ENGlobal Corp (ENG) 2010 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the ENGlobal Corporation first quarter 2010 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. Ma'am, you may begin.

Good morning everyone, and thank you for joining us today. With me on the call are Bill Coskey, Chairman of the Board; Edd Pagano, ENGlobal's new Chief Executive Officer; 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, 2010. Bill will then introduce ENGlobal's new CEO, Edd Pagano. Finally, Bob Raiford will review other financial points of interest for the quarter and in particular those topics that relate 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.

Now I would like to introduce our Chairman, Mr. Coskey.

Thank you Natalie, and good morning everyone. Our results this morning are disappointing. While we consider ourselves to be a lifecycle business, the turnaround currently in progress has yet to materialize for us.

For over a year our domestic clients have been spending significantly less on both capital and maintenance energy related projects in which we can participate. A number of our clients have chosen to delay or defer significant new spending, mainly became of the economic factors that impact their operations.

However, during this difficult time we've made enormous progress to maintain our strong balance sheet. Today we are practically debt-free and have no liquidity issues to speak of.

Going forward, our new CEO, Edd Pagano, will be working with the management team to take a closer look at overall costs.

You might be interested to know that we recently performed an internal assessment of our business development and proposal activities. In all of our offices, proposal inquiries received have increased by about 30% since year end and by approximately 47% from the third quarter of 2009. Over the same six-month period some of our largest offices have experienced a 66% increase in proposal activity.

As the economy recovers, we believe we have positioned ourselves in a way that can deliver value to our clients and stockholders, and current proposal activity and our success in landing many new master service agreements is an indication of better times for ENGlobal in the future.

Finally, I wanted to take this opportunity to publicly welcome Edd Pagano to ENGlobal. After a long search process, the Board enthusiastically and unanimously selected Edd to serve as CEO.

Going forward I plan to do everything possible to support Edd as he leads our company.

You may remember that when we began the search process last December, we stated we were to looking for someone that could take ENGlobal to the next level. Our longer range goals call for significant growth with a focus on much improved profitability. I truly believe Edd is the right person to serve our stockholders by accomplishing our collective goals, and I wish him the very best along the way.

Even though he has been our CEO for just over 48 hours, he'd like to say a few words this morning.

Thanks Bill. Good morning to all. It's good to be here. I'm looking forward to working with everyone, clients, stockholders and especially our employees.

As you know, I worked with ENGlobal many years ago. I was at WorleyParsons, and we were pursuing an alliance agreement with a major client that still continues to this day. I was impressed with ENGlobal then, and even more so now.

I may be new at ENGlobal, but after 30 years in the E&C business, I've been in this position before. I know there are a lot of expectations for improved financial performance.

ENGlobal continues to be adversely affected by macroeconomic and industry conditions, and unless these conditions improve significantly, our revenues for the second quarter of 2010 are not likely to improve.

Our management team will be taking a closer look at overall costs, specifically by identifying those areas where profits are not up to our expectations.

As Bill mentioned, proposal activity has vastly improved since the end of 2009. However, changes cannot happen overnight. In fact, our future success will come from not just one but many different areas.

I have some ideas for strategic opportunities into markets that I think we can begin to pursue immediately. This includes upstream, where I think we've made a significant improvement with Control Dynamics adding to our family. It was an excellent acquisition for us.

I believe we have topside capability as a good opportunity. We do predominantly the same kind of work now, same service now onshore.

International -- we've already jumped into the Middle East market, which has been very good for us, and I think there's other international opportunities.

On the power and renewable side, I think there's transmission and distribution opportunities, wind and biomass. And we have the expertise to participate in these markets.

On a positive note, we recently signed 12 new master service agreements during the first quarter. We anticipate that these MSAs could spur additional sole source project discussions with our clients.

In closing, 2010 will be difficult, but we will do our best to position ourselves for the future. ENGlobal is a great company, and I've admired its growth from afar. I would like to thank Bill Coskey for his past leadership and look forward to working with him and team ENGlobal going forward.

With that I'll turn the call over to Bob.

Good morning everyone. A lot of specific details of the first-quarter results were disclosed in our press release this morning, but I'd like to highlight other selected items.

Unless otherwise stated, the financial comparisons I will make compare first-quarter of 2010 results to those of first-quarter 2009.

Operations produced approximately $6.5 million in net cash during the first quarter, compared to approximately $8.2 million in cash produced during the same period of 2009.

Non-cash items in the first quarter totaled $1.1 million and included $0.6 million in depreciation for fixed assets, $0.5 million in amortization of intangibles, and $100,000 of stock-based compensation.

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

The positive impact of working capital in the first quarter was primarily the result of decreases in accounts receivable and costs and billings on uncompleted contracts.

Total capital expenditures during the first quarter totaled $259,000, compared to expenditures of $1.7 million in 2009.

If you recall, the high level of capital expenditures during the first quarter of 2009 were primarily related to the facility expansions in both Beaumont and Houston.

We expect our second-quarter capital investment in fixed assets to more than double our first-quarter investments, primarily due to the asset acquisition and the internal instrument and electrical initiative in our automation segment. However, we expect our annual investment in fixed assets to be well below our current credit facility's annual limit of $3.5 million.

Our long-term commitments net of current portion decreased approximately $6 million from $6.1 million at the end of December 2009 to approximately $100,000 as of March 31, 2010. The decrease in our long-term debt during the first quarter was almost entirely due to the continued improvement in cash flow and subsequent payoff of our new credit agreement entered into with Wells Fargo Bank effective December 29, 2009.

As a percentage of stockholders' equity, our overall long-term debt at the end of the first quarter decreased to less than 1%, compared to 8% at the end of 2009.

Total liquidity, which includes cash plus availability on our credit facility, was $24.7 million at the end of the first quarter, compared to $18.5 million at the end of 2009 and $33.3 million at the end of the first quarter in 2009.

At the end of the first quarter we'd paid off the outstanding balance of $6 million on our line of credit at the end of 2009. We had remaining borrowings available of $24.4 million due to outstanding letters of credit of approximately $600,000, primarily to cover deductibles on our insurance coverage.

Our credit facility with Wells Fargo is guaranteed by substantially all of the company's subsidiaries, is secured by substantially all the company's assets, and positions Wells Fargo as senior to all other debt.

At the company's option, amounts borrowed under the Wells Fargo credit facility will bear interest at either a fluctuating rate per annum at 2% above the daily one-month LIBOR rate in effect from time to time, or a fixed rate per annum determined by Wells Fargo to be 2% above LIBOR, in effect on the first day of any applicable fixed-rate term.

The Wells Fargo credit facility includes a commitment fee of 30 basis points for the unused portion of $25 million credit facility.

Our average days sales outstanding was 60 days for the first quarter, compared to 70 days -- 72 days at the end of the first quarter in 2009. Our DSO was 55 days at the end of 2009. We do not expect our average days outstanding to materially change in the second quarter of 2010.

Our effective tax rate for the first quarter was 40.8%, compared to a rate of 54.0% for the year ended December 31, 2009 and 41.3% for the first month's period ending March 31, 2009.

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

(Operator Instructions).

(Operator Instructions). Graham Mattison, Lazard Capital.

Wondering, Edd, if you could just talk about -- a bit about your experience in the areas that you outlined for areas you want to expand the company into, and maybe talk a little bit about how you see ENGlobal fitting into those and then perhaps when you think you might be able to see contributions.

Sure, no problem. On the upstream side certainly we have a lot of offshore experience at WorleyParsons, and then getting into that, we pretty much started the same way. We started doing topsides, which were really very similar to onshore facilities, just put on a skid and mount it offshore. So I think that's an opportunity for us to get involved there. And I think it's something we already do today and we can jump into it pretty quickly. Again, it's just a matter of getting some bidding opportunities there.

I think Control Dynamics can help us with some of that as well because they will bring us into that market.

On the international side, we've made some inroads already into the Middle East, and we are talking to other parts of the world as well to try and get into some of these markets already. So again, hopefully we will see some benefit from that in the forward period.

On the power side and renewable energy, again, biomass is something we've done in the past. TND and wind -- with our land business now we have a lot of that right-of-way experience, and again, I think we are capable of doing that.

So all of these things that I've outlined I believe are in our capabilities today. It's a matter of getting to the ground and start getting out there and knocking on doors.

Great. And then can you talk a little bit more about the master service agreements you signed in the first quarter, in which area of the business those were in, and when you think those might be able to contribute?

About 40% of those came from the refining area, 40% from the petrochem area, and about 20% from the pipeline area. This is just a number of operating companies that are new to us and really indicate the results of our business development efforts to expand our business with new client relationships.

So these the type of things that -- so as these companies start to move ahead in spending money, then you guys are the -- you're in line to start to see that -- see the (multiple speakers)

Normally if a client enters into a master service agreement with us, it's their expectation to spend money with us. I think the fact that we signed 12 new agreements in the first quarter is a good sign for the future.

Then one last question if I could. On the pipeline side -- and there's been a lot of talk about new projects being announced, both in terms of new build and just expansion projects. I was wondering if you could just talk about your potential for additional work there, both I guess on the construction and the land side.

Well I guess one in particular is the El Paso Ruby project, and we expect to be staffing up with about 125 or 150 new pipeline inspectors on that job. I think construction is expected to kick off in June of this year, should have some second quarter contribution.

Most of the drop in our employee count has come from our inspection group. At one point in time in late 2008 and maybe early 2009, we had like 850 pipeline inspectors that got down to maybe 250 recently, and we are building those numbers back up.

We see pipeline construction picking up in the second half of this year, and we believe our pipeline inspection numbers should pick up longer than that. The Ruby project is one good example.

Great, I'll jump back in queue. Thank you.

Matt Tucker, KeyBanc Capital Markets.

Could you guys give a little more detail on the types of delays you're seeing? Are these coming -- are these delays in projects getting awarded? Are they delays in work that you've kind of already booked but they are just asking you to hold off on doing the work? And then maybe if you could give a little color on I guess the types of customers and/or types of projects where you're seeing the most delays.

I think we are seeing the most delays in the refining space of the downstream. In general I believe projects are smaller, I believe clients are just being slower to commit to new capital projects, and even larger maintenance projects. That seems to be the softest area in the markets we serve.

We've seen I believe a little uptick in the petrochem area. Petrochem operators seemed to be spending more money than they were last year.

I guess the areas of most activity right now would be in the upstream and midstream. That's where the -- especially upstream. That's why we are so excited about this Control Dynamics acquisition, because it gives us a lot of history and capabilities to be able to go sell and expand our client relationships upstream.

Generally upstream is strongest; downstream refining, weakest. To a large extent these projects have not been canceled, but they have been deferred. Again, I mentioned this El Paso Ruby project, that has been delayed by 12 or 18 months and just recently got approved by FERC in the first quarter, so that's a pretty good example again.

Thanks. With the increase in proposal activity that you've been seeing, do you feel like you've been missing out on any work? Has there been maybe a change versus your historical win rate? And are you seeing increased competition leading to pricing pressure still? O has that kind of stabilized?

I think it's pretty stabilized as far as pricing pressure. I don't think we are losing opportunities per se. I think things are being deferred, I've seen this in a previous life as well where clients talk about jobs, as Bill said, 18 months, and then finally they get released. So I don't believe we are out there losing any work. We're still -- I think our hit ratio is still about the same. And again, projects have been a little smaller, so --

Thanks. And then just back to the upstream segment -- do you see any impact from the Gulf of Mexico disaster that's ongoing right now? Whether positive or negative? Would that potentially increase demand for the types of services that you'd be able to provide?

I think it's kind of early to tell what the implications are going to be. Right now everybody is in a panic mode, if you will, until they get this under control. Certainly we don't have that expertise right now to cap off wells, so I don't know that we can help in this particular situation.

Thanks. Just one more. Edd, does your comment on second-quarter revenues unlikely to show much improvement, does that kind of reflect the activity levels that you saw in April remaining pretty much in line with what you saw in the first quarter?

Exactly. Again, we do have -- we have this proposal activity, but these things are not coming over the transom as quick as we'd like. So yes, we are kind of looking at what we are seeing the first few weeks of April and seeing a similar trend. So we feel pretty comfortable with that comment.

Thanks guys, that was helpful. I'll jump back in queue.

(Operator Instructions). Graham Mattison, Lazard Capital.

Just wondering if I could ask a general question on a -- in terms of the refinery work in compliance there. I know there have been some safety issues at refineries around the country in recent months. Have you seen any pickup in activity there or any potential for additional work going forward as a result of that?

Not to a large extent. The way those projects happen quite a bit is through OSHA audits of refineries, process safety management initiatives. A lot of these projects tend to be smaller in nature. Some are self-performed by the refiners themselves.

But yes, we do get involved with helping our refinery clients comply with safety initiatives. But we haven't seen much change in that general environment over the last several quarters. I think it continues on. That's an ongoing situation. Nothing really new to report there.

Got you. And then just another comment, there have been some industry comments on the activity improving in the chemical industry as well as some new projects being announced there. I know you have some alliance customers there. Are you -- is that part of the -- you mentioned you're seeing some of the bidding activity pick up there. When do you think those might turn into the potential for new work?

Well, we've already landed some of these new MSAs -- I mentioned our petrochemical clients -- and we've already landed some new specific pieces of business on petrochemical projects from longer term alliance clients. So it's already turning into business.

I think what's happening to some extent is that maybe some petrochem work is displacing some former refining work. So maybe the total hasn't -- in total is not reflective because petrochem is more active, refining is less active. That's just a general trend we are seeing.

Great, thank you.

Matt Tucker, KeyBanc Capital Markets.

Just hoping you guys can comment a little bit on where you think the employee count goes from here through the rest of the year. You've talked about wanting to maintain the right people to address the potential uptick when it does come. That's if you did reduce headcount during the first quarter. And then you've got this Ruby pipeline ramping up here. Does that mean you'll need to add some people? Or do you already have those guys in the headcount? Or do you think you'll have to cut at all going forward?

We don't have those guys in the headcount. And we would probably have to add those. That's what Bill was referring to earlier and these inspectors that kind of ramp up and ramp down with the workload. So we don't have those guys right now. We have to bring them onboard.

(multiple speakers) [We] expect the headcount to go up a little bit because of that. (multiple speakers)

Outside of that would you expect to be adding people in other areas or potentially reducing further?

We've already started hiring a small number of people back to our staff, but not large numbers of people. Really I think what we feel is at some point in this year there will be an inflection point in our business. And this is all based on current proposal activity. These proposals will eventually turn into work. So there will be an inflection point in our metrics, like billable man-hours, and our metrics like employee staffing levels will go up.

It's a little difficult to sit here right now and say when that happens, we don't necessarily think that's a second-quarter event, we think it can be a second-half event for us. But we feel pretty good that there will be an inflection and a trend upward in our numbers sometime this year.

Okay, thanks.

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.

Hello again everyone. I will be available 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.

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.