ENGlobal Corp (ENG) 2009 Q3 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the ENGlobal Corporation third-quarter 2009 earnings 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, Ms. Natalie Hairston, Vice President Investor Relations and Chief Governance Officer. Thank you, Ms. Hairston, you may now begin.

Thank you, Joe. 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 September 30, 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 risk 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 factors 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 website at ENGglobal.com. Our filings with the SEC are also available on the SEC's website at SEC.gov.

As usual during the 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. Our breakeven financial results in each of the last two reporting quarters demonstrate the reality of the current market for ENGlobal services in the midstream and downstream domestic energy sectors. I emphasize the word domestic because international project activity, especially for the downstream sector is currently much stronger than in the US.

As a recap of ENGlobal's performance for the last year, our business trends, such as billable man hours were ramping downward during both the fourth quarter of 2008 and the first quarter of 2009. However, ENGlobal's business has somewhat stabilized during the second and third quarters of this year. Unfortunately over this time period we've seen about one-third lower levels of billable man hours than we enjoyed at the same time last year.

For a number of years we have talked about ENGlobal's business having around two-thirds of its revenue coming from sources that are sustainable and recurring, in fact, we can now feel fortunate to have these sources of sustainable revenues because that is primarily what we have been operating on this year. These are activities like number one, in-plant personnel staffing, which has proven to be very stable during the downturn.

Number two is from smaller projects we call run-and-maintain, most of which are maintenance related. While clients have cut their maintenance budgets, these projects never go completely away.

Number three is work that is provided as a result of our long-term client relationships. These used to be called alliance relationships; however now most of our clients prefer to use the term preferred provider.

Number four is projects created by technological obsolescence of automated control equipment, such as retrofitting old distributed control systems and analyzer equipment in process plants with newer technology.

And finally another big category of sustainable and recurring revenue is work that has a regulatory driver and which has been mandated by various agencies of the federal government for goals like reducing plant emissions, process safety improvements and pipeline integrity. But while again we can feel fortunate, the type of work that has been sustaining us tends to produce lower profit margins. In addition, during the lean times it becomes much more difficult to maintain utilization of our resources at historical levels.

So to recap our last two quarters, our various sustainable sources of revenue have produced sufficient profit margin to approximately offset our fixed overhead expenses. Operating in this manner has allowed ENGlobal to keep its core business structure intact, thus preserving our ability to respond quickly to our customers' needs when capital spending in our markets rebounds.

ENGlobal's management believes that our stockholders are better served in the long run by managing our business in this way during a downturn, as opposed to decimating our business structure just to report a small profit. Basically we have made a strategic decision to only prune the tree so far.

As most of you know, historically ENGlobal's engineering segment and specifically the services we perform in our offices, have contributed a majority of the profit for our company over many years. Over the course of this year, in-office engineering has been impacted to the greatest extent, mainly due to a reduced number of capital projects being undertaken by our clients.

Recently we have been encouraged by improving signs within the industry such as increased proposal activity and client spending plans. We have also seen improving signs within our company such as upward trends in our biweekly billable hours and utilization of resources. In addition our employee count has grown from 2,200 on June 30th to 2,300 at September 30th. Since the end of the third quarter, billable hours and utilization rates have continued to trend slowly upward.

As you might guess, ENGlobal's business development strategy has changed this year, primarily due to the ongoing recession. Our basic mission is to replace higher margin revenue we have lost from our heritage markets. There really isn't anything positive about an economic recession but if there is one thing it would be that it forces businesses to look farther and wider for work. For example, in our weekly senior management conference call last Friday, our team was encouraged by what we perceive to be increasing project awards and opportunities from our heritage clients, which are mainly refiners, chemical and petrochemical plants and pipeline operators.

But in addition, we spent about the same amount of time discussing recent awards and initiatives in areas that are new to ENGlobal and there were three general categories we talked about. Number one is infrastructure projects for state and local government, number two is international midstream and downstream opportunities, and number three is renewable energy where proposal activity has increased given improved availability of project financing and the stimulus package that provides 30% government grants to qualifying renewable projects.

We also have an active acquisition program in place and are currently evaluating a number of opportunities, and are optimistic that we can close on a number of these opportunities over the next 12 months.

In summary, while the current business environment remains uncertain and sluggish, the prospects for our business seem to be slowly improving. If these internal and external trends that I discussed gain traction, we could see a much improved business picture beginning sometime next year.

The potential for ENGlobal's return to profitability will involve three things. First, increased capital spending by our clients in our heritage domestic areas of operation, and again, this already seems to be getting underway.

Second is success with our internal initiatives in pursuing new lines of business. Some of these opportunities if awarded, could be significant for ENGlobal. This emerging area for us will involve infrastructure projects for governmental entities, international energy projects and renewable energy.

Finally, the potential for growth from strategic acquisitions as we are going to target 10 to 15% annual top line growth by external means by the end of 2010. In the mean time and in closing, I would like to thank our stockholders for their patience and support during the challenging times your company has faced this past year. I will now turn the call over to Bob.

Thanks Bill. Good morning, everyone. A lot of these specific details of our third 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 third quarter 2009 results to those of the third quarter 2008.

Liquidity remains strong. Operations produced approximately $4.5 million in net cash during the third quarter compared to approximately $3.5 million in cash requirements during the comparable period in 2008. For the current year, operations has produced approximately $18.5 million in net cash during the nine months ended September 30, 2009. Non-cash items in both the third quarters of 2009 and 2008 totaled approximately $1.1 million, with amortization of intangibles totaling approximately $445,000 and $225,000 respectively for comparable periods during 2009 and 2008.

Third-quarter working capital was positively impacted by a net decrease of approximately $4.5 million in trade receivables, the reclass account converted to notes receivable and costs in excess of billings, plus an increase of approximately $2.7 million in accounts payable and accrued compensation and benefits.

Capital expenditures during the third quarter totaled $300,000 compared to expenditures of $233,000 during the third quarter of 2008. We perceive minimal capital expenditures in the fourth quarter and we do not expect to exceed our credit facilities annual limit of $3.25 million for CapEx commitments during 2009.

Our long-term commitments net of current portion decreased approximately $22.7 million from $23.6 million at the end of December 2008, to $900,000 as of September 30, 2009. The decrease in our net cash long-term debt during the third quarter was almost entirely due to the reclass of our existing credit facility to a current liability.

As a percentage of stockholders equity, our total debt at the end of the third quarter decreased to 14.8% compared to 33.5% at the end of 2008. Total liquidity, which includes cash plus availability under our credit facility, was $39.8 million at the end of the third quarter compared to $21 million for the same period in 2008. The outstanding balance on our line of credit at the end of the third quarter was $10 million with remaining available borrowings of $39.4 million. Our outstanding letters of credit are approximately $600,000 primarily to cover project retentions and deductibles under insurance policies.

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 of the company's subsidiaries and secured by substantially all of the company's assets and positions Comerica as senior to all other debt. At the company's options, amounts borrowed under the credit facility bear interest at prime or a Eurodollar-based rate plus additional margin ranging from 125 to 175 basis points. This additional margin is based on our most recent leverage ratio. Currently we have $10 million of our outstanding credit facility on a 30-day euro based rate and term.

As of August 10, 2009 our credit agreement did by its terms become due in less than a year. As such, the total outstanding balance under that agreement was reclassified to a current liability. We are reviewing our options for replacing this credit facility, primarily due to certain covenant limitations. We are in compliance with all our covenants and continue to weigh our options given the current banking environment.

Our average days sales outstanding was 65 days for the quarter just ended, compared to 61 days at the end of the third quarter in 2008. Our DSO was 64 days at the end of 2008 and 72 and 69 days for the respective first- and second-quarter results during the current year. We do not expect our average days outstanding to materially change in the fourth quarter although we do expect to see improving trends for the year continue if revenues stabilize and aged accounts are collected.

Our effective tax rate for the nine months ended 2009 was 44.1% compared to a rate of 40.3% for the first nine month period in 2008 and a rate of 39.9% for the year ended December 31, 2008. The computed effective tax rate for the three-month period ended September 30, 2009 is higher because we raised our estimate for fiscal year effective tax rates to reflect proportionate changes in components of pre-taxed income for the year. We do not expect our tax rate for 2009 to materially change for the balance of the year unless we see material changes in earnings during that period.

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

(Operator instructions) Our first question is from Graham Mattison with Lazard Capital Markets.

Wonder if you could just sort of comment, you talk about activity levels and bid activity improvement; could you compare this to sort of the level that you saw the company last year at this time or even two years ago at this time?

The best way we can look at that really is through billable man hours and I would say in the second and third quarters of last year, our billable man hours are running 230,000 and 240,000 per biweekly period and probably our most latest number is around 180,000. So by that measure we're still roughly down about 25% from our best levels of last year.

But in looking back sort of two years ago or the early part of the cycle, how can we compare that?

We were pretty much a growing company up through about the third quarter of last year or 2008. And so I haven't looked that far back but I would say the levels we have now are comparable to ones we were showing maybe in 2007, something like that.

Okay. And then in terms of looking at your land group, could you just give a little bit more color in terms of what you're seeing there? Obviously the pipeline market seems to be picking up. Are you still adding people in that division and is there room for potential margin expansion?

Yes Graham, in the last month we've added about 17 people to our land group. Primarily we're going to be doing some land acquisition work on a pipeline project that runs out of the Haynesville from Shreveport to Baton Rouge, a fairly large diameter line and we're doing a portion of that line, I think 30 or 40% of the length of that line we'll be acquiring right of way for. And so pipeline activity is mainly being driven by the shale plays; Haynesville, Marcellus, the Bakken, Rocky Mountains.

We're starting to see a bigger piece of our land business involved in electric transmission lines and I believe that's grown to maybe even be about a third of that business right now, being involved in electric power transmission, about two-thirds pipeline.

And then just one last question if I could. Overall if you look out to next year and we've definitely stabilized and are beginning to pick back up, the recovery, do you see it more weighted towards the second half of the year or do you think the recovery could be more towards the first half of the year and then continue to grow throughout?

That's difficult to say. Obviously I believe if certain things happen, especially with our newer areas of focus, it could be in the first half of the year. But the stronger area right now is really the pipeline area for us; that's where we're seeing continued large capital spending. The downstream area is continuing to produce a good number of run-and-maintain projects but what we're lacking is the large capital work in domestic downstream. And that's why we're looking into new areas to replace this lost revenue.

Your next question is from Tahira Afzal of KeyBanc Capital Markets Incorporated.

My first question has to do with your engineering segment. As you look at your performance in the third quarter and you look at the pipeline of projects, if you look at that $32 million could you give some color on how much of that is sort of maintenance recurring business versus maybe some legacy projects that are still running through your backlog and hence through your numbers?

I would say in the third quarter we had very little legacy work. I would say we had very little large capital work. What we saw running through in the third quarter was maintenance related activity; small maintenance work, in general, run-and-maintain.

So as you look at the second and third quarter and you see sort of the engineering lines stabilizing at let's say $32 million to $33 million, would you say that's a decent, steady run-rate if there's no material change on the project side?

I think given the nature of our business, that's probably a stabilized run-rate. You have to consider a little bit of seasonality in the fourth quarter, maybe not that much this year, but again, our billable hours are up when compared to levels we saw in both the second and third quarter and we hope we're starting to see the beginnings of the flow upturn in our metrics.

Great. And Bill, if you look at your pipeline of projects would you say that stays similar as well; essentially baseline maintenance recurring type projects on the engineering side now?

Yes, with the exception of a few specific opportunities, especially ones in these three new areas I've pointed out. Most of the domestic engineering opportunities are the run-and-maintain smaller variety and that's what feeds our machine on a daily basis.

Okay thank you. And I have one more question and then I'll jump back in the queue, Bill and queue up for some more. If you look at the softness that you've seen in your margins it's been - clearly the engineering segment and the utilization and pricing has been the impact there. If you look year-on-year is it possible to give an idea of how much of the operating margin falloff is due to utilization versus pricing?

I'll let Bob answer that; I believe he has a data point on that.

Yes, I think we looked at it. It'll be detailed in our Q. I think for the third quarter probably about 2.4% of our margin we could attribute to I guess the lower utilization rates. On the year-to-date basis probably about 2.7, so we have seen some improvement in the third quarter in controlling the utilization and improving that result.

Your next question is from Jon Braatz of Kansas City Capital.

Bill, you touched on three areas of new business focus; the infrastructure, international and renewable. When you look at your billable hours, how much of your billable hours are now in those areas? How small a percent is that and can you give us a sense as to what may be an objective or a goal or target, whatever you want to call it in terms of percentage of billable hours?

That's an excellent question. I would say right now, my seat of the pants number would be about 5% of our current man hours come from work on foreign projects, work on infrastructure projects and renewable energy.

I think the thing we're excited about is really the magnitude of some of these opportunities in renewable energy and in infrastructure and in foreign; it really could provide some of that large man-hour work that we're lacking here in the US right now. I don't really have a target in mind as to what it becomes; it could be 20%, 30%, 35%.

But in each one of these areas we've undertaken a number of initiatives. In some cases we've hired individuals on our staff to help develop the business. In some cases we've retained commissioned agents, in particular in the case of infrastructure that's the case, that have contacts in the governmental markets. In renewables a lot of times it's partnering with technology companies and bringing technology to developers is what helps us out. But it's a work in process is what I would say.

Given the size, I mean some goals could be performing $50 million or $60 million projects for various renewable projects or performing $30 million or $40 million or $50 million projects overseas. So compared to where we are today, that could be significant.

Okay. The other thing is, you mentioned that you're doing a little bit more work in the land area regarding the transmission grid and I just read a couple of reports where some of the utility companies seem to be scaling back their capital spending plans, maybe even beyond sort of the T&D area and more into the transmission area. Have you seen any weakness in that regard? You said you were going to do more but have you seen any projects canceled or delayed, postponed?

I think we're already doing more. I think we've seen some deferrals, things stretch out, plans stretch out. I don't think we've seen any cancelations. Most of our work in the transmission area is in the West, involving Western wind power, solar power, bringing that to market. And most of our work would be smaller. We might be doing 100-mile, 150-mile power lines and not much bigger projects. And so we haven't seen any curtailment of work. We still have good opportunities out there for us in that area.

(Operator instructions) Your next question is from Craig Bell from SMH Capital.

You had talked about your credit facility moving to current; when do you hope to have that wrapped up in terms of getting it renegotiated or a new one in place?

We started to I guess look at some opportunities out there and just may have one by the end of I guess the fourth quarter, maybe the first quarter of 2010. Not a lot of pressure there to do that, Craig, I guess because we have such a good interest rate.

Yes. And then are you contemplating something about similar size?

No, I would suspect we'll cut that down. We don't need that unless we see a return immediately of our markets. But we'd probably look to maybe 50% of our current credit facility.

Okay. And then looking at your engineering segment, Bill you talked a little bit about it, but are you getting increased confidence that we're going to see that bottom out in terms of the revenue declines?

From the numbers I'm seeing we've been through a bottoming process really all through the second and third quarter if you just look at man hours in that segment, it's been along the bottom and we're starting to see the first inklings that it's turning up.

Your next question is from Tahira Afzal of KeyBanc Capital Markets Incorporated.

Bill, just to follow up, you reached this point where hopefully the engineering segment is reaching a steady state, perhaps pricing might be stabilizing. As you look over the near term versus the long-term which is when I assume a lot of these opportunities will take hold, what would you say would be key drivers to you moving beyond the breakeven point; is it more cost cuts, cost trimming or would you say it's utilization on specific businesses?

I think we can make some slight improvements to our current utilization. We're running in the high 80s right now. Historically we've run around 90%. The latest number I got was right at 89.8% for utilization. So, 90% plus or minus a couple of percentage points is the band we like to run in.

I don't think cost cutting is where it's at. I think it's just increased work. It's just bringing in an increased level of revenue basically over our fixed overhead base of operations is what it's going to be. I really don't see any continued pressure on margins or billing structures. I think that's pretty much ended. I think it's going to be a little bit our domestic clients spending more money on capital work and I think it's going to be some success in these three areas that we've mentioned is what's going to bring our engineering company back.

Okay. And you mentioned earlier on, Bill, that you're seeing some of your clients sort of showing a great amount of commitment to going ahead with their plans. On the refinery and on the downstream side, are these tied to them really firming up their CapEx budgets for 2010 or is it just a general macro improvement that's really making them spend, get a little more comfortable with spending on some of the deferred projects, etc. that they had?

I think what we're seeing right now from the domestic downstream area is deferred maintenance work. I don't think we've seen any significant large capital work to speak of and we're expecting -- at least I'm expecting an extended period of time of low capital spending in the domestic downstream industry and a lot of that's driven by uncertainty created around cap and trade. If you have an old plant and you're a refiner, why would you want to go make a big investment in it if you have the uncertainty hanging over your head? Then a lot of it relates to utilization of these facilities and margins and spreads.

So there's not many positives out there right now for the processing business or large capital work and that's really what stimulates us to look at these other areas. It will eventually come back, because it always does, but I think it's going to be an extended period of time before it does.

Fair enough, that makes sense. Bill, if you look a year back you had the [60] million sort of run rate on the engineering side and now you're down to the 30s; how much of that do you think is related to deferred maintenance versus capital projects going away?

I don't have that number on top of my head but I would think a lot, if not most of it would have to be a reduction in capital work. And I believe what we're seeing is a base load of maintenance work in our engineering segment right now.

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

Thank you Joe. Hello again, everyone. I'll be able to answer any follow-up questions this afternoon or you can always email 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.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and we ask that you please disconnect your line.