Hill International, Inc.
Q4 2018 Earnings Call Transcript

Published: 2 Apr 2019

[Operator:]

Welcome to Hill International Incorporated's Fourth Quarter Earnings for Fiscal Year 2018 Investor Call. On this call, John Grau, from 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 fourth quarter annual results for 2018. As a reminder, this call is being recorded. John, please.

[John Grau:]

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 that 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.

[Raouf Ghali:]

Thank you, John, and thank you to everyone who is on the call this morning. We will start the call with some noteworthy accomplishments we have made since our last call in November. Then, Todd Weintraub, our new CFO, will go through the 2018 financial performance. And lastly, we will go through our 2019 outlook. But first, let me tell you that since our last earnings call in November, I have visited numerous offices, existing clients and prospective clients globally. The positive feedback is overwhelming from our clients. They understand that we are once again focused on their needs rather than our internal reorganization. With that, let's proceed with some of our recent significant accomplishments. We have realigned our leadership and sales force compensation by significantly increasing the variable component of the compensation. This bonus includes cash and equity and is tied to EBITDA, sales and DSO targets. Clearly, we are incentivized to profitably grow the company and improve collection. We believe this new compensation structure aligns us with shareholders and is better in line with market practice. I am pleased to introduce Todd as our new CFO, who started in December 2018. Todd comes to Hill with nearly 30 years experience, including serving as CFO, Corporate Controller, Director of Accounting and Accounting Manager for six publicly held companies. In addition, Todd has served on the Board of Directors for multiple companies. As CFO, Todd has been a key contributor to those companies. With Todd on board, the leadership team at Hill is now complete. In response to your feedback on total revenue and CFR reporting, the company going forward will report both revenue and CFR as you will hear from Todd later on. As of March 2019, backlog has substantially strengthened compared to the year-end backlog with the company securing major wins since the beginning of the year. For confidentiality reasons, we're not always allowed to issue press releases. And the absence of press releases does not mean we're not winning major projects. As Todd will discuss later, the senior management has taken a hard look at the backlog number and has removed a number of projects awarded in the past, which we don't believe are likely to progress. This explains most of the drop in backlog between third quarter and fourth quarter 2018. In other words, our backlog today is of considerably higher quality than it was in the past and we are excited that we have reached an inflection point this quarter with backlog growing again for the first time in quite a while. Finally, we have won some major awards I will discuss at the end of these prepared remarks. Now, I will pass on to Todd to go through the 2018 performance.

[Todd Weintraub:]

Thank you, Raouf, and thank you to everyone on the call. I'm very excited to be at Hill and I think that we have a great opportunity in front of us. It's been a tough couple of years at Hill. There have been a lot of changes both planned and unplanned and those changes have created a lot of noise flowing through our financial results. I want to provide an update today on those changes and walk you through financial results for 2018 with a focus on how the noise from those changes have affected the results. So going back into 2017 and 2018, there were some major events. One, the Dominick family exited the company and there is now a new management team in place. Two, the company sold its claims business and the focus is now solely on project management and consulting. Three, we embarked on a mission during 2017 to right-size the organization and to implement a cost structure that would be sustainable going forward. This has now been completed. Four, finally, on the unplanned side, there were a number of issues in accounting and finance that had to be corrected

[Raouf Ghali:]

Thank you, Todd. I would like to reiterate that Hill is undergoing a new phase of growth. The perfect storm of events and the changes that the company underwent in 2017 and 2018 have passed and we are now building from a solid foundation of both new and existing clients. We expect 2019 to be a strong year for the company. This confidence is due to several factors. First, we have a pipeline of prospects totaling up to $1.2 billion in the U.S. and $1.3 billion internationally. Since the beginning of the year we have added $174 million to our backlog and have several new wins to report. These include

[Operator:]

[Operator Instructions] And our first question comes from Chris Colvin with Breach Inlet Capital. Your line is now open.

[Chris Colvin:]

Thanks for taking my questions and I appreciate the update. On the backlog, you called out some projects, but generally the growth in the backlog has that -- can you give us any sense how that's been split? It sounds like as a lot of Middle East and then potentially some U.S.

[Raouf Ghali:]

Good morning, Chris. Yes, the backlog has increased significantly in the Middle East. The Middle East is leading the backlog growth, with Europe and North Africa right behind it. That doesn't mean that the U.S. is not growing equally. It's just not growing at the same rate of growth.

[Chris Colvin:]

Okay. And then on your adjusted EBITDA that you provided for 2019, does that add back the $3 plus million paid to a former executive?

[Todd Weintraub:]

Hi, Chris. It's Todd Weintraub. Yes, the add-back does include that item, as well as other severance and personnel related costs involved with restructuring.

[Chris Colvin:]

Okay. And then roughly almost $20 million of restructuring and restatement cost is most of that held at corporate? In other words, it was corporate which was reported at like $40 million more like $20 million, or was that kind of spread across regions?

[Todd Weintraub:]

So, it was recorded in corporate. And I assume that you're referring to page 77 of the 10-K, which has an operating profit table and shows corporate of about $40 million, I assume that's what you're referring to. I would note that that's a bit of an incomplete picture of costs. That represents the corporate costs that we have not applied transfer pricing to and allocated out to the various other regions. So the actual corporate is going to be a number higher than that. So it's not really one-for-one -- it's really not a one-for-one type regime that you're looking at. I think what I would focus on is, as we've mentioned in the prepared comments that we're looking at SG&A in total and we're looking at cost base of roughly $120 million for all SG&A including corporate; and all the regional SG&A as well, which is a reduction of about 25% from where we were before we started the Profit Improvement Plan. And we do believe that at that reduced level of SG&A, which we think is sustainable, we'll be able to approach a 10% EBITDA as we go forward and as we grow revenue. I think that's the important point regarding the SG&A.

[Chris Colvin:]

Okay, make sense. And then, when I look at your U.S. business, its EBIT grew for the fourth straight year. I think it's probably close to $30 million EBITDA, arguably worth close to $300 million, yet your EV is sub-200. And I would say most of that's -- of course I didn't include overhead in that, but a lot of it is due to the international business. And it sounds like you're getting traction, again, in the Middle East. But outside of that region, especially, when you start to look at Latin America and Europe, those haven't been very profitable or really profitable at all most years. So can you comment on whether you would consider divesting those? Exiting those? And if not, why?

[Todd Weintraub:]

Sure. So, when you look at the profitability, again, by region the information that's contained in the footnote is a little bit hard to follow, because we do have transfer pricing in there, that is done for tax purposes, it doesn't really represent a true allocation on a pro-rata basis. But in addition to that, we've talked about the unrealized FX that is affecting consolidated results, that's affecting regional results as well and it's not affecting them equally. So there is sort of a lot of noise that's going through that. If you were to go through and eliminate the effects of the unrealized FX of the transfer pricing that we have in place and kind of the non-recurring costs and allocate them out on a regional basis, what you would see is that, in fact, the large regions are the most profitable

[Chris Colvin:]

Okay. And maybe last, one or two is, on the Libya, I think, you've still got 40 -- almost $43 million of receivables that you've fully reserved for. What's the update on potentially collecting those?

[Raouf Ghali:]

Chris, this is Raouf. We're still in discussions -- in close discussions with our client there. We haven't reported on it, because till things materialize we don't want to be promising. But we feel we're very close to potentially collecting some more. Last quarter, we collected some of our receivables that they paid certain amount of tax for us -- corporate tax for us. So, we feel -- we still feel very strong that we will be collecting. We cannot talk about timing, because it's more political than commercial.

[Chris Colvin:]

Yeah. Understood. And last question, is there going to be -- especially now that Todd's joined, Raouf you've been in the CEO seat for a little bit. You've got things it seems like not only stabilized, but growing again starting of having a story to tell with positive news. Is there going to be a little bit more of a concerted effort on the IR front as far as attending conferences and trying to get some analyst coverage?

[Raouf Ghali:]

Definitely. That's going to be one of the items that I think Todd and myself are going to be looking at in the future. But like you said, we wanted first to consolidate the financials make sure that we are right on track focused on growth and then we're going to be hitting the IR.

[Chris Colvin:]

Sounds good. Well, thank you so much for the update, I appreciate it.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Matt Sweeney with Laughing Water Capital. Your line is now open.

[Matt Sweeney:]

Hi, guys. Thanks for taking the question. I actually -- I got cut off. I lost the call during the middle of the last question period, so this may have been answered. But you did talk a little bit about the -- some of the other regions and how gross margin is good there and as the businesses grow we should see that in the results. But could you just talk about how we intend to grow? Do you think that's going to be organic or through acquisitions, or what's the right way to think about that in those regions the under-scaled regions?

[Raouf Ghali:]

For the immediate future, we're looking at organic growth. And that is in order to both preserve liquidity and maintain and manage our risks. So, we're looking at organic growth. We feel we are in all the right regions and in all the right spots. As Todd pointed out, all of our regions are -- have a healthy gross margin. And we want to leverage that in the places we currently are. So, we're not looking at growing locations, but putting critical mass in the existing locations we are in.

[Matt Sweeney:]

Thank you.

[Operator:]

Thank you. And I think that is our last question in the queue for today. Thank you to everyone for your attention and participation. This concludes today's call. Everyone have a wonderful day.