ENGlobal Corp (ENG) 2008 Q1 法說會逐字稿

Greetings and welcome to the ENGlobal Corporation first quarter 2008 earnings results conference call.

At this time, all participants are in a listen-only mode. A brief 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, Natalie Hairston, Vice President Investor Relations and Chief Governance Officer for ENGlobal Corporation. Thank you, Ms. Hairston, you may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us today.

With me on the call are Bill Coskey, Chairman and Chief Executive Officer of ENGlobal, and Bob Raiford, Chief Financial Officer and Treasurer. In a moment I will turn the call over to Bill Coskey who will highlight management's perspective on our financial results for the quarter ended March 31, 2008. Bob Raiford will then review other financial points of interest for the quarter and in particular those topics that relate to our balance sheet and cash flow.

Before we begin I would like to remind everyone that some of the information discussed on this call will contain forward-looking statements that involve risks and uncertainty. These statements are based on current expectations. Actual results may differ materially from those set forth in such statements.

Additional information concerning factors that may cause actual results to differ is contained in the Risk Factor section of our previously filed Form 10-K and 10-Qs. All of those filings are available on the Investor Relations page of ENGlobal's Web site at englobal.com. Our filings with the SEC are also available on the SEC's Web site at sec.gov.

In addition, non-GAAP measures may be referenced during this conference call. EBITDA is provided for informational purposes only and is not a measure of financial performance under GAAP. EBITDA does not represent and should not be considered ad an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity calculated in accordance with GAAP.

After our opening remarks we'll have a question-and-answer session. In order to give as many callers as possible the chance to ask a question, please limit yourself to one question and then one follow-up if necessary.

And now I would like to introduce our Chairman and Chief Executive Officer, Mr. Coskey. Go ahead, Bill.

Thank you, Natalie, and good morning, everyone.

On behalf of ENGlobal management I'm proud to have this opportunity to discuss our solid start to 2008 and also to say that our company has made good progress toward meeting the goals we previously established for this year. Now let me briefly review those financial goals.

First, our expectations for organic revenue growth is in the 15% range. Second, we have generically said that we would like to see net income growing around twice that fast which implies a target for earnings growth of approximately 30%. And finally, over the last several years ENGlobal has been successful at increasing operating margins and the Company has stated a goal of reaching the 8% operating margin level for this full-year.

As a matter of housekeeping and unless stated otherwise, the financial comparisons made today will be to compare the first quarter of 2008 to those from the first quarter of 2007. Let's start with a review of earnings.

The $0.15 in quarterly diluted earnings reported this morning compares favorably to $0.12 from last year. Also, the fact that our net income for the quarter increased 27% to approximately $4 million, means that we were roughly in line with our earnings growth target for the full-year.

Another encouraging trend is the way we made our $0.15. What we saw was steady month-to-month profit improvement during the first quarter. It isn't that unusual for our first and last quarters of the year to be a little slower than what we see during the middle of the year.

The start to 2008 certainly served as a good example because we produced about 20% of our total earnings for the quarter in January, about 35% in February and about 45% in March. I am not necessarily projecting a continuation of this upward trend in the future months, only that our company typically performs on small to mid-size projects and often there is a lag at the beginning of each year.

Our EBITDA for this quarter was $8.2 million which compares to $6.6 million last year and to $27.8 million for the full-year of 2007. We also have non-cash stock compensation expense for this quarter of $387,000 which compares to $233,000 last year.

In terms of top line results the Company exceeded its target in the first quarter growing revenue 20% to a record $98 million. And it is important to note that all of this additional revenue can be attributed to non-acquisition related activities.

We have several other metrics that measure activity in our business. One of these is bi-weekly billable hours which increased on average from 174,000 to 208,000 which not surprisingly matched our revenue growth of 20%. Another plus is that we added 150 people to our staff in the first quarter and we are now 2600 strong.

This statistic was somewhat surprising because in the last call I had projected to increase our staff by 200 to 250 for the full-year, but we have already come a long way in this regard and hopefully will prove that my original project was too conservative. Utilization of our personnel resources continues to be strong and is slightly above the 90% level inclusive of overhead personnel and this is an approximate level that we have maintained since 2004.

The fact that our consolidated gross profit margin was down deserves some discussion. On a consolidated basis it was 14.7% this quarter, down from 16.3% last year and also lower than our gross profit margin of 15.9% for the full-year 2007.

We did reallocate $300,000 of SG&A expense above the line into direct cost which negatively impacted gross profit margin by about two-tenths of a percentage point, so this really doesn't move the needle that much. The primary reason for the decrease in gross profit margin was related to a shift in our revenue mix quarter-over-quarter, mainly as a result of lower margin inspection revenue in our Construction group that more than doubled.

Regarding SG&A expense, it decreased 2.2 percentage points to 7.3% this quarter from 9.5% in the prior year period. The Company's SG&A expense for the first quarter 2008 was $7.2 million, a decrease of more than $500,000 from the first quarter 2007. As I said previously, around $300,000 of this decrease was due to a reallocation into direct cost.

I would like to reiterate that EnGlobal's philosophy is to manage our ongoing SG&A expense exclusive of any acquisitions in absolute dollar terms as opposed to managing such overhead as a percent of revenue, and our target here for SG&A expense is $30 million a year, or $7.5 million per quarter.

ENGlobal's consolidated operating margin for the full-year 2007 was 6.3% and I am proud to report that our operating margin for the first quarter of this year increased to 7.4%. One obvious question is how is ENGlobal going to continue to raise profit margins going forward.

As you probable know, we report detailed financial information on four operating segments, Engineering, Construction, Automation and Land and expect to release our 10-Q with detailed segment information in the next couple of days.

Our Engineering business, which is 53% of our consolidated revenue, continues to be by far our biggest profit maker and increased its operating profitability by over 2 percentage points this quarter compared to last year. Conversely, our other three businesses that represent the balance of our revenue and that are investing more in growth lag anywhere between 8 to 12 percentage points behind Engineering and operating profitability.

There is a long discussion that could be had about each business, mostly with reasons I could give for optimism based on recent project awards, but the mission is really clear. Much of the Company's incremental success going forward will depend on raising the profitability of its three non-engineering businesses. I actually consider it somewhat of a positive for ENGlobal that we had a good quarter and still have so much room for improvement.

Speaking of internal growth, I am proud to say that the Company has landed five new significant projects this quarter with each operating segment being the lead in landing at least one of these. Without going into a lot of specifics, these awards have come from three refiners, one petrochemical operator and one pipeline operator.

Without a doubt, the most exciting thing I've seen our company currently is the spirit of cooperation and cross-selling amongst our four groups. In simple terms, on much of the new work we are now landing more than one of our four businesses will be working together.

Regarding the South Louisiana ethanol project that was terminated late last year, this quarter we have had numerous conversation with the owners and also their lender as to efforts being undertaken to complete the project. Activity is good regarding potential [offset] agreements and equity partners.

We of ENGlobal have introduced potential equity partners to the owners and will await the outcome of those discussions for a few more weeks before taking legal action in order to recoup the amounts we are owed.

In terms of internal growth, it is my goal to add about 10% acquisition growth to our business over the next year which means around $40 million in incremental revenue. If we can achieve this level of external growth and meet our internal target then overall ENGlobal will be about a 25% grower.

These acquisitions will most likely come in two or three separate transactions and it is expected that each will be accretive and increase our margins. We have already reached an agreement in principle with the first of these, a $10 million automation related professional services firm which we hope to be able to close in the second quarter.

Thank you for your time this morning. I will now turn the call over to Bob Raiford, our CFO. Bob?

Thanks, Bill. Good morning everyone.

A lot of the specific details of our first quarter results were disclosed in our press release this morning but I would like to highlight some selected items, as Bill noted, unless otherwise stated, the financial comparisons I will make will be to compare first quarter 2008 results to those of first quarter 2007.

Operations generated approximately $400,000 in net cash during the first quarter compared with net cash used for operations of $4.9 million during the same period in 2007. An unfavorable change in working capital during the period negatively impacted cash flows from operating activities.

The primary impacts were the results of an increase in trade receivables, in particular the timing and processing of unbilled receivables as a result of our growth and activity with new plants and a decrease in accounts payable primarily due to approximately $2 million of scheduled vendor and subcontractor payments related to the ethanol project terminated at the end of the third quarter in 2007.

An additional $2 million in similar payments related to the ethanol project are scheduled to be made during the second quarter which we expect will fully satisfy our current cash commitments to that project.

Long-term debt net of current portion increased 5.5%, or approximately $1.6 million from $29.3 million as of December 31, 2007 to $30.9 million at the end of the first quarter of this year. However, as a percentage of stockholders equity, long-term debt decreased to 51.3% from 52.5% for the same dates.

The increase in long-term debt was primarily related to a $1.9 million increase in our line of credit supporting our growth and the timing difference between meeting short-term bi-weekly payroll obligations and collections of associated trade receivables. Total liquidity, which includes cash plus availability under our credit facility, was $22.1 and $22.8 million for the first quarter of 2008 and 2007 respectively.

The outstanding balance of our $50 million line of credit at the end of the first quarter was $29.7 million, with remaining borrowings available of $20.1 million. We have one outstanding letter of credit issued in November of 2007 for $247,000 to cover deductibles under our insurance policy period expiring September 30, 2008.

Our average days sales outstanding was 62 days for the first quarter compared to 71 days for the comparable three-month period in 2007, and 61 days for the twelve-month period ended December 31, 2007. Our targeted goal, our targeted DSO days remains in the mid 50s and we believe this targeted goal is still achievable.

We invested approximately $445,000 in capital assets during the first quarter compared to a prior year quarterly investment of approximately $574,000. We do not expect a material change in the level of capital investment during each of the remaining quarters of the year.

Our effective tax rate for the first quarter was 39.9% compared to a rate of 36.6% during the first quarter last year, and a rate of 39.7% for the year ended December 31, 2007. The tax provision increased by approximately $220,000 during the first quarter 2008 compared to a similar provision to last year's first quarter tax rate. The current estimated tax rate for 2008 annualizing the impact of both federal and our current state tax mix should average approximately 40%.

Thank you for your time this morning. I will now return the call back to the Operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question this morning is coming from the line of Rich Wesolowski with Sidoti & Company. Please proceed with your question, sir.

Thanks a lot. Good morning.

The headcount was very reassuring. Can you contrast the increase that you had in the first quarter with the flattish type numbers that we had seen in the second half of '07?

Was this a renewed effort? Was it just a chance of employees that were available? Was it tied to your backlog and where work was available, et cetera?

I think it's two things. I think it's the terminated ethanol project we saw a little decrease in headcount coming off of that late last year and it's mostly just staffing to meet our increased backlog going into 2008.

And again, a lot of this increase in personnel came from our pipeline inspection group which is within our Construction group, construction business and that's where a lot of the people were added.

Are you adding any engineers?

Yes, we are. In fact, I can say that all of our four groups are in a hiring mode, we are adding engineers and I think we'll continue to see an increase in the staffing throughout the year. I just can't really project -- I had said 200 or 250 for the full-year and so I hope I'm conservative.

Okay. How much, you mentioned that inspection revenue was up over 100%. How much was the inspection revenue in the quarter?

About 26, $27 million.

For the quarter?

It was about 13, I guess, it doubled, I think.

So it was 13 in the March '08 quarter?

Right.

Okay.

The inspection business has always been quoted as a stable mid-teens type of gross margin so I'm a little confused as to why a revenue mix heavily weighted toward inspection, even if it was 100% inspection, would take the Construction gross margin down to 8% or so.

In terms of gross margin, in terms it's probably lower than mid-teens, I think it's probably in the low teens. And that's just, it is what it is and we're going to do everything we can to get the margins up there but right now we're probably in the low teens for that.

Okay.

So I would imagine that the other half of the Construction business has margins that are, they must be a good deal below that to get the margin to where it was in the March quarter absent any one-time project effects or anything that we're not seeing.

Really, Rich, we have two halves to our Construction business. We have a group that manages capital projects and manages turnaround and that's the higher margin side and then we have the inspection side which has been the lower margin side and, Bob, could you help me quote any gross margin figures for each of those?

I would say our inspection group is probably in the 5 to 6% range.

Inspection gets 5 to 6% margin?

Yes. Okay. That makes it check out.

And finally, are you at liberty to say how much you pay even in approximate terms for the agreement in principle for $10 million in Automation revenue?

How much revenue will--

Right now how much are you buying the Company for.

Oh, no, what we can tell you is that in the past we've said we don't pay outrageous multiples and are limited to about five times trailing EBITDA and smaller firms, you know, larger firms go for higher multiples and the smaller firms we would contemplate buying would go for we feel like in the four to five times trailing EBITDA range.

Would you think that would you need to either expand the credit facility or issue any equity to add the $40 million in incremental revenue over the next year?

I don't think so, no. The way we would accomplish it I think not.

Great. Thank you.

Hey, Rich?

Yes.

Before I let you go I guess I want to clear up the question on the inspection revenue. I guess the $13 million was, I guess, the change quarter-over-quarter. Actually our inspection for the first quarter did a little over $23 million.

So the Construction segment is basically inspection? I mean as it was you did $26 million in revenue and if 23 of it was inspection that's the lion's share.

That's correct.

Great. Thank you.

For the balance of the year we expect the project management part to grow, though, based on recent project awards.

Thanks again.

Thank you, Rich.

Our next question is coming from the line of Craig Bell with Sanders Morris Harris. Please proceed with your question.

Yes, good morning. Just had a couple of questions for you in terms of some of the segment revenue.

Specifically looking at Engineering, you certainly had nice profitability in the quarter but in terms of growth compared to the first quarter last year it was pretty subdued. Just wondering is there anything going on there that we should be concerned about or just why was that growth level so low compared to the other segments?

I think to some extent in our Engineering group we're limited by the availability of resources. I can tell you we just started an internal initiative in Denver to start an operation there and have hired a key person which I think can really help jump start that operation for us in Denver so we would look to that to provide some growth.

We've always said we would like to have engineering operations on the West Cast and the Northeast and in the Midwest and those would probably come through acquisition but I think this internal initiative in Denver will provide some growth but, really, I'm seeing our Engineering group to be a slower growth operation but they've done a good job of improving margins. Really, the other three groups we expect to be faster growers.

Okay.

And then going back to the inspection revenue in the quarter, what's kind of your outlook for the remainder of the year there in terms of growth? Are we going to, do you think that you're going to continue to see very high levels of growth as we progress through the year or is that something that you're going to think is going to slow down?

I expect to it slow down. In the Construction group, like I said, I expect our growth to come from the higher margin project management side, in construction management side and I think further gains in the inspection side from here will be limited.

Okay.

And then last question for you on your utilization rate, you're reporting it at 92%. That kind of seems like it's really pushing the boundaries of how high you could get it. I mean it seems to indicate that you guys must be just running full speed right now. Is that an accurate assessment?

We put a big focus on utilization, keeping our variable overhead low and I think we've always been honest with people in saying there's not too many gains from here in improving utilization to higher levels. I think we are running at about full speed.

Okay. Great. Thanks a lot.

Our next question is coming from the line of Rick Nelson with Jesup & Lamont. Please proceed with your question

Good morning. Most of my questions have been asked and answered. I do have one or two small items.

I notice that your interest expense came down a fair amount. Is that due to the fed really ratcheted down short-term rates?

Yes, primarily to the reduction in rates. We've seen a little bit of reduction in our average outstanding line of credit but primarily it's due to the rate reduction.

Okay. And looking at your depreciation rate I'm estimating about $1.1 million for the quarter. Is that about right?

Yes.

Okay. Well, great. Thank you very much and congratulations on a very good quarter. Very nicely done.

Thanks.

Our next question is coming from the line of J. D. Padgett, the Boston Company. Please proceed with your question.

Hi, guys. Just wanted to clarify one thing that Rich was asking about.

Within Construction, the inspection business, I'm a little confused there. It sounds like the margin right now is a little bit low and over time you'd expect that to be double digits. Is that right?

I think it's a little low right now. We're going to take action to raise the margin level of that inspection business. Within our Construction group it is a big percentage of that group.

It really results from a company we bought back in, I think, late 2004 called Cleveland Inspection Company and when we bought them they had about 130 or 140 pipeline inspectors out in the field. And I haven't really heard in the last week or two but lately we've had maybe 600 or more inspectors out in the field so that's (inaudible).

Along with the growth in pipeline construction activity that inspection group has really grown but we need to look for ways to improve margins in that group and that's something that'll be a focus for us.

So your hope is that that could be a teens-type margin, gross margin for you over time?

I think it needs to be. I think that's about minimum acceptable.

What do you think it takes to get there?

I think passing on more cost to the clients, getting clients to understand the nature of the marketplace and our cost structure and costs more to hire good people and we just need to pass that through.

And is that, have margins always been in that range or have they come down recently as maybe costs have escalated and you haven't pushed as hard to price it through?

I think you're right. I think margins have been (inaudible) higher but some of the increased costs and employee costs and travel expenses and we're in the process, I guess, trying to renegotiate those rates and pass those on to the customers.

We see a little bit of the same thing in our Land group. We've lost maybe 2 percentage points of profit margin there over the last year just incurring higher cost and haven't quite gotten are returned to passing those through to the customers yet and so we just need to tend to that.

And this, the whole pipeline from Alaska, when do you think some of that work gets put out to bid, some of the front end of that?

I wish I could answer that, J. D., I don't know. I can develop that and get back to you but I don't have any timetable for that.

That sounds like a huge project, it would be great to see you guys get something there. Thank you.

Our next question is coming from the line of Megan Bissell at ARC Partners. Please proceed with your question.

Good morning everyone.

Hi, Megan.

I wanted to just, last quarter you guys offered us greater transparency with the revenue and operating income for the four division and obviously we welcome that transparency. But here we are just six weeks later and now you're giving us a gross profit margin percentage rather than EBIT.

Can you just kind of walk us through the thought process driving that change? Why change it up and what's happened over the last six weeks to warrant that?

I guess, if you'll repeat your question I guess I'm not sure I'm following you there, Megan.

Okay, In the last, in the fourth quarter earnings press release you gave us revenue and EBIT, or operating income for each of the four divisions, right? And this quarter you're giving us a gross profit margin percentage rather than that operating income or EBIT number.

And so you're kind of shifting up what data you're actually giving us besides the revenues, what profitability metric you're giving us. And I'm trying to understand why the shift from giving us EBIT to giving us a gross profit margin percentage.

The information will be in the 10-Q.

I guess it'll be in our Q. Why we overlooked that in the earnings release I'm not sure, I guess just trying to feel what the market's looking for. That's something we can probably change in the future to include that.

It makes it a little difficult for to us kind of look over where our expectations were when we are getting different numbers in the press releases each time. That's the only problem.

Bill, in the press release, and I think you answered this sort of at the beginning, but if you can just highlight it a little bit more, you mentioned that the results deliver on most of the goals that you've established for '08, and that begs the question, what goals are still to be met? Obviously, the operating income margin at 8% is one of them but what else has to still be met?

Well, that's the primary one I was saying when I used the word most is that we hadn't quite gotten up to that 8% level that we still target. That's it.

We would like to get this 10% of acquisition growth over the next year and that's something we have yet to, there's always something you have to do and those are the two things that we have to do.

Okay. Great. Thanks so much.

Thank you.

Our next question is a follow-up from the line of Craig Bell. Please proceed with your question, sir.

Yes, I had a question on what kind of, what's the environment for billing rates? Are you still seeing the trend upwards in that area?

You know, I don't think we're seeing quite as rapid a trend up as we did maybe last year throughout the, throughout the last year. I think maybe we've reached a level that might kind of be considered a comfort zone and I think further gains from here will be harder.

I think we've already come a long way on our billing rate structure as evidenced by the 2 point gain in our Engineering group. That's just my observation.

All right.

Craig, you asked earlier, I guess, talking about the inspection group and the Land group that Bill alluded to on the cost side, those are pretty much day rates and fixed bill rates as opposed to cost reimbursable billings that we have in our Engineering group. And those are locked in over a contract. It takes a while to go back and renegotiate those day rates and fixed bill rates.

And, Craig, what you're asking right now our average multiplier within the Company, average effective multiplier is probably at 1.9 maybe a little higher, and so you're asking can we take it to 2.0 or 2.1 and I think the answer is yes, I just think those gains are going to be harder than the ones we've had to date.

Okay.

And then lastly, you mentioned this in the press release and then in your prepared remarks on the steady month-to-month improvement that you saw in Q1. Have you seen similar kind of improvements so far here in Q2?

I would, my hope would be that we could probably maintain the March level of our business and kind of run for a while at the level of performance we saw in March. But we're seeing continued good performance this quarter, yes. About like we saw late in the first quarter. That's a good way to put it.

Okay. Great. Thanks.

Our next question is also a follow-up from the line of Rich Wesolowski of Sidoti & Company.

My follow-up was answered. Thanks a lot.

Thanks, Richard.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, Operator. Hello again, everyone. I'll be able to answer any follow-up questions this afternoon or you can always e-mail me directly at IR@englobal.com. Thank you for being on the call today and thank you as always for your continued support of ENGlobal.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.