Hill International Inc (HIL) 2018 Q4 法說會逐字稿

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.

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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.

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 6 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 are 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.

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 live 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 founding 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 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: a, 3 years of financial statements needed to be restated; b, the financial control framework needed heavy remediation; and c, we need to become current with our SEC filings. Those items have largely been addressed and are behind us at this point. All of these changes came at a cost, specifically a $20 million cost in 2018 alone.

In addition to that $20 million, there were other negative items that affected financial results. We had a performance bond that was called during 2018 that is currently in litigation. However, we do take the expense for the bond in 2018. In the other direction, we collected a large amount of a previously reserved account receivable. The net of those 2 items is about a negative $5 million, and we consider that to be nonrecurring.

In addition, we had about $6.5 million in unrealized foreign exchange losses running through our financial statements. These unrealized FX losses, primarily relate to intercompany loans and balances. The important point here is that these losses will not be realized until and unless the underlying intercompany items are settled. And settling them is completely within our control. As such, we have excluded unrealized FX from adjusted EBITDA as we control when and if we choose to settle them. This year, we are analyzing those outstanding intercompany balances and planning a course forward on how we should best manage them.

With that in mind, our adjusted EBITDA for 2018, adjusting for all these items, was $15 million, down from $17.5 million in 2017 or a 13% drop. Our adjusted EBITDA in fourth quarter of 2018 was negative $1.5 million compared to adjusted EBITDA in 2017 of $4.5 million.

I'd also note that fourth quarter 2018 results were impacted by an approximately $3 million provision for bad debts. This was not the result of any particular losses during the fourth quarter or the year. Rather, it was a result of an improved and more conservative reserve process and methodology put in place at year end, in part to address some of the prior accounting issues. This more conservative methodology resulted and a $3 million charge during the fourth quarter. However, we do not expect that going forward we'll continue to see provisioning at that level. Without the effect of that $3 million charge, we would have positive EBITDA during the fourth quarter of 2018.

Turning to revenue. Revenue for 2018 was $429 million, which was down from $484 million during 2017 or about an 11% decrease. We also saw our consulting fee revenue down by about 12% from $383 million in 2017 to $337 million in 2018. During the fourth quarter, we saw similar revenue drops of $119 million in 2017 to $101 million in 2018 and a drop in CFR from $90 million in 2017 to $75 million in 2018.

Our gross margin on that consulting fee revenue was 38.8% in 2018 for the full year versus 38.3% in 2017. So it was consistent with the slight uptick in 2018. On a quarterly basis, the 2018 fourth quarter gross margin was 39.3%, which is up from the 37.1% gross margin in 2017 during the fourth quarter.

Turning to SG&A. Our total SG&A for 2018 was $148 million versus $151 million in 2017, so you saw a $3 million of improvement during 2018. For the fourth quarter, those numbers were $37 million in 2018 and $39 million in 2017. So also a decrease year-over-year in the fourth quarter. Those SG&A numbers are inclusive of all the noise that I referenced before from the changes. If we exclude from those changes all of the nonrecurring noise, then our full 2018 underlying SG&A would have been $125 million, down from $139 million in 2017. So again, the noise that was a result of the changes the company underwent had a big effect on SG&A.

It's important to note that in terms of SG&A, if you go back and you look at apples-to-apples, you'll see our 2016 SG&A, excluding unrealized FX before any of these change happened, was approximately $160 million. Based on our pro forma 2018 SG&A and run rate for the fourth quarter, our 2019 SG&A should be slightly above $120 million. So we've taken close to $40 million of expenses or approximately 25% out of cost base. This is a number that we think is sustainable going forward.

Looking at backlog. Our backlog at the end of 2017 was $846 million that declined to $740 million at the end of 2018. The primary reason is that we have cleaned up the backlog. The new management team has taken a hard look at the backlog and has removed some projects that were in backlog at the end of 2017, but we do not believe at this point will go forward for a variety of reasons. Looking forward, we expect that our backlog when we report again for the first quarter is going to significantly increase from year-end levels. We have had some significant wins that have not been announced. We expect that we'll be over $800 million of backlog when we report to you again for the first quarter of 2019. The good news is that our backlog is now of much higher quality, and it seems like we have turned the corner and have started to grow the backlog again.

I understand the desire for us to provide specific guidance beyond the backlog and SG&A insights I just detailed. 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 we expect our adjusted EBITDA for 2019 will exceed the 2018 level. The important points are: One, we have completed rationalizing our cost base by cutting it 25% to a sustainable level; two, our backlog is again growing; and three, as that backlog is turned into CFR, the gross profit will most likely fall right through to the bottom line, increasing our historical EBITDA margins over time. We continue to believe that a 10% EBITDA margin on CFR is achievable as we gain more scale from our growth in backlog.

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

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 '18 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: A major 3-year award for a megaproject in the Middle East for an airport expansion that will peak at more than 100 professionals. Once our contract is finalized, I would be able to provide more specifics on the nature of this award. Hill has positioned itself as a major player in the aviation sector, and we are proud to have won this award against some of the largest project managers in the world. It speaks to the added value Hill can bring to its clients.

Also in the Middle East, we recently received a contract from the Qatar Industrial Manufacturing Company to help them deliver the Tower West Bay development. And we have been notified of another major win with the Abu Dhabi National Oil Company, our current client in the UAE.

In North Africa, we received an extension of work for the Grand Egyptian Museum in Cairo, where our assignment has been extended to 2020.

And in the U.S., a new 3-year contract to continue providing program management and inspection services to the City of Cleveland for Dominion Energy Ohio Pipeline Infrastructure Replacement program on multiple assignments for the Ohio Turnpike and Infrastructure Commission.

In Europe, Hill won a contract from S.C. Apa Canal Galati to provide project management and work supervision services for the development of water and wastewater infrastructure in Galati County, Romania, for projects under the European Union financing program.

Hill was also selected by the European Bank for Reconstruction and Development to provide, as a leader to the joint venture, construction supervision services for the railway rehabilitation and upgrade of the Fushe Kosovo Hani electrification line.

In Kazakhstan, Hill is supporting the Astana-20 state fund in developing the Grand Astana Mosque, which is planned to be the largest mosque in Central Asia.

In Brazil, we have secured 2 contracts from Millenium Bioenergia S.A., a new client for renewable energy biofuel plants. We anticipate that the backlog will continue to grow throughout the year. The team is also focusing on maximizing profitability and decreasing our DSOs.

At this point, we would like to take a few questions from those on the call.

(Operator Instructions) And our first question comes from Chris Colvin from Breach Inlet Capital.

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 it's a lot of Middle East and then potentially some U.S.

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.

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?

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.

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

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 1-for-1 -- it's really not a 1-for-1 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 a cost base of roughly $120 million for all SG&A, including corporate; and all the rest, 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.

Okay, makes 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?

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, and 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 nonrecurring costs and allocate them out on a regional basis, what you would see is that, in fact, the large regions are the most profitable: the U.S., the Middle East. Europe, even though it shows negative here, is profitable, as is the Mid-East, when you adjust for those items, as is Africa. In the smaller regions, Latin America and Asia Pacific, they're sort of close to breakeven. But if you look at that, those are also the smallest revenue bases right now. And we expect that, as those increase and we can grow those regions, those are going to become much stronger contributors.

I think the better way to compare the regions and kind of look at what's going on is I'd refer you to our MD&A on Page 29, where we've got a gross profit table. So before all the noise of SG&A and FX that I just talked about, you can see that, when you look at that, we do have pretty good gross profit for all those regions. And in fact, we've got a higher gross margin on some of the -- on some of those smaller regions, which as we can leverage that growth, it should really be able to contribute to our profitability.

Okay. And maybe last 1 or 2 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?

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.

Yes. Understood. And last question. Is there going to be, especially now 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 to have 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?

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'll eventually be hitting the IR.

(Operator Instructions) And our next question comes from Matt Sweeney with Life and Water Capital (sic) [Laughing Water Capital].

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?

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 our regions 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.

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.