ENGlobal Corp (ENG) 2021 Q3 法說會逐字稿

Good morning and welcome to the ENG third-quarter 2021 financial results conference call. Your host for this morning's call is Chief Executive Officer, Mark Hess. At the request of ENG, today's call is being recorded and will be available for replay on the Investor Relations section of the Company's corporate website, www.englobal.com. (Operator Instructions). At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications. Sir, the floor is yours.

Thank you, operator, and thanks, everyone, for joining us on this call. Before we begin, I'd like to review our forward-looking statements provision. During today's conference call, company representatives may make forward-looking statements. Any statements made in this presentation about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please note that actual results achieved by the Company may differ materially from such forward-looking statements. A discussion of factors that could cause such differences appears in the Risk Factors section of the Company's 10-K.

Presenting on the call today will be Darren Spriggs, ENG's CFO, and Roger Westerlind, ENG's President. Following the presentations, Darren, Roger and Mark Hess, ENG's CEO, will be available for questions. And now I'll turn it over to Darren Spriggs. Darren?

Thank you, Rick. I would also like to extend my welcome and appreciation for those on the call today. For the quarter, we reported $6 million in operating revenue and $6.7 million in direct operating costs. Included in the direct operating cost is $1.6 million related to underutilized staff and proposal costs, which have significantly increased over prior periods.

During the quarter, we reported an employee retention tax credit of $1.3 million for retaining our staff. This credit is classified as other income in accordance with GAAP. Our SG&A was $3.1 million for the quarter, which included nonrecurring legal and advisory fees of $230,000 compared to $2.2 million for last year. The remaining increase is primarily related to investment in our business development staff and related activities.

The PPE loan in the amount of $4.9 million was forgiven during the quarter and is also included in other income. Our income tax expense consists of state income taxes, primarily in states that do not use income to calculate tax such as Texas. Our federal income tax expense is offset by an adjustment to a valuation allowance reported against it. As a result, we recorded net income of $2.4 million or $0.07 per share for the quarter compared to a loss of $1.1 million or $0.04 per share last year.

For the first nine months of the year, we reported $29.4 million of operating revenue and $29.2 million of direct operating costs. Included in the direct operating cost is $4.3 million of costs related to underutilized staff and proposal costs, which has significantly increased over last year. During the first nine months of the year, we recorded an employee retention tax credit of $3.1 million for maintaining our staff, which is recorded as other income.

Our SG&A was $9.9 million for the first nine months of the year, which included an accounts receivable reserve of $1.4 million from one of our customers who suspended their operations, and $350,000 for nonrecurring legal and advisory fees compared to $6.6 million last year. The remaining increase is primarily related to investment in our business development staff and related activities.

The PPE loan, the employee tax credit from this quarter and the employee retention tax credit from the first quarter make up essentially all of the $8.1 million in other income. Our income tax expense consists of state income taxes primarily in states that do not use income to calculate taxes like Texas, our federal income tax benefit is offset by an adjustment to the valuation allowance reported against it. As of the end of the quarter, our entire deferred income tax asset included in our NOL was reserved. As a result, we recorded a net loss of $1.8 million or $0.06 per share for the first nine months of the year, compared to net income of $59,000 or $0.00 per share last year.

Our cash balance was $25 million as of the end of the quarter, an increase of $12 million over last year. Our working capital increased $16 million over last year to $30 million as of the end of the quarter. We believe this cash on hand, along with internally generated funds, availability under our line of credit and other sources of working capital will be sufficient to funding Global's current operations and expected near-term growth. And now to you, Roger.

This is Mark Hess; I'll make the next statements. We're going to talk about where we are in our process of changing this company from a -- primarily an engineering services company to a full suite EPC company. Last quarter, we spoke about a number of initiatives that we have undertaken to better position ENGlobal in the marketplace. At the center of these initiatives is an improvement strategy that supports our short-term and long-term goals.

During our last call, we shared information about our target markets -- renewables, automation, government services and traditional oil and gas. Our collective experience, history and relationships in these markets supports the decision and market focus. We are seeing significant increases in activity in each of the selected markets. We spoke about recurring seasoned leaders -- recruiting seasoned leaders for each of these markets by targeting candidates with solid experience and relationships in EPF and EPC areas, which will help us further develop even stronger ties with our current key clients.

The excitement surrounding our office relocation and rebranding has resulted in better applicants seeking career opportunities with us. This rebranding is something that we shared with you during our last call together. We talked about how important this is to the overall strategy of ENG, the new logo, the website, the relocation and all of the strategy to better communicate and expand our capabilities to our current and new clients. This campaign is fully launched and our online content is now noticeably improved.

The strategy execution has continued with the recent addition of construction services. ENGlobal now offers self-performed on-site construction for small projects. Our full suite of services now consists of engineering and project execution services, integration, automation, fabrication and now construction of small capital projects. You may have seen the press release on this topic.

With this addition, we offer our clients full, self-performed EPC project execution. Because we are positively positioned with our clients, this expansion quickly generated two project awards for small construction projects. These projects were awarded to ENGlobal by two different major midstream and pipeline companies. We will be releasing more information and providing additional confirmation on this addition to our strategy soon.

Last quarter, we updated everyone on the hydrogen plant we delivered from our facility in Henderson, Texas to Seaboard Energy in Kansas. We successfully completed this project (technical difficulty) has given birth to similar opportunities that our renewables group is currently bidding and/or evaluating. In addition, our current administration has committed over $500 billion towards the energy transition and a new infrastructure plan. This combined with the United Nations climate summit happening now will drive an increase in this activity. The IDA anticipates 1,500 renewable diesel jet fuel plants will be needed by 2030 to meet the Paris Accord's greenhouse gas reduction commitments. Our significant leadership strength in this group has positioned ENG as an authority in this space.

An exposure to these opportunities is a reflection of our level of involvement and exposure in the market. This is further confirmed by the number of new inquiries this group is receiving. With the initiatives we have been pursuing, we have improved our position in the markets that we serve. We have made a significant equipment investment in our structural fabrication facility located in Henderson, Texas. This equipment is a critical part of our overall strategy for making our fabrication services more efficient and increasing its capacity. We are seeing tangible signs of a successful strategy in the form of purchase orders for new and existing upstream clients.

We are seeing a similar trend in our automation and integration division with an increase in opportunities from our existing client base. The significance of these orders is far greater than the revenue that they represent. It's an industry validation for our growth in the segment.

Our project awards are also accelerating with recent Q4 purchase orders from several major IOC clients that then stand above -- where we stand an above average chance of winning the larger opportunities in our pipeline. We have already exceeded our Q3 bookings so far in Q4. This increase is a result of our business development activity and key account strategy combined with an uptick in the market. We are seeing increases in key metrics. Received RFQs from August to September are up 20% and we saw another 25% increase September to October.

Our number of submitted proposals has increased by $100 million in September. This is also evidence of the increased business development activity in the early part of the year. In total, we have just under $250 million in working opportunities and a total of over $1 billion in identified opportunities in our pipeline. I am optimistic about the opportunities we currently have in our pipeline and the increase in metrics and the wins we are seeing.

Safety is a continual focus and we gave an update of where -- we gave an update when we met last quarter. I shared about our safety program, Zero Impact and First Things First. A strong commitment to safety not only is paramount for our employees, but will also continue to enable ENG to work for our clients. This is a priority for us and this focus and commitment reflects this fact.

At the same time, we have been improving our balance sheet. And I am happy to report to you today that it is very strong. We have access to our working capital facility and capital markets if necessary with almost no debt. This is an important fact for our customers as it provides them with greater assurance that we have the financial strength to complete their complex projects. We believe in the strategy that we have chosen and implemented. It is aggressive but realistic. We are meeting weekly to monitor our progress and adjust where necessary. We are now seeing real results directly related to these strategic efforts. And we are extremely optimistic about the future of ENG. We believe this positive momentum will continue to prove to be successful.

We have accomplished a significant amount so far in 2021 and as 2022 quickly approaches, we must continue to work with urgency and focus. That being said, we are very pleased to be able to report that our strategy is working. This concludes my prepared remarks and now I'd like to turn the call over to the operator for questions.

(Operator Instructions). Jeffrey Campbell.

Good morning. This is Jeff Campbell with Alliance Global Partners. Mark, I was wondering to begin could you provide any color on the type of contracts that were not renewed during the third quarter, just to give us some sense of where COVID-19 is creating the most disruption?

Well, I think what you'll see is, as we entered -- well, let's take a step back and go back to 2020. When we started 2020, we had a backlog of about $60 million, and we worked through that. Even as COVID came into play in March of 2020, we had significant backlog to carry us through. We saw then at the end of 2020 where our business development folks were not able to go out and meet with our clients. Our clients weren't working from the office, they were working from home. We had the added impact of the decrease in oil price which significantly decreased activity in all of our markets.

And so, the backlog that we had then at the end of -- at the beginning of 2020 then reduced at the end of 2020 and has reduced to this point simply because many of our clients are not -- are just now getting back to the office. And so, again, with the uptick in the oil price and people getting back to work, we are seeing increases in activity both on the proposal side and actually on the awards.

Although the awards are smaller at this point, there's been quite a bit of backlog -- when I say backlog, there's been quite a bit of equipment that our clients had in inventory that they needed to work through before placing new orders. So, the projects that we were working on both on the renewable side with our hydrogen plant and on the government side, we've been working through that backlog and those are the ones that we've not yet replaced, those larger projects.

Okay, and then -- thank you for that. So, now let's flip it. With that in mind, are there specific areas in your oil and gas offerings that you see recovering earlier? It sounds like from your prepared remarks that that's already apparent.

Yes, I think where we're going to see the market come back the quickest is going to be in the upstream sector. Roger may want to pine in on this. But that's what we're seeing is primarily the upstream market. And as usual, it's the upstream piece of the market that swings the wildest. So, when activity is high, upstream is really high and when activity is low, upstream is really, really slow. So, it's kind of the leading indicator in the marketplace.

Right, that makes sense. Regarding the new on-site construction capability, can you qualify the size of projects that you're willing to complete at this time?

Yes, we're going to start carefully. So, I think what we're looking for is projects somewhere between a few hundred thousand maybe up to $5 million at this time.

Okay, great. Thank you. And then -- now let's turn to the recent announcement about the carbon capture and sequestration. If it's successful, how is the ENG solution going to differ from what's currently available to industry?

I think that -- we went over a few of us -- Bruce Williams which is leading our renewables group to San Francisco for a two-day conference Wednesday, Thursday, Friday last week. I guess that's three days. And I think that what's troubling us is the current activity to really go to [FIAV] versus the need. So, if you translate -- what comes out there is that if you only take sustainable airplane fuel, we need plus 30 million gallons of production to fulfill the current needs. That's expected to go up to 40 million. And that translates then to a huge number of plants. It's a lot of people that's talking about this. I think the trick here for us and the industry as a whole is to follow the ones that are really going to succeed to get to [FIV]. So, it is really hard to sort it out right and we're working hard with our technology partners, with our construction partners. It's to come; I think we just need to be careful how we budget for 2022.

Okay. And then my final question today is we focus a lot on the modular hydrogen production unit for renewable diesel. But now you're talking a lot about jet fuel, which is an additional end market. I'm just wondering are there any other applications besides specifically the HPU for renewable diesel that you think might reasonably attract a project in the next 12 to 18 months?

You have the whole CO2 capturing. I think there is many, many submarkets to the whole one cleaning up what we do to our planet and to produce that cleaner fuel. So, I think there are many avenues here. If you look at one of our technology providers (inaudible), they have a wide range of processes around this area. So, I think the way we see it is as long as we have the capability to manage, engineer, procure and fabricate, what's really owned in this plant doesn't really matter that much to us. We have the process knowledge to build if it's renewable diesel, sustainable airplane fuel, etc. It doesn't really matter that much, right? So, as I said earlier, I think what we really need to understand is the one that had the capabilities to execute these projects.

In addition to this, maybe that should be said, also the IOCs start moving. The question is how quick they will move. We know the pressure on some of the major ones to do this. I think my personal view is some of them probably will succeed quicker than others. But we have every week number of calls with both investors and IOC that are now seeking what should we really do.

So, my point is really is it now now? I'm not sure about that. But I think we will see a lot of, a lot of activities in 2022 and I think we just need to be very diligent in what we engage ourselves in.

Okay, well thank you for that. And I'm going to look forward to seeing that unfold in the next year. Thanks again.

Thanks, Jeff. Our pleasure.

(Operator Instructions). And there appear to be no further questions in queue.

Very well. Thank you, operator.

Thank you.

Thank you, everyone, for joining us. You all have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.