Hill International, Inc. (NYSE:HIL) Q1 2020 Earnings Conference Call May 8, 2020 9:00 AM ET
John Grau - InvestorCom
Raouf Ghali - CEO, President & Director
Todd Weintraub - SVP & CFO
Elizabeth Zipf - SVP, Global Marketing & Communications
Conference Call Participants
Peter Enderlin - MAZ Capital Advisors
Welcome to Hill International, Inc.'s First Quarter Earnings for Fiscal Year 2020 Investor Call. On this call, John Grau of 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, Chief Financial Officer, Todd Weintraub; and Senior Vice President of Global Marketing, Liz Zipf.
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 first quarter results for 2020. And Liz Zipf will highlight some of the recent wins. As a reminder, the call is being recorded.
John, please begin.
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.
Thank you, John, and thank you to everyone on the call. We hope that everyone is staying healthy and safe during this crisis. The well-being and safety of all our stakeholders is our priority, and I thank all our employees for their dedication as they continue working on our construction sites during this period.
We will start off the call with the highlights of our performance this quarter and the steps we have taken to endure the coronavirus pandemic. Todd will provide details on our financial performance. Liz will highlight some of our recent wins. We will proceed with the questions-and-answer session and then I will give some closing remark. So let's begin.
I am pleased to report we completed the first quarter with a $3.2 million adjusted EBITDA, a 36.9% increase year-over-year. Our consulting fee revenue was $77.2 million, a slight decrease of 2.3% year-over-year. This slight decrease was mostly due to the COVID-19 impact that started to be felt in the latter part of March. Since then, we have seen our billable workforce at 95% of the total billable staff with most clients allowing our teams to work from home on duties that can be performed off-site and to rotate necessary staff to supervise on-site construction activities.
Our new bookings this quarter was lighter than planned due to our clients' priorities being focused on the current crisis and not on signing new awards. We expect this trend to reverse as the global economy returns to some sort of new normality. We therefore retract our previously stated guidance for CFR as the timing of the new bookings is currently difficult to assess. We want to note that in any given year, a portion of the CFR, generally 25% to 35%, is estimated from new bookings, which is now harder to predict. Having said that, a significant portion of new bookings are renewals, extensions or variation orders on existing projects or task orders on framework agreements and therefore, we are hopeful that these bookings will come back in the second half of the year.
Last week alone, with more global communities relaxing their lockdowns, we received over $30 million of new bookings in Europe, Middle East and the U.S.A. This indeed is very encouraging. We expect public investment to remain strong due to the need for infrastructure upgrades and the likelihood that a large portion of the global multibillion-dollar stimulus packages will be spent on those upgrades. As a reminder, the largest portion of our business is in the global infrastructure sector.
Many of the infrastructure upgrades will support the aviation sector. We believe that government stimulus coupled with low traffic volumes, will motivate airports to undertake construction projects to enhance capacity for future demands. Additionally, while airfield operations are down, airports can focus on accelerating maintenance and capital projects that would normally affect flight operations and require implementation in phases over several months or longer. We saw similar behavior during the 9/11 and 2008 financial crisis when airport upgrades were accelerated to be proactive and ready for when traffic respike-ed.
Despite COVID-19 and plummeting oil prices, our Middle East business has had only minor disruptions to date with 95% of the billable workforce not impacted. As our business is mostly in the infrastructure sector and now growing in the facility management business, we are far less sensitive to oil prices. Here again, we have seen a delay in new bookings, which we expect to correct itself in the coming quarters. We note our Middle East business is currently almost 30% of the CFR.
In the U.S., most of our projects are considered essential construction. This allowed 90% of our billable workforce to continue during this period. We already are seeing some of the suspended projects being recalled in the Mid-Atlantic region. The hardest impacts remain in our New York organization.
I am pleased to report that liquidity of the company remains healthy. We witnessed a slowdown in collection in March that was actually reversed in April. We have also been proactive managing our cost structure and made cost reductions of $10 million mainly in our SG&A to manage the possibility of the crisis being prolonged. Some of these costs will eventually be required once the economy is normalized. But until then, we believe we can manage our business without jeopardizing the quality of our service or future business with this scaled-down cost structure.
Now I will turn it over to Todd for details on our financial results.
Thank you, Raouf, and thank you to everyone on the call. We had an interesting first quarter, as in most of the world, as we began to navigate the impact of the global pandemic. We grew our adjusted EBITDA over last year and kept it roughly in line with our expectations by continued attention to controlling costs, which more than offset slightly lower levels of CFR and gross margin. I'll address these results in more detail, but we'll also discuss the impacts of the pandemic we've seen thus far, the actions we've taken and our revised outlook for 2020 costs based on our current global view.
The forward looking disclaimer John always announces at the beginning of the call has never been more relevant. The uncertainty of both the quantity and timing of the economic effect that pandemic will continue to have, notwithstanding, we believe it is critical to provide revised guidance on those items we are able to control.
Highlights for the quarter include: one, our adjusted EBITDA was $3.2 million for the quarter marking our fifth consecutive quarter of positive adjusted EBITDA and a 36.9% year-over-year improvement from the same period last year. Two, SG&A was $32.1 million for the quarter, which included noncash items I'll detail later in my comments. With the cost-control actions we have implemented, we expect to be well below the $120 million SG&A guidance we gave previously. Three, our backlog is $753 million, down from the prior periods due to a slowdown in new bookings, as Raouf explained in his remarks. Four, consulting fee revenue was $77.2 million for the quarter, down 2.3% from quarter 1 of last year negatively impacted by some project suspensions toward the end of the quarter. And five, we had a net loss for the quarter of $6.6 million primarily due to noncash unrealized foreign exchange losses and noncash leasehold improvement breakdowns related to the sublease of half our corporate office space in Philadelphia.
I want to provide you now with more detail on the results for the quarter. Let's start with SG&A. Our guidance has been that after cutting costs from $160 million down to $120 million between 2016 and 2019, we expected the $120 million level to be sustainable for the time being. Our SG&A includes noncash items such as unrealized FX, depreciation and amortization and stock compensation. Depreciation, amortization and stock comp are generally not subject to much variation. This quarter, however, we recorded a nonrecurring $1.6 million charge to depreciation. U.S. GAAP mandated that we write off the unamortized portion of our leasehold improvements made to the portion of our corporate headquarters that we subleased as part of our cost-cutting initiatives. Additionally, we recorded $4.1 million of noncash unrealized FX on intercompany balances.
Unlike the other noncash items, FX is subject to significant variations. The important FX points are: one, the unrealized FX is noncash, related almost entirely to intercompany balances and will not be realized until and unless these balances are cash settled over which management has complete discretion; and two, we exclude only the unrealized portion of FX from adjusted EBITDA. Any FX that is realized is included. This is an important context because our headline SG&A for the quarter seems high at $32.1 million compared to $120 million prior guidance. Adjusting for the noncash unrealized FX and nonrecurring leasehold write-down, which together total over $5.5 million, places our SG&A run rate well below our prior $120 million guidance.
Management has taken a number of actions to address the uncertainty of the future impact of the pandemic on our business. One, all travel, conferences, seminars and events have been canceled until further notice. Two, employees on suspended projects will use any accrued paid time off and will then be placed on leave-without-pay furlough until the project resumes. Three, open indirect positions have not and will not be filled until further notice. Four, certain indirect employees have been laid off. Five, office costs have been cut as employees are working remotely. Six, company match of 401(k) contributions has been suspended. Seven, the Board of Directors have agreed to a 20% reduction in fees. And eight, certain vendor contracts have been renegotiated to lower rates.
Based on these actions, we expect SG&A to be approximately $10 million lower and are lowering our 2020 guidance from approximately $120 million to approximately $110 million. This assumes these temporary measures stay in place the remainder of the year. The consulting fee revenue, was $77.2 million for the quarter, down 2.3% from Q1 of last year negatively impacted by some project suspensions toward the end of the quarter. Approximately 95% of our billable employees continue to service ongoing projects. A majority of the projects we service have been classified as essential services by the appropriate authorities. While we cannot predict how the pandemic will ultimately affect all of our projects and what percent of our billable workforce will be able to continue, we do not believe there will be a significant variation to the current workforce if the pandemic stabilizes at current levels or declines.
So in summary, we have not seen a significant impact to date on our CFR from pandemic, and we currently believe the CFR we generate from existing projects will mostly continue. However, our CFR in any given year is a combination of CFR from ongoing projects and CFR from new projects. As mentioned earlier, our new bookings are down as many projects scheduled to be awarded this year have been deferred. We are therefore retracting our prior CFR guidance of $330 million to $350 million for 2020. We are not giving any revised guidance on 2020 CFR at this time due to the uncertainty regarding the future economic impact of the pandemic. We intend to provide revised guidance when we have a higher level of confidence of the impact of the pandemic on CFR.
We had negative free cash flow of $11.8 million for the quarter. The first quarter is historically slow for collections as some public sector clients await funding from new budgets to become available. The cash flow deteriorated more this year as we saw a significant slowdown in collections in the latter part of March. We believe this was due to an initial disruption in processing at some of our clients as back office locations shut down from coronavirus and went remote. Collections have returned to more normal levels in April. And our unrestricted cash balance at banks has increased by approximately $3 million from March 31 levels to approximately $19 million as of April 30.
We also had $3.8 million of capacity under revolving credit facilities at April 30 for a total of approximately $23 million in available liquidity. We believe this level of liquidity is sufficient to support our cash requirements for the foreseeable future.
In addition to the cost-saving actions discussed earlier, we have opted into CARES Act programs that permit us to defer the employer portion of FICA taxes until 2021 and 2022, and we intend to apply for the refundable payroll tax credit for employees unable to work through the pandemic. We have also negotiated deferrals of certain second quarter lease payments until 2021. All these actions will assist us in preserving liquidity.
Aside from the actions discussed, we believe we will qualify for loan under the Main Street Lending Program announced in April by the Treasury. We are waiting to see the final terms and conditions to verify we qualify and determine the loan amount for which we may qualify and intend, based on currently available information, to apply once the final program and application process is announced.
I'll now turn the call over to Liz Zipf to highlight some major awards since our last call.
Thank you, Todd. As Raouf said, Hill's core business operations, though modified, have not been seriously disrupted by the pandemic in most cases. Our employees' commitment to working through the challenges presented by remote or otherwise modified working conditions have enabled the continuous flow of quality services for which Hill is known.
Now let's proceed to some of our latest wins. In Europe, Hill was recently awarded a contract by the Cyprus Tourism and Development Company, a company owned by INVEL Real Estate and Prodea Investments to provide project management services for the redevelopment of the iconic landmark, Nicosia Hotel, into a distinct mixed-use hospitality and lifestyle destination in Cyprus. The development plan for this historic 294-keys hotel involves upgrading and modernizing the hotel and building a new mixed-use development of approximately 23,000 square meters of gross floor area on an adjacent plot. The project will include state-of-the-art conference facilities, new restaurants and bars, a new spa and fitness center and more.
In Wroclaw, Poland, Hill has been selected by BaseCamp to provide project management and multi-disciplined technical supervision services for the transformation of the historic Mamut Bakery into approximately 45,000 square meters of student housing and a 4-star hotel. This historic complex will include a 775-room student apartment building with a wide range of multipurpose common spaces and a new 4-star, 6-story hotel, including 236 double rooms and 4 apartments and amenities such as 360-square-meter conference center, a fitness area, a restaurant, a lobby with a bar and an underground car park.
In North Africa, Hill will provide project management services for the Arab African International Bank for its new headquarters project in 1-Ninety, Fifth District, New Cairo, Egypt. This project involves the design and construction of a new headquarters building of a ground floor and 5 typical floors with a total area of approximately 28,100 square meters in addition to 3 basement levels for car parking and facilities with a total area of about 25,300 square meters.
In the U.S., Hill has also had some significant recent wins. In Texas, Hill has been selected by the Texas A&M University system to provide project management and inspection services on the $546 million 2-part construction of a new medical and housing complex in the Texas medical center area of Houston. The first project involves the purchase and renovation of an 18-story building, which will be used to host Texas A&M's unique EnMed program. The second project will use a P3 delivery method to build 2 new towers adjacent to the EnMed building. The first phase will include the construction of a new 19-story, 714-bed student housing building and the base of a second tower, including a 1.2 million square feet parking garage with 2,700 spaces, 15,000 square feet of retail space and 8,700 square feet of green space. The second phase will be an integrated medical plaza, a 17-story medical office building atop the parking garage.
In New England, Hill was awarded a contract by the University of Massachusetts Building Authority to serve as owners' representative for the University of Massachusetts, substructure, demolition and quadrangle development project on the institution's Boston Campus. This project involves the demolition of the science center pool building and the majority of the existing plaza, construction of a new quadrangle, restoration of the remaining plaza areas and construction of a new 500-plus spaced service parking lots.
In the Mid-Atlantic region, Hill recently won PennDOT District 12 signal upgrade project. This project involves the installation of 2 new traffic signals at state Route 18 and state route 4022 and the replacement of 3 existing traffic signals in Washington County, Pennsylvania. In addition to the signal updates, state Route 18 will be resurfaced and receive various roadway improvements, new sidewalks, ADA ramps, upgrades to drainage, new signing and pavement markings. Hill is providing inspection services for this project.
And recently in Ohio, Hill received a contract to support the Ohio Turnpike and Infrastructure Commission's project number 39-2002, which involves pavement reconstruction from Milepost 46.5 to Milepost 50.92 of the Ohio Turnpike in Fulton & Lucas Counties. The project will also construct a toll plaza from Milepost 48.8 to Milepost 49.1. Hill will be supporting the project with construction management and inspection services. This project is part of the Ohio Turnpike and Infrastructure Commission's more than $250 million program along the Ohio Turnpike since 2013.
Our continued success in winning work despite these difficult times is a testament to the hard work and commitment of every Hill employee.
I will now pass the call back to the operator for Q&A.
[Operator Instructions]. Our first question comes from Pete Enderlin of MAZ Partners.
It sounds like you've been very busy and have accomplished a lot, actually. On that decline of about 7% in the bookings, did that also reflect some cancellation or deferrals? Or was that just basically not getting as much new business?
Pete, very good question. This is Raouf. It did include cancellations, and we had some cancellations that were more than the normal cancellations because of the ongoing crisis. So it did -- it included a sizable figure on that.
Can you give us some idea what that means? Sizable, 10's of 20?
About $20 million to $30 million worth of cancellations.
That's very helpful. And have you seen any pricing pressure on CFR in terms of general contracting terms going forward?
We had very, very few instances where our existing clients have asked for minor discounts and temporarily minor discounts just for the ongoing. We were able to negotiate something with them. But again, it was only for a very few months. And these were the exceptions rather than the rule.
Got it. And on accounts receivable terms, aside from the disruptions that you experienced late in this quarter, do you think that they may likely stretch out? Or is there basically no real change in the typical terms under normal circumstances?
Pete, this is Todd. So we're not seeing any changes in terms under the normal circumstances. What we did see is a slowdown in collections at the end of March. And we've recovered and returned to normal levels of collections in April. So we believe that as this was all beginning and due to everybody working remote and the normal slowdown that, that caused in just the processing of payments, we did see impact at the end of March. You'll notice that our cash balance is a little bit lower than it normally would be at the end of March, but we have seen that recover in April. Our collections are back to a normal period. And as I think we discussed in the press release and the 10-Q, our cash levels have come back. And we've actually increased our cash during the month of April by about $3 million during the month of April as collections have come in. So it has returned to a more normal, and we're not really seeing that turns have been altered.
And I'd like to ask a couple of questions that sort of relate to the longer-term strategic outlook and potential for the company. One is are there areas of infrastructure spending where you have a relatively lower market share that you could address with either some fill-in-type acquisitions or some direct hiring -- I mean, not now, but over a longer period of time?
And then the second question is historically, you worked with a lot of larger project management and construction management companies. For example, ACOM, you worked with them quite a bit. Do you think that kind of partnering will increase? And well, I have a couple of questions to follow on about that, if that's true. So let me stop there.
Pete, let me take this one. The answer is yes, definitely. And there are certain market share that we can grow through acquisitions and partnering. It's part of our strategy. As we increase our liquidity, we will be looking at strategic potential acquisitions, one's that we can basically go after without putting the company in any jeopardy. Those would be mainly in the U.S. and mainly either in the federal market, U.S. federal market and disaster recovery.
Okay. And if you do more of the partnering with larger companies, what do you see as the capabilities that you bring to doing that? In other words, like what are the pros and cons for you and the other people? And are there some disadvantages to doing that?
I think pros and cons, obviously, when we're partnering up with some of the major players within our sector and industries, one is, obviously, you are taking away one of the main competitor because we are a player in it. So it's 2 strong competitors combining their resources together. What we bring to some of the major players, I believe, is a -- we are probably one of the few global pure project management play there is. So we may be smaller in size, but we are very focused and specialized on what we do, which is project management and construction management.
[Operator Instructions]. We have another question from Pete Enderlin of MAZ Partners.
Since I have a chance, are there any prospects to get more money from Libya on a near-term basis?
Pete, we are working on that. And the answer is always the same. The problem is we cannot assess the timing and when it's going to happen. We have no reason to doubt that it will happen. The question is when, and when is more political rather than financial. Libya and our client in Libya has recognized and continues to recognize the debt. So it's a matter -- and they want -- sorry, restate. They've recognized the debt. They want Hill to go back to work. One of our conditions is we get significant more payments before we go back to work. The question becomes is when is it safe enough for us to go back to work, and when is it safe for them to be able as well -- administratively, to be able to process the outstanding payments.
[Operator Instructions]. I'm showing no further questions at this time. I'd like to turn the call back over to Raouf Ghali for any closing remarks.
Thank you. In closing, let me reiterate. Adjusted EBITDA is 37% higher year-over-year. 95% of our billable workforce is unaffected from the crisis, and we are seeing positive movements to remobilize the suspended projects. The company's liquidity is sufficient to support our cash requirements for the foreseeable future. We have taken $10 million out of our SG&A as a precautionary measures in the event the crisis is prolonged. The outstanding proposals for final decisions and request for new work during the last 2 months indicates a strong demand for our services.
Thank you, everyone, for participating on the call, and we look forward to our next call. This concludes our call.
Ladies and gentlemen, thank you for participating. You may all disconnect. Have a great day.