ENGlobal Corp (ENG) 2009 Q1 法說會逐字稿

Greetings, and welcome to the ENGlobal Corporation first quarter 2009 earnings results conference call. The 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 of Investor Relations and Chief Governance Officer for ENGlobal Corporation. Thank you. Ms. Hairston, you may now begin.

Thank you, Jackie. 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 Corporation, 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, 2009. 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 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. Looking back at recent history, ENGlobal finished fiscal year 2008 on a strong note, reporting record revenues and profitability. However, many of our clients in the midstream and downstream sectors of the energy sector dramatically slowed their project spending during the first quarter. As you might expect, the types of services offered by our engineering segment for front end development studies, through detailed design is immediately impacted when our Heritage operating client made decisions to defer or cancel planned projects.

ENGlobal continues to have significant opportunities with another group of clients, these being developers of alternative energy projects. Most of our focus in this area relates to biomass projects, such as for the production of biodiesel and adaptation of feed stocks like petroleum [coat], municipal waste, and tires. Biomass is an area we believe that's our Company's extensive process capability's best, and it is where we believe in ENGlobal can add the most value in the alternative energy equation.

But while these planned projects represent a tremendous potential for the Company, all of our developer clients have one thing in common, and that is a lack of financing. However, we continue to believe that some of these prospects will turn into business as credit markets loosen and as government stimulus grants and loan guarantees take effect.

So as a general comment, the economic and industry conditions that had slowed project activity during the first quarter 2008, intensified during the first quarter as today's results would indicate. ENGlobal reported a first quarter net income of $0.07 of earnings per diluted share for the quarter ended March 31, 2009. This result represents a decrease of 53% from diluted earnings of $0.15 for the same period last year. I am proud of our management team, first, for their action and response to the challenging industry conditions, and also for collectively producing a profit for our stockholders in the first quarter.

During the last call, I spoke of a fourth quarter downtrend in billable hours for both our office engineering operation and inspection group, which resulted in necessary reductions in our workforce. Our first quarter results continued to reflect this trend and Company-wide, our employee count is down this year to approximately 2,220. As a comparison, our high employee count last year was approximately 2,900.

ENGlobal's consolidated gross profit margin decreased to 11.2% in the three months ended March 31, 2009 from 14.6% in the prior year period. The primary reason was reduced performance from our engineering segment in the first quarter. Specifically, the engineering segment experienced, number one, lower resource utilization, and number two, a change in revenue mix toward lower margin contracts.

For our construction segment, reduced revenue was primarily driven by a lower number of pipeline inspectors in the field. However, construction's profit margins improved fractionally. On a positive note, our automation group's increase in revenue and profitability relates to a performance on a higher level of backlog that was awarded late last year, and also Hurricane Ike recovery report.

The land group has been our steadiest performer and its results were roughly in line for those of the prior year. One thing I can say with certainty is that we have never had a more active sales effort in our Company's history, and this is not just from our dedicated business development professionals, but also from our entire management and operations staff as what we call team sales.

Your might be interested to know that the term I've been hearing a lot lately from our folks is thawing, as that is how most people are describing the current up turn in proposal activity. As one example of the ways we interact with our clients, ENGlobal is proud to be co-hosting the Central States Refining Conference later this week. I look forward to meeting with refining industry professionals and learning more about current issues effecting this industry. Our current overall view, based on a compilation of in-house trends, proposal activities, recent awards, and client's comments is that our business has bottomed out over the last couple months.

When I say bottoming out, for us this is in terms of total man power, billable hours, and utilization. My expectation is for ENGlobal to begin a slow recovery by these same measures from this point forward. Sufficed to say that we have responded to the current marketplace by removing costs from our business (inaudible) and we will continue to do so in a prudent manner and as conditions dictate.

Now, I would like to take some time to outline new strategic directions for our business, which mainly involve the push to continue an active market. First, we are going to expand our international marketing efforts where we already have a significant resume. Although ENGlobal has been primarily known as a domestic engineering and construction Company, we believe that perception will change over time as we increase our focus on international work.

Our prototype for success is our own automation group, as much of their recent backlog comes as a result of having access to more active international markets. Their end products, which is automation design, remote instrument building, and analyzer systems are often applied to larger overseas projects for both tier-one engineering and construction firms, as well as the integration of oil and gas companies.

Basically, we will work to apply the same general principles to our engineering and construction businesses as a means of gaining access to a new marketplace for our services. Second, we are well along in the tapping the transmission and distribution power sectors for immediate business growth, and have current small work as well as significant outstanding proposals. It's now secret that large capital outlays are planned for transmission and distribution infrastructure, and much of the spending will be in our own backyard.

We are implementing a team concept with ENGlobal in the leads and includes our own expertise and history, and right-of-way fighting, permitting, engineering, automation, and construction management, together with outside expertise from our [Alinex] partner in areas such as surveying, environmental, pole design, and construction contracting. We have found utility clients receptive to our approach given the large amount of planned work.

Further, we plan to continue our focus on renewable fuels. Over the last couple of years, we have made a considerable effort to condition ourselves for the expected wave of renewable projects. While we don't have much to show for it yet, and we have to be careful to manage various risks, the opportunities are large and we believe our efforts to date will eventually pay off. You don't have to study our country's current energy policies very long, which contains major focus on renewable and sustainable forms of energy, to know that this is going to be a good place to be.

Fourth, we're actively pursuing alliances with technology providers, both domestically and abroad. We already have alliance agreements in place for biomass gasification and biodiesel technology that we believe will create engineering, procurement and construction opportunities for ENGlobal. When we align ourselves with a technology partner, we effectively differentiate ourselves from the competition, and therefore provide opportunities for higher margin work. We believe in applying technical solutions to our energy related customers will be a key to our future success, and we hope to expand our list of technology alliance partners going forward.

And finally, we believe this is an excellent opportunity to pursue acquisitions. Over the years, ENGlobal has done a good job of joining forces with smaller firms and transitioning and integrating them into our Company. We consider this to be one of our core competencies. We have also had a great deal of success in cross-selling newly acquired capabilities and providing growth for the firm's adjoining. Our current relatively low level of debt, which is roughly $10 million net of cash on hand, should also be supportive of our Company continuing to make smaller strategic acquisitions at reasonable valuations.

In summary, we are beginning to see proposal and project activities that indicates a general environment for our business is thawing, and therefore we should slowly see improving conditions from this point forward. However, it is difficult to predict the timing when ENGlobal will put on a new leg of growth given economic uncertainties. Our primarily goal is always to position our business in a way that maximizes results to our stockholders.

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 our first quarter results were disclosed in our press release this morning, but I would like to highlight other selected items. Unless otherwise stated, the financial comparisons I will make compare the first quarter of 2009 results to those of the first quarter 2008.

Operations produced approximately $8.2 million in net cash during the first quarter compared to approximately $400,000 produced during the comparable period in 2008. Net cash items in the first quarter of 2009 total $1.4 million with $500,000 coming from amortization of intangibles. We had a decrease of approximately $100,000 in total non-cash items quarter-over-quarter.

Although first quarter working capital was positively impacted by the decrease in accounts receivable, and billings in excess of cost, we experienced unfavorable impacts during the quarter as a result of a decrease in accounts payable, primarily related to payments of significant pass-through procurement, the subcontractor services previously recorded in the fourth quarter of 2008, and also a decrease in accrued compensation primarily related to the timing of our final, biweekly payroll for the quarter, plus our distributions of 2008 incentive bonus payments.

Capital expenditures during the first quarter totaled $1.7 million compared to expenditures of less than $500,000 during the first quarter of 2008. The increase in our capital expenditures during the quarter was primarily related to our facility expansions in both Beaumont and Houston. We anticipate additional expansion costs during the second quarter, but we do not expect to exceed our credit facility's annual limit of $3.25 million for CapEx commitments during 2009.

Overall, our long-term commitments, consisting primarily of a $20 million line against our credit agreement and $2.5 million related to acquisition notes, decreased approximately 11%, or approximately $2.8 million, with $25.7 million at the end of December 31, 2008 to $23 million as of March 31, 2009. The decrease in our overall long-term commitments during the quarter was primarily related to improved cash flow and subsequent pay down of our credit facility. As a percentage of stockholders' equity, our overall long-term debt at the end of the quarter decreased to 29% compared to 33.5% at the end of 2008.

Total liquidity, which includes cash plus availability under our credit facility, was $33.3 million at the end of the first quarter compared to about $22 million at the end of the comparable period in 2008. The outstanding balance of the line of credit at the end the quarter was $20 million, with the remaining borrowings available of about $29 million. Our outstanding letters of credit are approximately $900,000, primarily to cover project retentions and deductibles under our insurance policy.

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

At the Company's option, amounts borrowed under the credit facility bear interest at prime or a Euro-based rate plus an additional margin ranging from 125 to 175 basis points. This additional margin is based on the most recent leverage ratio. Currently we have $20 million of our credit facility on a Euro-based rate at a mix of one-month and three-month terms.

On average days sales outstanding was 72 for the quarter just ended compared to 62 days at the end of the first quarter 2008. Our DSO was 64 days at the year end. The primary reason for the increase was three past due accounts totaling $11.9 million, which added 11 days to our average days sales outstanding for the first quarter. We do not expect our average days outstanding to materially change in the second quarter of 2009, although we do expect to see an improving trend during that period. We continue to see improvements in the timing of our internal billing process.

Our effective tax rate for the first quarter was 41.3% compared to a rate of 39.9% for the year ended December 31, 2008. We do not expect our tax rate for 2009 to materially change for the balance of the year.

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

(Operator Instructions) Thank you. Our first question is coming from David Yuschak of Sanders, Morris, Harris.

Yes, good morning, everybody. Just as far as your outlook here for the rest of the year, Bill help me out. It would seem to me looking at the second quarter coming that business is bottoming then the results of this upcoming quarter could look more like the first quarter, maybe just a modest uptick given some of these new addition designs kicking in yet. Is that a fair assessment?

I think that's a fair characterization. We are bottoming right now. We're close to halfway through the second quarter. We expect to see a slow climb out and it sounds like your assessment is correct.

Okay, and then as far as labor utilization, you had indicated you were down to 2,200 I think in the -- at the end of the first quarter on human resources.

That's correct.

Where did most of those cuts come from in the quarter? Was it mostly just engineering talent, or was it other than engineering talent?

I think that's come in two areas. We had a pretty significant decrease in the number of pipeline inspectors we have in the field. I think we hit a high in that group last year, maybe a little over 800 and now a little over 400 during the first quarter. So that's roughly 400 people right there. I think the other cuts came largely from or engineering office group. Those were two areas where the cuts have primarily come from.

Would you characterize those cuts from the engineering group basically maybe new hires that you picked up in the course of the last two years because of this trend of business?

I believe so, yes. I think we're keeping or more experience people, or more long-term people, and unfortunately a lot of the people we had to let go were our less experienced folks.

Okay, that's all I have for now. Thank you.

Thank you. Our next question is coming from Tahira Afzal from KeyBanc.

Good morning, Bill. How are you?

Morning, Tahira.

I just wanted to firstly ask you, in all the initiatives that you're looking at, what kind of a capital outlay to this is (inaudible), including the fall acquisitions you're looking at?

Well, these internal initiatives will not be a major capital outlay, probably bringing on a few business development people at most for some proposal activities that we would do on overhead. That's fairly insignificant money for us. The kind of acquisitions we're looking at would typically be anywhere from the $2 million to $20 million revenue range and typically we pay in total consideration, 25% or 50% of that revenue depending on how profitable that firm is. So we don't see significant capital outlays from this new activity.

Got it. Okay, thanks. And second question I have is in regards to your visibility on the engineering segment as it stands right now, and I'm sorry I missed out a bit on the earlier comments that you made right at the beginning of the call. So just trying to get a bit of sense on, are we seeing some maintenance activity being first leg up and is that what makes you a little bit more certain that second quarter is going to be probably the worst one, and then things get better?

What we're seeing right now is our business is consisting right now of a lot of small projects, and I'd say small maintenance work, small capital projects that can be anywhere from $5,000 to $100,000 on our total revenue line, as an example. What we're (inaudible) out on is really the larger, longer term projects we saw mid last year, and that will probably come later. So we're seeing our clients come back with smaller projects.

We expect those to be followed by larger projects. And we truly, based on or in-house billable hours trend, our utilization trends, we do believe we're going through a bottoming right now. Just based on anecdotal comments from folks around our Company, we believe we will start climbing out of it. Clients are basically talking better, if I could put it that way.

If you're looking at your small projects, how sustainable could that make the (inaudible) if let's say the large projects really do not really (inaudible) middle of 2010.

Could you repeat that, Tahira? I didn't understand.

Sorry about that, Bill. How sustainable is the second quarter since the second quarter (inaudible) if large projects really don't come back on the map to let's say middle of 2010?

Well, then we'll continue bouncing along the bottom at these levels performing on small work, and really, the real upside for our Company is the large projects, many of them, which are on the renewable energy here that we talked about on the call. That's the real upside, that plus a renewal of larger projects in the oil and gas sectors.

Got it, and another questions is in regards to the transmission side of the story. Would you talk about if those opportunities are now picking up. There was a very large wind conference in Chicago and it seems like from feedback coming from various that the wind projects are now going to start picking up again by the fourth quarter of this year. How can you position ahead of that? And if I was to look at your capital outlay, how much of those would be needed to work the transmission side of your story?

I guess I should start by saying a lot of the capability we have in transmission comes to us through an acquisition we did in mid-2006, a company called WRC. They're primarily known as a land, they're a siting group, a right-of-way acquisition group, but in addition they had an engineering company and in their history performed some pretty significant power transmission projects. And this is the group where most of our proposals are going out from to do transmission line work. In addition, we've internally started a group. We've put together a team of companies and we're leading that team to really have everything in place to go to our clients for smaller work.

What we're seeing is there's so many projects in this area and there's really not enough contractors. And so some of the smaller utilities and coops feel somewhat left out. Nobody's calling on them. And so we're being received pretty warmly as another alternative to perform this work. We don't expect to have to spend any capital dollars other than some business development and proposal dollars to get into this market. And so right now we're performing a little small work. We have several major outstanding proposals that we're starting to feel better about, and we see it as a fairly easy market to get into.

Got it. Are there any specific regions where the activity is stronger, Bill?

Well, I would say in Texas with the [Crez] work. I would say out West and some projects in Florida as the ones we're targeting specifically.

Got it, and one last question, Bill. There's some buzz coming out of DOE and out of CPA that they're trying to do away with some of the corn-based ethanol buildup and trying to put more to work cellular-based ethanol. They're looking at some of the other (inaudible) opportunities. If I was to look at those two opportunities for you in terms of the corn-based ethanol versus the rest, net-net where would you stand out going forward?

Right now, we don't see much of a future in corn-based ethanol, and I think anything we did in ethanol would be cellulosic in nature. If I'm answering your question, we did see some significant opportunities in biodiesel mostly from non-agricultural sources, from exotics such as [tutropha] beans or from animals, animal sources, and that's where we see biodiesel.

Got it. Thank you very much, Bill.

(Operator Instructions) We have a follow-up question coming from David Yuschak of Sanders, Morris, Harris.

Yes, just on the quarter, Bill, would you argue that the revenue you did here was a good deal baseline business that just you typically have, whether it's in plant and so forth? I'm just kind of curious as you look at that quarter how much may be baseline versus project related type of revenue?

Well, we've always advertised that about 75% of our business comes from recurring sources such as in plant staffing, alliances, long-term relationships with clients, and so I think what we did see is a lot of this baseline of revenue. That's what carried us through the first quarter (inaudible) projects.

Would that 75% been higher in the quarter then?

Oh, I would think so, yes. I would think, we haven't calculated it, but I would think that number would be higher in the first quarter.

Okay, and then as far as your outlook, with the amount of misspending that's gone on in mid and down stream over the last two to three years, does that cause you some concern that these larger projects, if they're out there, may not be out there for a couple more years as some of this large spending kind of runs its way through the system as the economy recovers? That's kind of why you're looking at other alternative, potential opportunities?

Yes, I'm more encouraged by pipeline midstream spending just based on projected activity I hear about than I am from the downstream refiners, petrochem. I believe what our best position would be is for some renewable energy process activity to replace maybe a lesser amount of work refining the petrochem, and if I see anything, what we're trying to do is replace what we see with lower spending in refineries and petrochemical plants, and that's income from the areas we talked about.

I got it. That's all I have for now. Thanks.

Thank you. (Operator Instructions) We have a follow-up question coming from Tahira Afzal from KeyBanc.

Bill, just a follow-up on David's query. As you transition more to the alternate energy profile, how does that impact the risk-taking, i.e. in terms of the contractual rates, and then the types of clients that you are forming alliances with?

Well, as you know we've learned quite a bit from previous experiences in the ethanol business and we don't plan to repeat that experience. Any work we do in this area will be on a cost plus reimbursement basis. We don't plan to bid on a fixed project basis any larger renewable energy projects, and we also don't plan to take any creditor risk from developers. We can either get some letter of credit or up front financing arrangement with our clients in this area.

Got it. And on the transmission side, would it be -- are you looking at maybe leveraging yourselves more by forming alliances or building relationships with utilities? Or would it be more with some of the (inaudible) contractors, they're like [CuEd], [Petra], or maybe perhaps some of the engineering teams such as power engineers?

Well, we don't -- we haven't been talking to those firms in particular. What we're trying to do is fill in the gaps where we don't have expertise, and I mentioned environmental, and surveying, and construction contracting, and maybe some real technical aspects, the [pole-on] design. These are areas that we don't currently have expertise in, and how the other areas we can fill with in-house resources. And so we're combining the best of ENGlobal and some outside firms, and we're presenting that team to potential clients, but the work will be done under the ENGlobal banner and we present a unified team approach. This has been well received thus far. This is honestly still a little bit of a working process, but we are out there selling and we've had good acceptance thus far.

Thanks a lot, Bill.

Thank you. There are no further questions at this time. I'd like to now turn the floor back over to

Thank you Jackie. Hello again, everyone. I will 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.