Hill International, Inc. (HIL) CEO Raouf Ghali on Q2 2022 Results - Earnings Call Transcript

Aug. 10, 2022 2:01 PM ETHill International, Inc. (HIL)
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Hill International, Inc. (NYSE:HIL) Q2 2022 Earnings Conference Call August 10, 2022 9:00 AM ET

Company Participants

Devin Sullivan - Senior Vice President, The Equity Group

Raouf Ghali - Chief Executive Officer

Todd Weintraub - Chief Financial Officer

Conference Call Participants

Pete Enderlin - MAZ Partners

Bill Dezellem - Tieton

Operator

Greetings, and welcome to Hill International's Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President for the Equity Group. Thank you, Mr. Sullivan, you may begin.

Devin Sullivan

Thank you. Good morning, everyone, and thank you for joining us today for Hill International's second quarter financial results conference call. Our speakers for today's call are Raouf Ghali, Chief Executive Officer; and Todd Weintraub, the Company'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 actual 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 & Exchange Commission. Including that, unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realized as revenue, infrastructure, legislation may not be implemented, and our expenses may be higher than anticipated.

We do not intend and undertake no obligation to update any forward-looking statement. We have prepared a presentation, which is available for your reference at our website www.hillintl.com. The safe harbor provision applies to the information contained in those slides. Those slides also include definitions of the non-GAAP measures we will be discussing today.

I'd now like to turn things over to Raouf Ghali, Hill's Chief Executive Officer. Raouf, please go ahead.

Raouf Ghali

Thank you, Devin. Good morning and thank you for joining us today to discuss our 2022 second quarter financial results. The strong start to the year that we reported in Q1 carried over into the second quarter of this year.

Total revenue, again, topped $100 million, increasing to $105.7 million from $101.5 million in the second quarter of 2021. Consulting fee revenue rose 12.9% to 87.7% from $77.7 million in the prior year period and represented our second consecutive $80 million-plus CFR quarter.

These increases reflect a return to pre-COVID project activity levels, including returns to full staffing on certain existing projects and mobilizations on certain newly awarded projects.

New contract awards were $86.7 million. Operating profit improved to $4.5 million from $2.9 million in the second quarter of 2021. The Net income improved to $1.4 million from a net loss just under $0.5 million, in the prior year second quarter. And adjusted EBITDA rose $6.5 million from $3.8 million in the same period last year.

We also entered the second half of 2022 with a strong backlog of $724 million. We are confident in our business outlook and expect a strong half of 2022 driven by new project starts and project resumptions. We continue to see strong and developing market trends and recorded a number of significant wins this past quarter.

While many of our contracts were infrastructure related, at depth and breadth of our project management expertise attracted clients from a variety of end-markets, including an extension to provide Staff Augmentation Services to support Procurement and Sourcing from Merck's, Global Projects and Programs.

As contract renewal with the City of Columbus to continue the Department of Water's ongoing upgrade and maintenance projects, in the city of Cleveland, we are providing program and construction management services with the Dominion Gas Multi-Billion-Dollar, City-Wide Pipeline Replacement Program.

A major contract with a new client in the Midwest AquaBounty to help deliver a New High-Technology Salmon Farm in Ohio, in the transit sector, we placed a new team in Puerto Rico to Support the Tren Urbano Rail Program. And in Southern California, we were selected to manage the Metrolink State of Good Repair Program for System-Wide Track, Structures and Signal Rehabilitation Projects.

We also secured new projects internationally, including projects related to Energy, Residential Development and Hospitality. Approximately, 52.7% of new awards in 2022, second quarter were infrastructure related, none of which were associated with the infrastructure investment and Jobs Act.

We believe that we are well positioned to capture the opportunities inherent in our industry. Our low-risk professional service model provides us with the flexibility and resiliency to grow under multiple economic circumstances.

We have long-standing client relationships that continue to produce high-levels of repeat business, a diverse revenue profile and a team that has established an industry benchmark for client service. I remain grateful to Hill's professionals and their commitment to excellence.

We reiterate our outlook for 2022. We are forecasting CFR of $340 million to $350 million, an increase of 11% to 15% from 2021. Our adjusted EBITDA guidance for 2022 is expected to range between $22 million to $24 million, up from adjusted EBITDA of $16.3 million and representing a growth of 35% to 47%.

Thank you for your attention and I'll turn now things over to Todd Weintraub, Hill's Chief Financial Officer. Todd, please go ahead.

Todd Weintraub

Thank you, Raouf. Revenue increased in the quarter, coming in at $105.7 million compared to $101.5 million in last year's second quarter. CFR for the quarter increased 12.9% and to $87.7 million from $77.7 million in the second quarter of 2021, reflecting an increase in project activity to pre-COVID levels.

For the quarter, most of our revenue was generated in the Americas, followed by the Middle East, Asia-Pacific Group, Europe, and then Africa. Gross profit improved to $37.4 million and $31.3 million in last year's second quarter, driven by the higher CFR and improved contract margins. SG&A expenses rose 19% to $32.3 million, which is 86.4% of total gross profit from $27.1 million or 86.6% of total gross profit in last year's second quarter. The year-over-year increase in SG&A can be attributed to investments in Hill's business development team and a higher level of revenue.

Our SG&A this year also includes a $632,000 charge related to a bond being called. We have received a final court order to have the bond turned to us and expect this charge to be reversed in the second half of 2022.

SG&A expenses in last year's second quarter had been reduced by $474,000 from bad debt recoveries on a fully reserved Libyan-based project. Excluding the impacts of that Libyan bad debt recovery and the bond cost just mentioned, our SG&A expenses in Q2 2022 and Q2 2021 would have been 84.7% for this year and 88.1% last year of gross profit, respectively. This more accurately reflects our efforts to ensure that costs grow more slowly than gross profit.

As previously discussed, we've reduced the run rate of G&A expenses by approximately $4 million annually from the run rate, the initial impact of which began being realized this quarter. These savings were achieved primarily by realigning certain parts of our workforce to improve utilization and efficiency.

Operating income in the second quarter improved $4.5 million from $2.9 million in last year's second quarter, driven by higher CFR and improved gross profit, partially offset by an increase in foreign exchange currency losses and higher SG&A to support our growth initiatives.

On an adjusted basis, adjusted operating profit nearly doubled to $6.3 million from $3.3 million in last year's second quarter. Net income for the quarter improved to $1.4 million or $0.02 per share compared to a net loss of approximately $500,000 or negative $0.01 per share in the year ago period. Adjusted net income improved to $3.2 million from an adjusted net loss of $74,000 in last year's second quarter.

Adjusted EBITDA for the 2022 second quarter improved to $6.5 million from $3.8 million in last year's second quarter. The reconciliations for these adjusted figures are included in our press release.

Our unrestricted cash position at June 30, 2022, was $20.3 million and total liquidity was $28.5 million. Net cash used in operating activities was $400,000, which is a significant improvement from the $3.3 million use of cash in the first quarter of this year. Free cash flow for the quarter was negative $800,000, which also includes $400,000 in purchases of property and equipment. Again, this is a significant improvement from the negative $4.1 million negative free cash flow that we reported last quarter.

We expect to generate a positive cash flow for the remainder of '22. We have retained a debt adviser to assist in the refinancing of our facilities, maturing in 2023 and are conducting a formal process to secure this funding. We granted exclusivity this week to a potential ,lender after receiving a nonbinding term sheet from them, based on their preliminary due diligence. They are now conducting confirmatory diligence and we expect to refinance these facilities by the end of 2022.

As Raouf noted, our backlog this quarter was approximately $724 million. Hill's 12-month backlog at June 30, 2022, was $250 million. From a geographic perspective, backlog remained concentrated in the Americas, followed by the Middle East Asia group, Africa and in Europe.

Thanks very much for your time, and I'll now turn the conversation back to Raouf.

Raouf Ghali

Thank you, Todd. Thank you all for your time today, and I'll ask now the operator to open the call to questions.

Question-and-Answer Session

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your question.

Q - Pete Enderlin

Thank you. Good morning.

Raouf Ghali

Hi Pete.

Pete Enderlin

The book-to-bill ratio in the second quarter was approximately 1%, I think, and that was down from 1.2% in the first quarter. Were there any specific puts and takes in that, or any specific reason, why you had somewhat of a slowdown, which seems to be a little contrary to the trends in the industry?

Raouf Ghali

Pete, no, there isn't -- a lot of our awards are sometimes lumpy. And we had very strong awards and we closed on a lot in the fourth quarter of last year and last quarter was a very strong quarter. So it's -- I think it's pretty logical that this quarter, some of the procurement wasn't catching up fast enough for us to close all the projects to have the same amount. We're expecting a very strong third and fourth quarter again on bookings.

Pete Enderlin

Okay. And then along the same lines, Europe and Africa together, which may not be the right way to look at it. But they were both sort of on a combined basis, about flat in terms of CFR. Does that -- how do you relate that to the economic environment in those two areas?

Raouf Ghali

Again, I think both of these -- not, I think both these regions have had a very significant growth in the last two or three years. We're expecting them to continue having some growth. Some of the revenue lag this month or this quarter because of some delays in remobilizing and mobilizing some of the new awards. But we're -- we believe our plan is that we're going to be catching up and you're going to see the expected growth for both these regions by the end of the year. We've already got the staff and the mobilization ongoing.

Pete Enderlin

Okay. Accounts receivable were up quite a bit in the quarter in comparison to the revenues. Is there any specific reason for that?

Todd Weintraub

Well, yes. So, I mean, in general obviously an increase in revenue is going to lead to an increase in accounts receivable. But it's actually normal for -- on the international side for receivables to increase more than the revenue. And a primary reason for that is the value-added tax. So, for example, if we book $1 million in revenue in locations that have the VAT that leads to a 10% rate. That's receivables will increase by $1.1 million essentially. And when you collect that then it comes down by more but in a rising revenue environment it is normal that you would see the receivables go up by a higher rate than the revenues would. So, that’s…

Pete Enderlin

So fair enough, Todd. But most of the strength in the revenues has been domestic. Is there some structural reason why accounts receivable are going up more there in relation to the revenue?

Todd Weintraub

Well, there's a number of reasons. Part of it is that, but part of it is also just remember we report everything in US dollars. So part of it has to do with the exchange rates too. The dollar has been over the course of the year quite strong against some of the other currencies that we do business in particularly the Egyptian, pound, and euro the US dollar has been pretty strong against those.

So when you look at the local currencies, it's more muted. But when you look at that, look at the exchange rates that contributes to what you're seeing as well. But I think that's relatively the main reason we've looked at this has to do with the VAT and notwithstanding that the frailty of the revenue was in the US, the majority is still coming internationally. Over half of our revenue is international, much of that is subject to the VAT.

Pete Enderlin

Right. Got it. And then one last one for me. Do you guys have any comment at all on the letter, I guess you could only a letter from Godspeed proposing an acquisition?

Raouf Ghali

Well, obviously, we've seen the letter, we've received the letter. The Board is reviewing it. We haven't commented on the letter, and we have no comments today.

Pete Enderlin

Okay. Thanks a lot.

Todd Weintraub

Thank you.

Operator

Our next question comes from the line of Bill Dezellem with Tieton. Please proceed with your question.

Bill Dezellem

Great. Thank you. Raouf, I think you mentioned in your opening remarks that none of the new projects in the US were tied to the infrastructure bill. If we did hear that correctly, what's the time frame that you are currently anticipating that the infrastructure bill projects will kick in? And maybe taking that one step further, are you expecting it to be any sort of a step function increase in your activity or simply a continuing of the growth trends?

Raouf Ghali

Let me add, the first part of the question is we're expecting towards the end of this year to see activities from the build really start come through, revenue generation, I think, is going to be coming slowly as awards are given, and we are mobilizing. So it will be a trend that slowly starts boosting our revenue. I'm not sure I can answer the second question correctly, if it's going to be a step or is going to be just an increase in steady revenue. It depends on how they're going to package it. We believe there's going to be some major programs that are going to come out that will really be, in some cases, material and would have a step -- a larger step in our revenue. But I cannot confirm this because we haven't seen any of the RFPs hit the street yet.

Bill Dezellem

Understood. And the next question is relative to your sales force. As you become healthier and your CFR is beginning to grow again, have you been expanding the sales force? And I guess maybe the question should potentially be tied to the infrastructure bill, but I am not wanting to limit the question to the United States. So kind of take it as you may, please.

Raouf Ghali

We have not yet increased our sales force. We think our sales force as it is right now is adequate. Todd and I referred to the business development activities, and those were really from the sales force, not the increase of it, but more travel activities being meeting in person with clients and prospective clients going to conferences and other means of selling our services. Obviously, as the market starts really heating up, we will then determine whether we need to increase our workforce at that time. Right now, we think we're sufficient and we're trying to keep our SG&A at levels where a bigger portion drops to the bottom line.

Bill Dezellem

And we certainly do appreciate that. So taking that a step further, if you were to make the decision that you did want to increase your sales force, where in the world would you anticipate that would be the first place that you would increase the sales force?

Raouf Ghali

Our largest sales force is in the US. I think we would add potentially some more in the US just because of what we're expecting as far as needs for our services and the gap in it. But Internationally, we have a very, very small sales force, and we use the seller doer model. We may potentially look at in Europe and potentially the Middle East of adding their some resources. But it's not for right now. And I don't believe – we're not planning to have anything for this year.

Bill Dezellem

Thank you. And then maybe this question is somewhat similar or related but geographic expansion, how are you viewing that if at all?

Raouf Ghali

Bill, I think we've referred to that, I think, in the past. Our plan is as our priority is to expand our services within the footprint that we have. We would like – we need critical mass in the existing footprint. That's how we're going to be reaching higher operating levels, as well as net income. So the priority is obviously cross-selling different services and to new clients within the existing footprint. That does not limit that we're going to say we will never expand geographically, but that's for sure, not our priority.

Bill Dezellem

Excellent. Thank you. And then may be switched to facilities management that wasn't referenced in the press release or your opening remarks. And yet, I think it's one of your initiatives to build the business, update us where you are with the facilities management, please?

Raouf Ghali

I think facilities management is continuing to be a good portion of our business overseas, in Middle East and North Africa, in particular. We're looking now at Europe, potentially of having several assignments and opportunities that we hope to close on in the near future. The reason we didn't mention it because there wasn't any material moves either positive or negative to it. We're hoping, again, in the next couple of quarters to be able to report on a couple of opportunities that have been pending to close for some time now, but have not yet closed. But up to now, it still maintains the level that it has maintained. So there was really no urgency to mention it.

Bill Dezellem

No, that's understood. And I believe that, you had quite a large contract that you announced in Saudi Arabia right before COVID closed things down. And where does that contract stand relative to activity resuming and the need to have management of the facilities, meaning that people are back in it?

Raouf Ghali

Bill, I assume you're referring to the schools project that we received in Saudi Arabia. And just to give you an update on that, we have mobilized around 40 people to 50 people on that – on those projects continues to be there. And there are opportunities for us to grow in that particular contract as well in the future.

Bill Dezellem

Great.

Raouf Ghali

Not just by extend – but by adding other facilities to it.

Bill Dezellem

And so a couple of thousand facilities, and if I'm way off, please correct me. But if you were to add additional facilities to that contract, would it be a meaningful number or a small number relative to the starting base.

Raouf Ghali

No, I think it would be a meaningful number.

Bill Dezellem

And is that one of the larger deals that you're hoping you can announce in the next few quarters, or is that in addition to what you were previously referring to?

Raouf Ghali

No, those are – I was referring to was in addition to this one. These are brand new assignments with new clients.

Bill Dezellem

Wish you luck on the quarter.

Raouf Ghali

Thank you.

Bill Dezellem

Lastly, if I may continue to take more time, the $600,000 charge for the bond, can you explain that in more detail? I apologize. It's just not a concept that I am familiar with. And if you want me to take it offline, that's fine. But would love whatever explanation that you can provide behind just maybe not the individual client, but just the phenomenon that happened.

Raouf Ghali

Yes, let me -- I'll try and – go ahead, Todd, maybe you want to take. Go ahead.

Todd Weintraub

Okay. It's – on quite a few of our projects, particularly international, we're required to put up a performance bond as we win these. And the requirements for a client to call the performance bonds are pretty low. They pretty much just have to put in a letter to the bank. And it happens and the onus becomes on us to recover that. So that's what happened. Client without getting into who or why really -- we didn't feel had anything to do with our performance.

It was more about other things going in the project, called this bond. So we've got to make good on it. We got to record the charge. We immediately went to court, and we had our day in court pretty quickly and got a final court order. It now has to be returned. We can't reverse the charge until we actually cover that, which we expect to happen later this year.

But just to add a little bit of color of that. I've mentioned that in the history of the company since 1979, I think that we've had three bonds called. So it's always a risk, and it can happen, but it's not common. It's very rare that it actually does happen. And in this case, we'll be able to recover it. Raouf. Do you want to add anything to that?

Raouf Ghali

No, I think you've given sufficient color there. Bill, any other – does that clarify?

Bill Dezellem

That does clarify. Thank you. I appreciate that. And my final question is in response to the prior questioners question about activity levels. Do we understand correctly that -- or did we hear correctly that you are feeling like the activity level is picking up and you are gaining momentum in terms of orders and therefore, future revenues.

Raouf Ghali

That is correct.

Bill Dezellem

Great. Thank you.

Operator

Our next question comes from the line of Michael Rassner, a private investor. Please proceed with your question.

Unidentified Analyst

Good morning. My question is actually in regards to the letter from Godspeed Capital. And I know you say that you guys won't comment on that right now. But my question is, has Hill or would Hill would be hiring outside firm to -- for other suitors – that's something that won't be commented on right now?

Raouf Ghali

Michael, we're a publicly listed company. We have not -- we're always for sale as you know. But we have not -- the board has not decided yet -- made any decisions on hiring anybody and we're not commenting on any process.

Unidentified Analyst

Okay. Thank you very much. That was my question.

Operator

Our next question comes from the line of Steve Schnipper, a private investor. Please proceed with your question.

Unidentified Analyst

Good morning, guys. Good quarter. Still hammering a little bit on the takeover offer, which I know you're not commenting on. My concern is you received a buyout offer about three weeks ago. I've never seen in all my years of investment in the public company that never acknowledged it. You didn't put out an 8-K. You didn't put out a statement that says we've received it. We'll review it in due course. It wasn't in your 10-Q, until you got to a Q&A on a conference call. Can you explain the disclosure process from the company of why you've considered this a non-material event and chose not to even acknowledge it?

Todd Weintraub

Well, I mean -- we've obviously discussed any whether or not it requires a response from the company with our SEC counsel, we've taken advise on that. As you know, it was not a private offer. It was a -- they chose to make that a public offer. So, it is out there. It's publicly disclosed. And there's no requirement for us to publicly respond to that and we've chosen not to publicly respond, as Raouf said, the Board is evaluating and deciding steps. So, there's frankly nothing to report at this point.

Unidentified Analyst

That's an interesting position by counsel, because -- that's because somebody says something, doesn't absolve in my mind and my experience at company of saying, we actually received it. We received this. Just because somebody says, I sent the letter, does it mean that there's any reality to it and the company says, we get it and we'll consider it. I mean that's a very strange thing to not have to disclose it. But if your counsel signed it off, all right. Interesting. I hope your disclosures in the future on this process will be better than relying on some third party to send those out to investors. It's a little concerning. Thank you.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Raouf Ghali

Thank you very much for your time, and have a wonderful day. We look forward to speaking with you in connection with our 2022 third quarter financial results.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this conference and have a wonderful day.

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