Hill International, Inc. (NYSE:HIL) Q4 2021 Earnings Conference Call April 1, 2022 9:00 AM ET
Devin Sullivan – Senior Vice President, The Equity Group
Raouf Ghali – Chief Executive Officer
Todd Weintraub – Senior Vice President and Chief Financial Officer
Conference Call Participants
Peter Enderlin – MAZ Partners
Matt Dhane – Tieton Capital Management
Zach Liggett – Desmond Liggett
Greetings. Welcome to the Hill International Fourth Quarter 2021 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]. Please note, this conference is being recorded.
I will now turn the conference over to your host, Devin Sullivan of The Equity Group. Thank you. You may begin.
Thank you, Alex. Good morning, everyone, and thank you for joining us today for Hill International’s fourth quarter and full year 2021 financial results conference call. Our speakers for today’s call are Raouf Ghali, Chief Executive Officer; and Todd Weintraub, 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 our 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 and Exchange Commission, including that unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realized as revenue 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 slide presentation for today’s call, which is available for your reference at our website, www.hillintl.com, in the Events and Presentations section. The Safe Harbor applies to the information contained in those slides. Those slides also include definitions of the non-GAAP measures that we will be discussing today.
I’d now like to turn the call over to Raouf Ghali, Hill’s Chief Executive Officer. Raouf, please go ahead.
Thank you, Devin. Good morning, everyone, and thank you for joining us today to discuss our 2021 financial results. We ended the year in a very strong fashion across several metrics. Consulting fee revenue rose to $305 million from $297 million in 2020 achieving our previous guidance. CFR for 2021 was driven in large by infrastructure projects in the U.S., especially in roads and highways and tranches program and projects. We believe that the COVID related headwinds we experienced those past 2 years are beginning to subside, and that belief is validated by our success in business development during the year.
Although we are still in earlier recovery, we do believe that Hill is well positioned to capture significant growth opportunities in 2022 and beyond, driven by U.S. infrastructure investments and the commencements of new and delayed projects internationally.
New contracts award for 2021 rose by 21% to $437 million from $361 million last year, producing a book-to-burn of 143% compared to 122% last year. These new awards covered multiple geographies and end markets, particularly in the U.S. and Europe. Backlog at December 31, 2021 rose 9% to $730 million from year-end 2020 and represented the highest backlog since 2019.
We narrowed our net loss, improved EBITDA by more than 37% and ended the year with an adjusted EBITDA of $16.3 million. Our adjusted EBITDA for the year was below our previous guidance due to a onetime unusual expenses related to our response to COVID-19 pandemic. Todd will provide additional details. However, I want to stress that these onetime costs were confined to 2021 and are not expected to repeat in 2022 or any future periods.
Our 2021 fourth quarter results were also largely encouraging, with CFR rising 8% to $78 million from last year’s fourth quarter, and new contracts increasing 95% to $162 million from $83 million.
With respect to new awards in Q4 2021, our project wins encompass each of our global regions and focus primarily on infrastructure projects and programs. They included: serving as lead technical consultant for current and future Athens metro and tramway projects in the Attica Region in Greece; managing the delivery of Johns Hopkins Medicine and Health System’s new 126,000 square foot health and care and surgery center project on the 138-acre site in Maryland; selected as program management consultant for a 5-year contract for the Texas Department of Transportation’s Alternate Delivery Program; serving as owner’s engineer for the development of the new power plant in Eastern Macedonia and Thrace, Greece; and providing PMCM services for 2 new task orders under the Santa Clara Valley Transportation Authority’s ongoing $6.5 billion capital program in California.
We continue to expect that Hill’s project management services will be in high demand by agencies and owners who will be securing funds associated with the infrastructure bill. For all of 2021, 45% of our total new awards were infrastructure related. We believe this success makes Hill an ideal partner. As we sit here today, our expectation is that we will begin to realize these awards in late 2022.
We are also pleased to have made further progress in collecting our outstanding receivables from our client, the Organization for the Development of Administrative Centers or ODAC, an agency of the Libyan national government. Earlier this month, we received $500,000 cash payment against our outstanding balance and expect more to come.
Before turning things over to Todd, I want to address a question that we have been hearing regarding the ongoing war in Ukraine. Hill has no exposure to and no operation in Ukraine or Russia. We do not plan on pursuing work in these regions. And of course, we are praying for a swift and peaceful resolution to this conflict.
That said, thank you for your attention, and I will now turn things over to Todd Weintraub, Hill’s Chief Financial Officer. Todd, please go ahead.
Thank you, Raouf. CFR in the fourth quarter increased to approximately $78 million from approximately $72 million in last year’s fourth quarter, primarily reflecting return to pre-COVID business activities. For the quarter, the majority of our revenue was generated in the Americas, followed by Middle East, APAC, Europe and in Africa. As Raouf noted, despite generating higher CFR, our results for the fourth quarter and the full year periods of ’21 were negatively impacted by unapplied labor costs and higher-than-normal paid time off resulting from a onetime allowance for our employees to carry over unused 2020 PTO into 2021 as an accommodation during the COVID-19 pandemic. Despite this negative impact, we felt strongly that it was important to support our employees during an unprecedented time. These costs were confined to ’21 and are not expected to repeat in ’22 or future periods. .
Gross profit was approximately $33 million or 40% — 42% of CFR compared to $33 million or 46% of CFR in last year’s fourth quarter. The $6 million CFR improvement quarter-over-quarter was offset by a decrease in gross profit as a percentage of CFR, due primarily to a credit from one of our partners in 2020 that did not reoccur in 2021.
SG&A was approximately $31 million or 39% of CFR compared to approximately $29 million or 40% of CFR in last year’s fourth quarter. The increase in SG&A for the quarter was related to the unapplied labor costs and onetime PTO allowance that I mentioned earlier.
The effects of our lower gross profit as a percentage of CFR and SG&A increases impacted our operating income of approximately $2 million as compared to operating profit of approximately $6 million in last year’s fourth quarter. Net loss for the quarter was $2.3 million or $0.04 per share compared to a net loss of $1.8 million or $0.03 per share last year.
Adjusted net loss for the quarter was $257,000 compared to an adjusted net loss of $699,000 in last year’s fourth quarter. Fourth quarter of 2020 included a $1.4 million expense related to the closing of the company’s Brazil operations.
Adjusted EBITDA for the 2021 fourth quarter was $5.2 million compared to $5.7 million in last year’s fourth quarter. For the year, CFR improved to approximately $305 million from approximately $297 million the year before. Gross profit improved to approximately $124 million or 40.5% of CFR from approximately $119 million or 40.3% of CFR last year. SG&A was $114 million or 37% of CFR and compared to approximately $109 million or 36.8% of CFR last year.
Operating income was $9.3 million in 2021 compared to $10.5 million for the full year 2020. On an adjusted basis, operating income for ’21 was approximately $14 million compared to approximately $17 million last year. In 2020, adjusted operating income included a $2.6 million unrealized FX loss as compared to just under $700,000 in ’21, as well as a $1.6 million write-off of the leasehold improvement as opposed to no such item in ’21. Adjusted income for ’21 included $2 million of nonrecurring activity, which includes the partial collection of the fully reserved Libyan receivable on a net basis.
Net loss for the year narrowed to approximately $4 million or $0.07 per share from approximately $8 million or $0.14 per share last year. Adjusted net income for 2021 was $700,000 as compared to adjusted net income of approximately $4 million in 2020.
Our unrestricted cash position at December 31, ’21, was approximately $22 million and total liquidity was $31 million. Cash flow for the year turned negative, reflecting payment during ’21 of certain items deferred from 2020, including employer taxes and rent, increased working capital due to CFR growth as well as slower billing due to resource shortages and the timing of collections on certain clients. We are now current on the deferred items, our billing function is fully staffed, and we expect to have positive cash flow for 2022.
As Raouf noted, we received a payment of over $500,000 from ODAC, our client in Libya. The remaining balance owed to Hill is a little over $20 million against the original accounts receivable balance of approximately $60 million at the time when the Libyan civil unrest began in 2011. The company fully reserved the net accounts receivable from ODAC at the time and remains in discussions with the appropriate authorities in Libya regarding the receipt of additional payments.
Our full year ’21 EBITDA rose 38% to approximately $11 million from approximately $8 million last year. Adjusted EBITDA was $16.3 million as compared to $19 million in 2020 due primarily to the unapplied labor and paid time off items discussed above. We have amended our main revolving and term loan facilities to extend the maturity of the revolving facilities to May 2023 and the term loan to October 2023. We paid a 1% fee on the term loan portion and 0.5% fee on the revolving portion and will pay an additional 0.5% on the revolving portion only at the end of the second, third and fourth quarters of ’22. The interest spreads on both facilities will increase by 1%.
As Raouf noted, our total backlog rose 9% to approximately $730 million from $667 million at December 31, 2020. Backlog also increased 10.4% from backlog of $661 million at September 30, 2021, reflecting our positive book-to-burn during the quarter. Our 12-month backlog at December 31, ’21 was $260 million. From a geographic perspective, our backlog remained concentrated in the Americas with nearly 48%, followed by the Middle East, APAC, Africa and Europe.
Thanks very much for your time, and I’ll now turn the conversation back to Raouf.
Thank you, Todd. To close, for 2022, we are forecasting CFR of $340 million to $350 million, an increase of 11% to 15% from 2021. 12-month backlog of $260 million represents 74% to 77% of our projected CFR for 2022. 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 time today, and I will now ask the operator to open the call to questions. Thank you.
[Operator Instructions]. Our first question comes from the line of Peter Enderlin with MAZ Partners.
The first one is you, obviously, had a very sharp pickup in contract awards in the fourth quarter. Can you give us a little more color on how that suddenly ramped up when the overall economic environment didn’t seem to improve very much? And was it mostly due to projects that had been deferred or granting awards have been delayed because of COVID or was there some other things involved?
Sure. We had a very strong contract awards in several regions, but mainly the U.S. was very strong for us. We had a couple of major contracts awards. One of them is in California on the infrastructure and utilities with Southern California Edison Company, which has been a client with — for us for 15 years. So we were extended with a major contract, and I believe that has been announced already.
Other major assignments we had, again, in the infrastructure in the U.S. as well as a couple of large awards in Europe on infrastructure programs in Southern Europe to be exact.
You mentioned, by the way, I think, Europe awards in your comments. And on the slides, I saw Greece and Southern Europe, but do you have anything significant going on in mainstream or Northern Europe?
We continue having a lot of business in Northern Europe, 1 of them in Switzerland being with the United Nations, the revamping of the entire United Nation campus in Geneva, which is a 10-year contract that continues to be very strong for us. That’s one of our major programs. We also have the headquarters of the IT, which is another UN-owned non-profit organization. We’re in Germany, doing several major projects for commercial contracts such as [Nike], and we are on several of the major programs with different projects for the data centers and other critical projects that were given to us by major corporations such as Microsoft, Intel and so forth.
Okay. And Todd, can I try to pin you down a little bit on the onetime costs for deferred time off? Was that about equal to the difference in SG&A for the year? Or can you give us some better idea of how significant that was?
Yes, it was significant. There’s actually not an exact quantification. Some of it is an estimation on what we thought would happen versus what did happen with time off and the impact — but what I can say is that absent that, we would have been fairly close to the lower end of our previous guidance. And our previous guidance, I think, for the EBITDA was $20 million to $22 million, toward the lower end of that. So I think absent that, without giving an exact quantification, it would have put us fairly close to that range.
Okay. Fair enough. And then the whole idea of the company, I think, really is to leverage the growth in CFR. But and the plan was to keep SG&A basically flat. If you go looking forward, are you going to get more leverage from continuing to hold that flat? Or can you get some improvements in the direct labor impact on gross margin? In other words, is it more SG&A or more gross margin to provide leverage going forward?
It’s SG&A. The — I don’t expect that the gross margin is going to very much. That’s been pretty consistent over the years. And the direct labor, it is what it is, and that’s, for the most part, passed through in the terms of margin. So the leverage really comes from the SG&A and holding that as flat as possible. Or I mean, I think it’s safe to say that SG&A is — will increase a little bit, but it will increase at a much slower rate than the CFR will increase?
Okay. Well, good work on the top line. We need to see more on the bottom line, obviously.
Thank you, Peter.
We’re working on it. I think you’ll start seeing that starting from next year.
Our next question comes from the line of Matt Dhane with Tieton Capital Management.
I was curious, are you starting to see any of the benefits yet from the infrastructure bill both in the United States as well as I know Europe has in place some infrastructure-related additional spending as well. Are you starting to see any of that flow into backlog yet? Or are you having discussions around that at this point in time? Just curious on an update there. .
Sure. We are starting to see signs that things are coming down. I think the impacts of the bill and the money flowing, we’re expecting to see that towards the end of this year where really the procurement comes in. But what we’re starting to see is, in particular, in New York and East Coast is the budgets or state budgets have been released, and there’s a lot more funding for the infrastructure that was held up in the last 18 months to 2 years because of the political standstill that happened in those states.
So it’s not particularly related to the infrastructure bill, but because they’re anticipating of that coming in, the budgets have been released, and there’s a lot more money that we’re seeing being awarded to us and flowing in the market.
[Operator Instructions] Our next question comes from the line of Zach Liggett with Desmond Liggett.
My first question is on the internal controls, and I was just hoping you can give us an update on when you expect that to be remediated.
Absolutely, it will be remediated over the next couple of months. And we’re disappointed that we still have this — that we have this material weakness notwithstanding, we were able to clear the existing ones. And we have put in, and we’re very confident that at this point and after a lot of work over the last couple of years that the design control structure is in place and very effective, but there was some change in personnel throughout the year that unfortunately contributed to some of those controls that we had put in place just not being performed on a consistent basis throughout the year, which is really the basis that you see for the material weakness.
So we will be dealing with that in terms of and already have taken steps in terms of retraining, strengthening personnel, be bringing on some additional personnel to ensure that, that gets executed on a consistent basis. So it’s never good news, but I think to put everything in perspective, the really heavy lifting is putting the control structure into place, which has been done.
And along with that, it has to be executed. The execution part is a little bit of the less heavy lifting, I would say. So we’ve already taken steps to address that. I will say that we saw a much better performance of the controls in the fourth quarter. And most of these issues that popped up were earlier in the year. And although we did have a strong fourth quarter over the controls, it’s just because of the inconsistent performance throughout the year, that’s really the reason for the material weaknesses. So we’re on our way to remediating that.
All right. Fair enough. And then my second question is on the free cash flow expected in ’22. You have a pretty big improvement guided on adjusted EBITDA. I’m curious how you guys see that flowing through to free cash, and then what your priorities are with the cash. We’re looking at a share price that’s back near all-time lows. And I’m just curious if you’re — I don’t think I’ve seen you guys ever do a buyback. I’m curious if the Board is discussing that with either the free cash you expect in ’22 and/or whatever it comes from Libya. Just if you could give us some thoughts on, I guess, capital allocation in general and your expectations for free cash flow in ’22.
In terms of expectations for free cash flow, what we’ve said is we expect it to be positive. And with no further quantification of that other than I think that we’re probably, if you look at historically, our first quarter is a pretty down quarter generally for cash flow. I mean we usually have negative cash flow in the first quarter. We’re sitting here, and I don’t have quarter numbers yet. But I think we will see I think we’ll see better performance during the first quarter than we have. But for the full year, all I would say is that we expect that we’re going to be somewhat positive based on the view that we have right now. And I don’t think that that’s going to give rise to a big pool of capital to be allocated. If you look at our guidance for the year on the top line, which is 11% to 15% top line growth, there is a working capital component of that, that’s required in order to achieve that. So — and we have sort of a minimum level of unrestricted cash that we need just to operate the business day to day.
So I’m not sure that on just on a regular basis, there’s going to be this big pool of cash that we have to figure out what to do with in terms of your question about if we were to get another chunk of money from Libya. And what to do with that? I think that’s pretty speculative. And I’ll let Raouf address any questions about Board activities. I think the answer is probably going to be going to discuss that, but I’ll leave that to Raouf to discuss.
Thank you, Todd. As far as that, I mean, we look at this. Let’s first get the money out of Libya. Once we get the cash in, we’re going to be looking from a Board point of view, what is the best use of the cash, whether it’s a buyback or reinvested in the business or potentially pay dividends. I mean this is a Board decision that we need to discuss it. But let’s first get the cash in, make sure that we have the working capital that we need to run the business. And then obviously, we want to do what’s best for shareholders and what’s going to give the best value for shareholders going forward.
I will note to is important to note that the — to the extent that we do get Libya cash in, and this will be in the agreements that were filed, so you can look at the details. But there is a requirement that will, in the first instance, we are going to use that to pay down debt, some of the outstanding debt. So that will be the first use of the — any Libyan money that we do get in to a certain extent before we will kind of be free to allocate that to other uses.
Okay. I guess just one follow-up there then. I mean do you have a targeted, I guess, leverage ratio or other debt metrics you’re looking at? I mean it seems like you’ve got variable rate debt. We’ve got an increasing interest rate environment. I guess what are you thinking in terms of appropriate leverage for the business?
We kind of have been running — I mean, for this — right now, for this quarter and again, it wasn’t a strong cash quarter. So we’re running at 2.36 net debt-to-EBITDA leverage. That’s a little bit higher than we’ve been on a run rate basis. We’ve been kind of sub 2. And I mean, I’m fine with where we are right now. The covenant is actually for 3x. I don’t think we really want to operate at a 3x, absent a good reason to be doing that.
So I think the target — there’s not a specific target, but I think around that kind of 1.5% to 2% range is a comfortable range generally to be in.
Our next question comes from the line of [Eric Goldberg], a Private Investor.
So my question is about your comment in one of your recent filings about getting back into the claims business. Apparently, your non-compete expires in May 22nd. Can you give us some thoughts into how you approach the claims business now? When you sold the business, sold it for about $140 million on about $165 million in revenue and you can’t use the retained knowledge of Hill claims business to that scale? And that’s #1. And #2, could you give us a sense of what the margins could be in the claims business now that you got the India facility? And I guess, #3 is, any update on the facilities management business?
Sure. We are very excited that — I’m getting an echo so I’m going to — we’re very excited that we are free again to go into the claims business because it’s a business where we do hold a very high reputation. We retain the expertise to be able to do that. What we’re going to — our current approach is we’re going to have a center of excellence for the claims under the existing project management business that we have. We’re not going to create another unit for it. We’re going to be — until now, we have been responding to certain inquiries because of our non-compete that we cannot perform and we could not service our clients for that.
We will now be taking on assignments from clients in order to get back into the claims business. And we’re going to be servicing these clients existing and new ones organically. We still have a fairly large network of experts, and that is required for that business. So we will be tapping into that. And we were — again, we will service, grow the business but based on really using current staff levels and current expertise that we have in-house, and do it organically.
The margins are much higher or fairly high as far as the claims business is concerned, but also the claims business, their short-term assignments. And that’s why they really require a higher margin for it. So we’re setting it up a little bit different than what we used to. Again, we had created the largest claims consultancy practice in the world that we invested in because of conflicts that we — that the company was seeing. So we want to recreate some parts of that, provided to our clients because they’ve been asking for it. But we’re going to set it up a little bit different, and it’s going to be a support function rather than a complete separate function for now.
Again, we’re going to look at it with the minimal investment and with the highest possible returns for it. Once we’re in the business, we’re going to reassess and relook at it, whether that’s the long-term strategy or just for now, and change it if need be. Otherwise, we’re going to continue as is.
As far as I believe, you asked, margin-wise, project management business is in the low 40s as far as gross margin. We expect to be at least 5 points to 8 points higher on any of our claims assignments.
As for facility management, we’ll continue growing that service overseas, particularly in the Middle East and North Africa. We are awaiting for certain several large awards that is anticipated this year, and I hope to be able, hopefully, by — when we come back on talking about our first quarter, be able to announce some of these awards as they come in.
Our next question is a follow-up from Peter Enderlin with MAZ Partners.
Yes. You’ve stated that you have a strong position in transportation infrastructure, all the different pieces of that, like airports and rail and highway et cetera, and also a strong position in energy. But are there other vertical segments that you can enter of project management, either organically or by niche acquisitions that could open up more opportunities for CFR growth? I’m thinking of things like you do some already in the resorts, construction area, maybe alternative energy, remediation, other environmental aspects. So are there things like that, that you’re looking at? And would it be more likely to be internal or through niche acquisitions?
Peter, good question. I mean there’s a lot of niches that we can look at. One of them is, for example, high-speed telecommunication networks, which with the 5G coming up, there’s going to be both infrastructure that’s required for it as well as on the wireless as well, a lot of upgrades. And we’re looking at that of how potentially to focus on it and go on it.
As far as acquisition is concerned, once we have the liquidity for acquisitions, we intend to go back into acquisitions, but it’s going to be towards the end markets that we’ve already invested in, and mainly in the U.S. I think I’ve said it before, we would be looking at acquisitions that really will help us grow in the federal market in the U.S. as well as potentially for the disaster recovery, which continues to be a very strong market for us with good growth potentials. These would be the main 2 end markets that we’ll be looking at.
Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks.
Okay. Thank you, everyone, for joining us today, and I look forward speaking to you in a few months talking about our third quarter — our first quarter financial results. Thank you very much.
This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Hill International, Inc. (NYSE:HIL) Q4 2021 Earnings Conference Call April 1, 2022 9:00 AM ET