Q3 2020 Hill International Inc Earnings Call

[music].

Greetings and welcome to the Hill International third quarter 2020 financial results conference call at this.

This time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Devin Sullivan Senior Vice President of the equity group. Thank you you may begin thank you Jesse.

Good morning, everyone and thank you for joining us today for Hill International's third quarter 2020 financial results conference call and webcast. 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 intense 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.

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 factor 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 Rob.

New 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 the call over to ROE.

I'd like to make you aware of the Safe Harbor statements regarding forward looking statements as well as the slide regarding our GAAP financial measures, which will apply not only to the presentation, but to the remarks made today.

With that said I'd now like to turn the call over to low Ghali Hill's Chief Executive Officer Rose. Please go ahead.

Thank you Debbie good.

Good morning, everyone and thank you for joining us today to discuss our third quarter financial results.

Results for this quarter reflect the ongoing improvements to our business. Following the significant impact COVID-19 June on our results to start the year.

While challenges with respect to the buyers are still lingering most notably with respect to CFR, our third quarter performance was among the best in recent memory.

We produced 71, and a half million CFR concern.

Continued to reduce as DNA.

Improved operating income by 53% from last years third quarter.

Returning to net profitability.

Generated positive free cash flow for the second consecutive consecutive quarter.

And improved our liquidity profile.

We also generated $154 million new contract awards during this quarter.

Presenting the best new booking.

This year.

I will provide greater detail on this project. Shortly however, I'm pleased to note that they cover multiple geographies.

And end markets, including infrastructure.

As we stated on our second quarter call, we expected the New awards would accelerate in the second half of the year.

Based on current business conditions and the activity we remain confident in our earlier projections, but new awards will continue throughout the fourth quarter.

This is based on our third quarter results and the plentiful opportunities. We are currently pursuing.

Todd will discuss our results in greater detail shortly.

If we can move on to slide five.

As you can see.

Our revenue profile continues to reflect very geographic end market and client exposure, which 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 very important part of our business has declined by design as we focus our efforts more.

More and more on the U.S. infrastructure Mark.

Our fee based model mitigate threats typically associated with Atlas construction services. It provides us with the flexibility to pursue complex dynamic long term projects along with the added benefit of providing us with repeat business.

Historically.

Approximately 70% of our CFR from repeat clients, both us and international.

If he could turn into slide six please.

Earlier this month, we acquired a license New York State Engineering Corporation.

Acquisition.

Extends our service portfolio by allowing him to offer our New York and Stateline resin claim.

Clients resin engineering and inspection services.

The acquisition of this license was named for cash generated by our operations and consisted of a New York entity with a grandfather engineering license to allow us to provide these services to existing and new clients.

Hey, currently provides resin in engineering and inspection services for infrastructure clients across the U.S., including work on major Aviation Highway and bridge unveiling transit programs and projects.

However, we have been restricted from offering these services to many New York and state clients due to our lack of New York State Engineering license.

With this license.

We now have a significant opportunity to expand our presence in one of our largest U.S. operating regions.

Under the leadership of giving most area, we will leverage the best practices and lessons learned from our U.S. infrastructure projects to benefit from our New York Metro area appliance.

I want to formally welcome Gail to heal.

He will serve as vice President and New York Metro infrastructure and operations manager.

Yes, he has more than 20 years of experience.

We are very excited to work with them to roll out these expanded service offering.

Moving onto slide seven.

I am very proud of our team and their continued pursuit of new business and particularly in these challenging times.

We have recently announced.

Several high profile wins, and the U.S. Middle East and Europe that cover rail rich.

Hi, right power.

Power and public buildings.

These wins reflect our deliberate pivot to mobile infrastructure projects, which we believe are resilient.

Staying above and a potential catalyst for domestic and international economic growth.

These new projects include the U.S. Interstate five improvement in Los Angeles, California.

A major transmission line from program for Southern California, and Southern California, sorry.

Investment program for Southern California, Edison in Southern California.

The new administrative capital stated and six of October City, Monterey you need.

Incidentally, its the longest plan Monterrey and the world.

Bosnia and has to give a principal more the highway and the buttons.

The conference and hospitals development program in Cairo University Egypt.

These projects have an aggregate construction value of more than $6 billion.

Overall history here last participated in over 10000 project assignments or the total construction value of more than 600 men billion dollars.

We believe we are very well positioned to continue to capture global infrastructure project opportunities.

They must related and otherwise.

We are closely monitoring activity in Washington regarding infrastructure spending proposals.

We will also pursue projects a d. you, which would be funded under the COVID-19 related stimulus programs that have an aggregate value in excess of 200 billion euros for 2021 alone.

These projects would be in addition to those that have already been approved by the European Union for.

Infrastructure.

Moving on to slide eight.

Next to Slide show recent awards received by health for our projects many of which were in the category of best projects.

Or project of the year.

These include the I.S.P.C. pedestrian bridge crossing at northeastern University.

The Spokane River Park, you asked a billion project.

Notably Hill project 120 Major awards this year.

The most in our 45 year history.

Going on to slide nine.

Sure The award of the S. Steer Palace hotel in Greece, which has been just a crown jewel resort of the Affinion Riviere.

Boeing V 22, obviously factory.

In Pennsylvania, the Metro link parking structure in Orange County.

And the S. R 237 phase two expressly in project.

Providing innovative transportation solution for commuters and the Silicon Valley.

These awards recognize the inherent tenant of our teams from our clients and designer and contractor partners through our own very project managers inspectors scheduled as estimated and engineers.

I could not be prouder of these professionals and applaud their achievements.

Thank you for your attention.

Now I will turn things over to Todd Weintraub, Hence chief Financial Officer.

Now please go ahead.

Thank you I hope I'll pick things up to slide 10.

This slide provides an overview of our GAAP results for the second quarter 2020.

Excuse me third quarter of 2020 CFR for the third quarter of 2020 was 71 and a half million compared to 75.7 million in the third quarter of 2019, reflecting delayed project starts from earlier Twentytwenty. Two later this year and into 2021.

These delays were due in large part to uncertainties driven by cold at 19.

<unk> expenses were 25.6 million or 35.8% of CFR compared to 27.4 million or 36.2% Oxy ARX <unk> in Q3 2019.

Declining that's gionee was primarily attributable to lower labor corporate and business development expenses due to COVID-19 stay at home orders. It was partially offset by a decline in bad debt recoveries.

As we previously announced we have undertaken several initiatives designed to reduce corporate costs by 11 to 13 million in 2020, which is a.

Which is up a little bit from the 10 million that we had previously announced to savings.

Our operating profit for Q3, 2020 was 4.7 million nearly 53% increase from operating profit of 3.1 million in Q3 2019.

Net income attributable to Hill in Q3, 2020 was 2.1 million or four cents per diluted share compared to net income attributable to hill, a two and a half million also four cents per diluted share in quarter three of 29 gene.

Now, let's take a look at our results on an adjusted basis on slide 11.

On an adjusted basis operating profit rose to 4.4 million in the 2023rd quarter from 4.3 million for the comparable 2019 quarter, which adds back 415000 this quarter of share based compensation and deducts, an FX loss of 700.

And excuse me out an FX gain of $760000 last.

Last year's comparable number added back 296000 of share based compensation, an FX loss of 858000.

Adjusted net income was 1.8 million in the 2023rd quarter compared to 3.7 million last year's third quarter same variables that impacted adjusted <unk> adjusted operating that.

Profit. We're also reflected in the adjusted net income.

We also reported adjusted EBITDA of 4.8 million and 2023rd quarter and that compared to 5.6 million last year store every quarter.

You'll note that our adjusted metrics this quarter are not all that different from our GAAP metrics we.

We think that's a good sign that weve cleaned up the past noise in our results and we do expect going forward that we'll continue to have only minor adjustments for noncash stock comp and unrealized FX likewise, the more favorable comparable on a year to date basis reflect quarter variability on FX and share based compensation.

Nation.

Turning to slide 12.

We'll take a look at our our liquidity management and our cash flow.

We continue to maintain strong focus on liquidity management.

Our cash collections were strong during Q3 2020, producing a $10.1 million increase in unrestricted cash at September Thirtyth 2020 from June Thirtyth.

Our total liquidity at September Thirtyth, 2020, which includes our unrestricted cash as well as access to our lines of credit was 36 point Sixmillion $10.2 million increase from June 30, yes.

Free cash flow in the quarter was 70.7 million nearly 19 and a half million dollar improvement from the first quarter of 2021, and a half million dollar increase from the immediately preceding second quarter.

This improvement was due in large part to the receipt of pine payments in the second and third quarter of 2020 that had been delayed early in the year to the impact of cold at 19.

So although we expect that we'll remain cash flow positive in the fourth quarter of 2020, it's not likely that its going to remain at the same levels, we experienced in the second and third quarters of this year.

It is worth noting that cash flow generation and increases in cash and liquidity during the quarter were achieved primarily from organic growth.

And now if we could turn to slide 13.

Our Q3 bookings helped to drive an improvement in your backlog at December September Thirtyth from the second quarter ended June Thirtyth 2020.

As you review the progression of our backlog quarter to quarter I want to make you aware of a recent joint venture agreement that we entered associated with our modern International Airport project in adult Hofh Qatar.

The agreement will elevate our ability to serve this client and it positions us to work collaboratively with our new JV partner not only on the current project, but to secure additional project work some of which could be significant.

Agreement did had the effect of decreasing our current backlog associated with this project by approximately 45 million. However, we believe that the impact of this reduction will be more than offset by new projects that we expect to secure in book in the future be a this JV relationship.

From a geographic perspective, our backlog is concentrated in U.S. with the middle East comprising the next largest area.

I'd also like to mention the increasing role of our facilities management business is taking.

Facilities management contracts now comprise just under 6% of our backlog compared to just over 4% of our year to date CFR through September.

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

Thank you Todd.

In summarizing if we can move on to slide 14.

Uh huh.

We are cautiously optimistic for the balance of 2020 and continue to improve our financial.

And competitive position.

With respect to guidance based on our current business conditions and considering certain previously announced project deferrals and cancellations that occurred earlier. This year. We continue to expect CFR to range between 303 hundred $10 million consisting of both New awards.

And extensions of existing contracts.

However, the impact of the pandemic on project start dates and mobilization would likely you will see how far to the lower end of the range.

As background, we estimate that approximately $18 million a fever far has been delayed due to cold 19 from existing contracts since the beginning of the year.

This figure does not include going Nineteens impact on expected awards that work for phone and or cancel.

We are targeting an annual gross margin of 38% to 39% for 2020 and consistent with our previous guidance.

I see a name for 2020 is expected to be approximately 107 to 109 million down from our prior estimate of 110 million.

This revised outlook reflects continuing cost cutting measures due to the lingering impact of COVID-19 on certain aspects of our business.

We will continue to manage SDMA and the sense of Finjans CFR relative to the evolving effects of coal was 19.

Adjusted EBITDA for 2020.

I had been expected to range between 16 million and $20 million.

However, based on our year to date performance we are increasing.

The lower end of this range and now expect plenty front, the adjusted EBITDA will range between 18 and 22 million.

Thank you for your time today, and I would ask the operator to open the call for questions.

Thank you we will now be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation kindly indicate that your line is in the question queue.

You May press star two if he would like to remove your question from the queue for.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please let me pull for questions.

Thank you. Our first question comes from the line of Pete Enderlin with Amazing Partners. Please proceed with your question.

Thank you good morning, thanks for taking the questions.

It seems you're doing a good job of coping with the.

Fast array of difficult situations I just had a few specific questions were there any major cancellations or cuts.

That that stand out to you in the quarter as a result of co bid or other you know.

Impacts on the economy, and you know what would be the approximate total of all those cuts and reductions.

This is Rob I'll take this one.

We had we did not have any major cancellations we had some.

Some minor ones roughly probably.

In the neighborhood of.

An aggregate number it would be a 15 15 to 20 million.

That didnt only effect.

The Twentytwenty revenue, that's also going going forward.

And we had we had performance of.

And delays of actual projects that really impacted 2020 revenue generation.

Okay and [noise].

The establishment of that joint venture.

And Cotter.

What's the percentage breakdown of the joint venture itself and did that change the accounting treatment for that how you report the backlog.

So it doesn't yeah I don't in terms of the joint venture.

I don't think Weve disclosed you know kind of the idea the percentages of that and what it looks like from the accounting standpoint, it doesn't change our it doesn't change our accounting.

While we will continue to consolidate the results of the project into our financial statements and in terms of backlog. It it had a exactly the impact that that we discussed which it it reduces our our current backlog by the like 45 or so million that we that we discussed before immediately and.

The Oh the important point I think is that we expect to that you know this is and the roof can talk a little bit more in detail about this but the project that we were awarded is a is the first couple of phases of a very very major project there will be other phases to it to be awarded in the future and we.

I believe that this really positions us well along with our partner to be able to to be successful and secure one odd the future contracts as well would you know, which again will you know we think will be a net positive for us in terms of your bench won't work and and our own you'll see a lot of that will be able to book on this.

Okay. So the 45 million specifically is just because you previously accounted for all of that whatever the projects or that were in there and now it's it's a proportion of that is that the way the reduction came about.

Yes, that's correct okay.

Okay, I'm only a resident.

Resident engineering and inspection services.

Do you offer those services a lot of other parts of the country and New York was just kind of a missing piece or is this sort of a new area of activity for you.

No. The answer is the first product, which is we offer these services.

In other parts of the U.S., However, New York in order to offer these services, we need to to have an engineering license, which we would have missed.

And is it generally true in these other areas that you have to have those kinds of licenses as well.

Yes, but they are but in some cases, we have to have a license and it's much easier to obtain and other states you don't have to have a license and then getting license.

Okay. Thank you and.

As Brazil completely gone at this point in terms of cleaning it up and.

Disposing of assets or whatever.

That is correct.

And [noise].

Is there any potential long term or strategically to get back into that market at some point.

I think the future will tell for for right now we don't believe.

For our organization our business model.

And so it is the right market for us.

So we're not looking at it right now.

Our main focus is really to maximize critical mass within the locations. We currently are by offering different types of services within the markets that we are.

Mhm.

Thank you very much.

Thank you. Thank you for the questions. Thank.

Thank you. Our next question comes from the line of Phil Duff, Alan What Titan Capital. Please proceed with your question.

Thank you would you talk about the wins in the quarter and how they break out amongst your categories or industries. Please.

For the most part I don't have the exact breakdown on but most of them.

Are within the infrastructure.

Yeah, maybe within the transportation and infrastructure sector.

And it's pretty much in even split between domestic and international.

And I just don't have any more details on <unk>.

Sorry, maybe Todd has more details on the exact a split on it I I got one.

No I don't have the exact split but I you.

You know I agree to that route says just you know off the top of our heads I think you know we know that the some of the projects that Ralph reference specifically in his remarks.

They were they were pretty bumpy projects for us I don't think Weve disclosed the exact amount you won't but I buy a highway project in a in California is a you know that that's nice bulky project for US the mine a real high in Cairo that you mentioned is that that's also a very you know that's a bit but.

The project you know those are the ones that kind of topped minded you know in terms of in terms of some of the major ones and and as Harold mentioned that you know there's kind of diversity. There I mean, it's so it's all infrastructure, but you know you've got rail you've got rolled you've got a you've got the message that your national and no debt.

Up a major ones, but I I think downstream to it follows although the dollars aren't as big and you Gotta ones I think I was the same general Adam.

Great. Thank you Andy as you look out over.

Over the next.

Cycle of wins do you see the ratio generally similar to what you had this quarter or is there any sort of interesting.

Change in a into potential make up that you see coming.

I think the ratio will continue to be the same as Oh, you know one of our focus is obviously the U.S. So yeah. We're hoping as you know was with the elections now over but it's not going to be this quarter.

I've been in the future quarters, we wouldn't be looking at the U.S. on the ratio of New awards being higher.

But yeah, our focus is to focus a one as.

Infrastructure sector or that includes all all the infrastructure, including variation as a variation rebounds and the next focus their focus is growing the U.S.

I I also add to that.

Another you know kind of hot sector, which kind of spends that we we are actively trying to expand we've made some progress and use the facilities management business and.

And as we said before we like that business because of the recurring odd the recurring fee nature of it I mentioned in my remarks that we you know it's still not a big part of the business, but it's growing it's about 6% of our backlog right now oil is 4% of our CFR for the year to date I think that you know what.

In any case and see how far is more history and the backlog obviously its future. So you can see direction that we're trending and we'd like to continue to expand that that part of the business as well.

Great. Thank you just preempted a question. So I will then jump to a different one.

Which is relative to the New York Engineering license, what's what's the timeframe that you would anticipate a that that you would start booking business or.

From that that new capability.

Well, we're planning to have a hopefully a revenue share far being generated by the third or fourth quarter of 2021, it's going to be small based on the.

The plan, but I think it's gonna start growing very fast there on after I.

And there's a lot of potential opportunities out there that just takes time for for us to to get in the procurement cycle.

And start moving so I think it's going to take us six to nine months for the first one and then things will start developing from them.

Great. Thank you both for the time.

Thank you great questions.

Thank you. Our next question comes from the line of Tim Show Tarred with Melrose investments. Please proceed with your question.

Good morning, you mentioned.

Airport related work, a little bit, but can you give give some feedback on.

How much.

How that looks as a part of your work to do either via new bidding activity or work you have in the backlog.

Sure.

Addition, we we we have been involved in many of nation project sales.

Domestically and internationally.

Most of our aviation projects that were on have kept on going there has been some slowdown obviously because of the low traffic and.

The impacts of Cowen.

We some of the new procurement and new tenders that are out there and the U.S. have been delayed.

Delayed although now we're starting to see one or two really coming to live and potentially hopefully closing even before this year end with Oh some of retention programs.

In the country.

Long term and short term we believe the addition industry based on all the statistics and.

Everything that we see.

As you know by now.

End of 2021, well capacity and traffic capacity.

<unk> is expected to be a you know 70% of what it was.

Before I go with and probably mid 22 is where we're going to reach the same level that.

We were before covering the nine.

19 had.

And basically at that point in time, there was a lot of demand for expansions.

Accordingly.

Hi vision industry. So we feel it's still going to be a very good market for us.

We've invested in human resources, bringing in right caliber of people for us to be able to secure future a vision projects and we feel still confident that we're on the right track on.

Just one last thing here just based on your guidance for the year on one CFR and operating expenses.

It just doing the quick arithmetic it seems like your your CFR sequentially would would be higher than it was in the current quarter.

And the church in a word would sequentially be lower.

In order to kind of fit into the guidance numbers, you're giving are those both directionally correct.

Ah yes, they are.

That's it for me thank you.

Thank you.

Thank you ladies and gentlemen, we have reached the end of our question and answer session I'd like to pass the floor back to management for closing comments.

Thank you very much.

And thank you all for your time, we will be participating in two investor events. This month.

The p. details of which would've Vietnam, shortly and hope to be able to speak with some of you.

On behalf on 2700 employees.

Around the World I. Thank you for your continued support ill then internationally.

Have a wonderful day.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.

[music].

Oh.

[music] mm.

Oh.

[noise].