ENGlobal Corp (ENG) 2008 Q4 法說會逐字稿

Greetings, and welcome to the ENGlobal Corporation fourth-quarter and fiscal-year-end 2008 earnings results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Natalie Hairston, Vice President of Investor Relations and Chief Governance Officer for ENGlobal. Thank you. Ms. Hairston, you may now begin.

Thank you Rob. 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 year ended December 31, 2008. Bob Raiford will then review other financial points of interest for the year 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 uncertainties. 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 factors section of our previously filed Form 10-K and 10-Q. All of those filings are available on the investor relations page of ENGlobal's website at ENGlobal.com. Our filings with the SEC are also available on the SEC's website at SEC.gov.

As usual during Q&A, please limit yourself to one question and then one follow-up if necessary.

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

Thank you Natalie, and good morning everyone.

We are extremely pleased to announce that 2008 was a record year for ENGlobal both in terms of revenues and profitability. This morning we reported $494 million in annual revenues and reported net income of $0.66 per diluted share for the full year. Both of these results are unprecedented in the Company's history and especially given the fact that we almost reached the $500 million revenue mark.

It's a significant point and also a very good sign that our year-over-year earnings growth of 46% exceeded our revenue growth of 36%. In addition, it's an important fact that 97% of our revenue for 2008 was the result of internal or non-acquisition related activities.

For our fourth quarter, $0.15 per diluted share represents our best fourth quarter ever in what is normally a seasonally down quarter. And the $0.15 of earnings also represents a 200% increase when compared to the fourth quarter of 2007.

I would like to knowledge the Management and employees of ENGlobal for achieving these results and commend them on their outstanding performance on behalf of our clients and stockholders.

Given the economic slowdown in the second half of the year, our Company performed very well in 2008. It's impressive to me that all four of our operating groups participated in our positive results as each of our segments grew their revenue and operating income to varying degrees.

The fourth quarter of 2008 was driven in large part by a significant turnaround in our automation segment. As previously reported, the automation group booked about $46 million in backlog during the fourth quarter of 2008. Approximately $14 million of automation's fourth-quarter revenue was attributed to recovery efforts that were specific to Hurricane Ike in September of 2008.

Also during 2008 our automation group completed the integration of ACE, Advanced Control Engineering. We are already beginning to see the benefits and opportunities that our new Mobile, Alabama office has to offer. We are proud to welcome ACE as a valuable part of our team in this their first reporting quarter with ENGlobal.

As you may know, ENGlobal, like many other service providers in our industry, is somewhat of a seasonal business. Our strongest financial performance normally occurs during the second and third quarters while the first and fourth quarters are typically weaker. This seasonal trend can mainly be attributed to projects ramping down at year end and then ramping up at the first of the year.

Also we experienced reduced billable time around the holidays at year end.

Our backlog increased 11% to about $326 million when compared to our backlog level at the end of 2007. Although ENGlobal continues to win contracts and our backlog has increased slightly from this time last year, we are not immune to the current economic slowdown.

My perception is that midstream pipeline spending has been impacted but not to the extent that downstream spending has been. For example, the Oil & Gas Journal predicts that US pipeline construction will be down around 7% for 2009 when compared with 2008. It is projected that over 20,000 miles of new pipeline will be constructed in the US in 2009, which is still a high amount by historical standards.

Certain refining and petrochemical clients currently seem to be taking a more aggressive approach to cutting their costs and capital spending. The general trend is toward project delays and deferrals as opposed to outright project cancellations.

I'm also seeing that spending by our clients is very much a function of their size and balance sheet with larger, self-funded clients being able to sustain their levels of spending early this year much more so than smaller operators that typically require financing.

A greater amount of project activity and spending by our clients going forward in the midstream and downstream sectors is likely to be a function of several factors such as higher commodity prices, higher refining and petrochem origins, and availability of capital.

Today I believe that conditions that support our business have already improved and are better than they were early this year or late last year. Also several clients have informally told us they expect to increase their spending as the year progresses.

We're fortunate not to have a majority of our work tied to large capital projects, as this area seems to be the most impacted. For example, last week we issued a press release wherein we summarized an internal analysis of our larger book projects from just one month -- that being January of 2009 -- and the purpose was to assess the underlying drivers of recent new work. Although one month cannot be a leading indicator of work we will see ahead of us, current trends in the analysis showed that approximately 75% of anticipated 2009 revenue is likely to come from a variety of smaller sources such as what we call "run and maintain" projects, and these are small capital projects, alliance relationships, and ongoing maintenance work.

Another is control system upgrades where we retrofit obsolete distributed control systems and analyze their equipment and process plans.

And a third is recovery efforts like the ones we did related to Hurricane Ike or other natural disasters.

And a fourth is regulatory compliance. This is process safety management, pipeline integrity, environmental mandates, and other governmental programs.

In summary, the results of our recent internal analysis are consistent with our statements over many years regarding the mix of our business, which tends toward smaller and recurring work.

Here are some current trends from each of our business units.

For our engineering group, billable hours for work we do in our offices has been trending down since January and is currently running around 20% less than levels seen through much of last year. The bright spot within our engineering group is our in-plant staff, which has remained relatively stable over the last six months.

For our construction group, our higher margin construction management division is still running numbers that are roughly in line with what they did last year. However, the numbers for our inspection group have been trending down since the start of the fourth quarter of last year -- some of which is seasonal. Our expectation is for our number of inspectors to trend up again through the rest of this year and into 2010 as pipeline construction projects get underway.

For our automation group, they're probably best positioned in terms of backlog that should carry them through much of the year. We are also in the process of relocating our control systems fabrication shop into a larger, better equipped 80,000 square foot facility in Houston. This move is due to the increased amount of work we have booked to fabricate remote instrument enclosures and analyze our systems.

It's important to note that major distributed control system manufactures like the ones we install for our clients have already scheduled the phase-out of heritage platforms that have a large installed base in the process industry. We believe that this one fact is going to create a significant amount of retrofit work in coming years given our clients need to migrate to newer DCS platforms, and we expect to participate in this trend.

For our land group, they continue to generate steady revenue and profits, and there are considerable new opportunities to acquire right-of-way for electric power transmission projects. We have already had some success of landing projects in this fast-growing area in addition to the work we already do on pipeline projects.

Some of our biggest opportunities comes from a new set of clients in the alternative energy sector. To that end we've already formed alliance partnerships with key alternative energy technology providers and project developers, and these relationships have the near-term potential to create substantial work for our Company. If these potential projects are funded and awarded as we expect, then ENGlobal will provide support for the design, construction, and operation of these facilities.

Two particular areas where we have alliance partners are for the production of bio diesel and also various gasification technologies such as gasification of refuse-derived fuel. These multiple project plans are consistent with the administration's new energy policy, which provides significant support for all renewable and sustainable forms of energy.

So to sum it all up, today we reported very good financial results from last year and in particular our fourth quarter. While most of our operations are still performing roughly in line with the recent past, we have seen a downtrend of billable hours for both our office engineering operations and our inspection group. We're starting to see proposal and project activity that indicates the general environment for our business should improve as the year progresses.

Thank you for your time this morning. I will now turn the call over to Bob.

Thanks Bill. Good morning everyone.

A lot of specific details of the results of 2008 and fourth quarter ended December 31 were disclosed in our press release this morning, but I would like to highlight some other selected items. Unless otherwise stated, the financial comparisons I will make compare fourth-quarter 2008 results to those in fourth-quarter 2007.

Operations produced approximately $7.4 million in net cash during the fourth quarter compared to approximately $7.7 million produced in the same period in 2007.

For the 12 months ended with our most recent quarter, operations provided approximately $8.3 million in net cash compared to approximately $1.8 million used during the year in 2007.

Given our sustained growth and the need for working capital to fund that growth, 2008 was the first year in the last five years that our business has produced cash from operations.

Non-cash items for 2008 totaled approximately $3.1 million and included $1.9 million in amortization of intangibles and $1.2 million in stock-based compensation. Both of these items were slightly higher in 2007.

Overall we had a decrease of approximately $400,000 in non-cash items year-over-year.

Although fourth-quarter working capital was negatively impacted by increases in accounts receivable, costs in excess of billings and prepaid expenses, we experienced favorable impacts during the quarter as a result of an increase in accounts payable primarily related to significant pass-through procurement and subcontractor services recorded in the fourth quarter, and an increase in accrued compensation primarily related to the timing of our final, biweekly payrolls for the year.

Total capital expenditures for 2008 totaled $1.9 million compared to expenditures of $2.2 million in 2007.

We do expect an increase in capital investment during 2009 as a result of office expansions, but we do not expect to exceed our current credit facility's annual limit of $3.25 million.

Overall our long-term commitments, consisted primarily of a $22.5 million against our credit agreement with Comerica Bank and $1.1 million related to acquisition notes, decreased approximately 26%, or approximately $8.2 million, from $32.1 million at the end of the third quarter to $23.9 million as of the end of the year. The decrease in our overall long-term commitments during the fourth quarter was primarily related to the decrease in our credit facility due to the timing of our final biweekly pay period.

For the 12-month period of 2008, our overall long-term commitments net of current portion decreased approximately 18%, or approximately $5.4 million, from $29.3 million as of December 31, 2007.

As a percentage of stockholders' equity, our overall long-term debt at the end of 2008 decreased to 31% compared to 53% at the end of 2007.

Total liquidity, which includes cash plus availability under our credit facility, was $28.1 million at the end of 2008 compared to $22 million at the end of 2007.

The outstanding balance on our line of credit at the end of 2008 was $22.5 million, remaining borrowings available of $27.1 million.

Our outstanding letters of credit are less than $400,000, primarily to cover deductibles on our insurance policy.

Our credit agreement with Comerica Bank provides a $50 million senior secured revolving credit facility that matures in August of 2010. The agreement is guaranteed by substantially all the Company's subsidiaries, is secured by substantially all of the Company's assets, and positions Comerica as a senior to all other debt.

At the Company's option, amounts borrowed on the credit facility bear interest at either prime or a Euro-based rate plus an additional margin ranging from 1.25 to 1.75 basis points. This additional margin is based on our most recent leverage ratio.

Currently we have $20 million of our facility on Euro-based rate at a mix of one-month and three-month terms.

Our average days sales outstanding was 64 days for the year just ended compared to 61 days at the end of the third quarter of 2008. Our DSO was also 61 days at the end of 2007. The increase during the quarter of the year was primarily due to administrative delays in getting billings completed on hurricane-related projects and clients extending payments beyond contractual terms.

We do not expect our average days outstanding to materially change in the first quarter 2009.

We're seeing recent improving trends in our internal billing process, which has lowered our average unbilled receivables by 50%.

Our effective tax rate for the year ended December 31, 2008 was 39.2% compared to a rate of 39.7% for the year ended December 31, 2007. We do not expect our tax rate for 2009 to materially change from the effective tax rate for the year just ended.

Thank you for your time this morning. I will now turn the call back over to the operator.

(Operator Instructions). Graham Mattison, Lazard Capital Markets.

I wanted to chat with you about the margin outlook and what you're seeing in your different divisions, because we did see somewhat of a decline in that in particularly engineering. With the decline in billable hours going forward, is this a new margin, that 12%? Is that a sort of good run rate going forward, or could we see that coming back up to more the 16%, 17% range seen in prior quarters?

I think the biggest impact on our gross profit margin for engineering in 2008 was the result of a higher level of pass-through -- low margin pass-through for procurement and when we take responsibility for subcontractors. So I don't really think our job profits on our labor billing rates have changed materially. I think that fluctuates around due to the pass-throughs we do for our clients.

And that was the case in the fourth quarter?

Yes, that would be the case in the fourth quarter, primarily related to the hurricane recovery work we did.

And the [under] procurement work on that. Got you. Okay.

Then one question on the CapEx. You mentioned the CapEx was going to be up a bit in 2009. Can you give us an idea of how much you think you would be spending there? If it will be up materially or --?

Less than $1 million. Probably in the $500,000 to the $1 million range.

Oh, okay. Very small.

And then for SG&A, the costs in the quarter, those ticked up a bit. Is that a -- you always talk about the $7.5 million run rate going forward as a sort of quarterly rate. Would we see that coming down just given the -- some of the slowness in the overall engineering sector and some other parts of the business?

We should be taking some steps to reduce our SG&A. I think -- of course you have to remember in the fourth quarter we did kind of layer on an acquisition of ACE, and that added some incremental SG&A on a comparative basis. But we still plan to be nominally in that $30 million SG&A area for the year.

David Yuschak, Sanders Morris Harris.

On your engineering side, does that suggest if you hadn't more pass-through volumes in that fourth quarter, your billable hours -- as far as new work or anything else you may be working at -- was down, probably one of the lowest in the quarter at all? Could you guys give us a sense of what's happening there?

Well, for our engineering work?

Yes.

You said -- I don't really understand the question. I'm sorry.

Well, the revenue produced in the quarter was $59 million, which was the lowest I think since the first quarter. And I'm just wondering. You mentioned that the margins were lower in the quarter because of pass-throughs. If you had more pass-through in there, does that mean your billable hours as a percentage of that total revenue were down relative to the total you produced in the way of revenue for the quarter?

I think what I saw was the highest billable hours we had in our engineering group last year occurred probably in the second and third quarters and have been probably trending down since late in the third quarter or so.

Yes, we did see a reduced level of billing hours in our engineering group in the fourth quarter, and we'll probably come down another notch in the first quarter of this year.

Now, having reduced billable, does that mean that you are also having some kind of impact then on the gross margin because of that, because of your not being able to get that leverage of that higher margin business up?

I don't know that it should impact our gross margin. It might impact our operating margin to the extent we have -- to the extent we are not fast enough to reduce our SG&A associated with that group. (multiple speakers)

I guess one of the problems a lot of E&C companies are having today is continuing to hold onto the talent and figuring when this slowdown starts to bottom out and come back in. As you guys look at it, what's your thoughts about billable and as you go through the rest of the year?

Well as you know, for many, many years we've done a pretty good job of keeping our utilization rate up. We have seen it trend down slightly below 90%. It's always been -- our utilization of billable resources is always about 90% -- plus or minus a few points.

I think right now we're -- we were in 2008 above that 90% mark. Now we're probably a point or two below that mark, and that's kind of the band that we operate in. So I think we've done a pretty good job of keeping our utilization high during this time.

So your thoughts is if this contraction would end up being a lot longer, you'd just have to probably take some look at the staffing requirements then (multiple speakers) to keep those billable rates -- to keep that capacity up where it's normally been?

As I've said in my comments, we're actually fairly optimistic about some things that could potentially happen for our business, but our employee count is driven by the need -- project needs.

Could you just give me just some sense as to where that optimism is? Is it just basically because of these smaller projects?

Well, it's a base of the small projects to run and maintain the alliance relationships. It's some incremental opportunities related to alternative energy that have some potential. I think it's just things like I said. Things today, what we're hearing from clients today is a little more positive than what we heard in November, December, and January. So the purse strings seem to be loosening a little bit, and people are going back to work. So that's why I'm optimistic.

And then one last thing on the construction. The gross margin there can be variable from one quarter to the next. And was there anything in this fourth quarter that -- on the gross margin there that had an impact, or is it just basically the mix in there that created a gross margin -- I think it was your lowest gross margin of the year I guess?

Yes, it's very much governed by our mix of inspection personnel, which is low, and the fact that on the construction management side we've really been making some investments -- some business development investments -- to get in -- to position ourselves in the alternative energy sector and to make these alliances with technology partners and developers. So that's probably a mix -- is my answer. But then also some investments we're making for the future.

So the alternative energy thing is where you view -- is part of that extra lower gross margin, is some of the cost you are putting into that resource?

That's right. That's an (multiple speakers)

Could you give us any idea how much money we're talking about there as far as these new initiatives?

Oh, on an annual -- I really don't have that number -- to be honest.

It's an area where you have done -- I mean, you have worked in the past, and it's just a matter of -- do you think it's more a case now of just beginning to ramp up some of that expertise?

It's a case of getting positioned with certain technology companies and certain developers to be able to do the work once they get their funding in place. That's what we're awaiting right now is funding for alternative energy projects. We've been spending money getting positioned throughout 2008.

Tahira Afzal.

Just wanted to start off by asking you a question about your accounts receivable. You said you saw some clients going down, some of their receivables they backed. Is that a specific group? Is it more on the midstream or downstream side? Or is it really more broad-based?

I would say it's a little more broad-based. The issue I guess in the fourth quarter are primarily related to the hurricanes. There were some issues of the client side because they were really more impacted -- or really more interested in getting their operations back up than cleaning up the paperwork for contractual amendments and billings.

So I guess we're seeing also on the land and the pipeline groups some of that administratively. It's a -- we've gotten some of it cleaned up in the first quarter of 2009. But overall, the fourth quarter's, it was just kind of a slippage of our collections, not really in light of our performance but just administrative issues.

Got it. Okay. Then from that backlog of $326 million, how much of that came from the inclusion of ACE?

Oh, the acquisition of ACE?

Yes. How much backlog came from [it]?

Yes.

My guess is maybe -- pure business, which has an annual run rate revenue of about $10 million to $12 million, my guess is maybe $5 million to $7.5 million worth of backlog came from maybe nine months worth of their operation.

Great. It's not a big amount. It was largely organic (multiple speakers)

No, it's not a large amount.

And I thought it was pretty interesting because a lot of your peers are indicating that they are seeing things not becoming worse but at best staying static. But it seems you're more optimistic. Is there -- and this commentary is coming on both the downstream side and midstream side. For example they both have indicated they are seeing second half of the year being down versus the first half.

Can you talk about how you might be different from some of your peers? And of course the fact you're engineering and maintenance might be one of the reasons. But I would love to get a little more color on what gives you a little more optimism.

Well, I think first of all on the pipeline side, I think we will start seeing pipeline projects start up as the year progresses, and between now and into two thousand -- 2010 is anticipated to be a real banner year for the pipeline construction industry, with a number of new projects -- large projects -- that are starting.

I believe that there have been some slight improvements to refining margins and petrochem margins, which would support their spending.

We have seen several of our small to mid-sized clients receive financing. I don't talk to them about this, but we see reports in the financial press to where they are able to receive capital to do their business, and that should allow them to spend money.

And that's really the -- our automation -- I'd just point back to those same four factors of the type of work we do -- the control systems upgrades, and the "run and maintain" work, and compliance work, and -- so maybe in that regard we're a little bit different from some of our peers.

So it seems like -- and I guess that makes sense. One of the main reasons you're seeing some of the maintenance systems come back is because it's roughly more tied -- it's probably more tied to the credit market versus maybe some of the capital spend which is more tied to demand. Would that be the right way of looking at it?

Probably so. I would think so, Tahira.

Great. Then just one last question. Just wanted to go over which projects on the refinery side you were working on in the Middle East. If you can just go through perhaps the names of some of the larger ones?

Did you say refineries? We're working on a few -- our automation group is working on one specific petrochemical complex in Yambu. And other than that, I don't know of any Middle Eastern projects we're working on other than that one.

Okay. Great. So it's just Yambu? Okay. Thank you very much. Great quarter guys.

(Operator Instructions). David Yuschak.

Just on your automation group, guys, with your acquisition and the kind of volumes you put up there in the gross margins, did the acquisition have a material impact on it, or was it things that you guys were doing going into the quarter plus the acquisition that really helped boost the prospect there from a profitability point of view? I'm just kind of -- I wonder if there's a -- what kind of combination of -- because you know the gross margin there was outstanding compared to anything you've ever done. I just kind of wonder what kind of combination of things may have affected (multiple speakers)

I think the ACE acquisition had a definite impact, but I think the bigger impact came from the business we landed probably late in the third quarter and during the fourth quarter -- was a bigger impact than the acquisition itself. But they've actually -- with the ACE acquisition, they've actually helped us on the execution side of a lot of this work that was landed.

So a lot of that work was just quick burn work that helped to get the revenue up, but the execution spend helped a good deal in getting that kind of gross margin?

That's right.

Okay. So it was you guys getting the business, they helped you execute it. That was to wrap it up? (multiple speakers)

[Right].

Tahira Afzal.

I just had one more question. If you look into different segments, which one in your opinion do you have the least visibility on in general?

I would say our engineering group right now, especially in the office services, is where we have our least visibility.

And is there any (technical difficulty) [chance] that you might (inaudible) good opportunity in terms of -- on the transmission side, would it be able to -- is it possible to quantify that for you as you look at opportunities right now? If you do see a federal -- let's say a renewable mandate going across and that results in material energy (inaudible) [designated], does that -- could that percentage of materials [citing] benefit for you going forward, or is it just a very small part of your business?

Well, when it comes to electric power transmission, everybody believes there's going to be this tremendous growth, and I do too. Really the low hanging fruit for us is with our right-of-way agents in our land group. That's kind of the way we kick the door down to get there.

But we're also getting positioned to do further services in electric power transmission. I'm just really not prepared to talk about it. I have some meetings throughout this week, and we're looking again at partnering or maybe small acquisitions or maybe hiring some key individuals to help us get positioned more on the engineering and construction management side of that industry.

So -- but yes, it's something we have our eyes on. It's -- most of the work we would do today would come through our land group, and it would be probably right now a small but growing percent of their activity.

Got it. Do you think you have an advantage should you decide to do some small acquisitions or get a little more aggressive in the space given the business that you have in the land group? Does that provide you an edge in any way?

Yes. We see our land group being our beachhead. Just like they gave us a beachhead in Denver to open an engineering office, we believe they can give us a beachhead as an entry to do engineering and construction management for power transmission projects. And so, yes, we're going to use that to our advantage.

Okay. Super. Thanks a lot.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Thank you Rob. Hello again everyone. I will be able to answer any follow-up questions this afternoon, and 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.