention to Slide 11. As previously announced, Q1 2020 bookings declined due to COVID-19-related project deferrals and cancellations. We also had some cancellations and reductions of existing projects. This resulted in a $46 million adjustment to backlog at June 30, 2020. Thankfully, as Raouf noted, during Q2 2020, an improving business landscape generated more than $70 million of new awards in Europe, Middle East and the United States. From a geographic perspective, our backlog is concentrated in the U.S., with Middle East comprising the next largest area after the U.S. Thanks very much for your time, and I'll now turn the conversation back to Raouf.

[Raouf Ghali:]

Thank you, Todd. If you could move to Slide 12. We are cautiously optimistic for the balance of 2020, and we find ourselves in a much stronger position than just a few short months ago. As previously announced, we withdrew our 2020 CFR guidance of $330 million to $350 million earlier this year due to the uncertainty regarding the economic impact of the pandemic. Based on current business conditions and considering certain previously announced project deferrals and cancellations that occurred earlier this year, we now expect CFR for 2020 to range between $300 million to $310 million, consisting of both new awards and extension of existing contracts. I note that the deferred and canceled projects mentioned previously negatively impacted our CFR by around $10 million in the second quarter alone. These were offset by new bookings, and I'm proud of the efforts of our business development team and their focus on capturing these opportunities. We are targeting an annual gross margin of 38% to 39% for 2020, consistent with previous guidance. As a result of our cost reduction initiatives, we now expect that corporate expenses for 2020 will approximate $110 million, down from our previous estimate of $120 million. We do not expect that this reduction will negatively impact client service or business development. We also expect to generate adjusted EBITDA of $16 million to $20 million for the year with a long-term goal of 10% EBITDA margin. Thank you for your time today, and I will now ask the operator to open the call to questions.

[Raouf Ghali:]

Thank you. This is an extraordinary time, and it has required an extraordinary response. Once again, I'm very proud of our team and the remarkable fortitude they are demonstrating. Hill is a strong and vibrant company. We have a long history of success, a portfolio of more than 10,000 completed assignments and a reputation that is among the best in our industry. We believe that we have taken the steps necessary to help us to navigate these challenging times, along with a plan that we'll build on our strengths and allow us to capture the opportunities inherent in our industry. We remain committed to creating long-term value for our shareholders. On behalf of Hill's 2,700 employees around the world, I thank you for your continuing support of Hill International. Have a wonderful day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.