ENGlobal Corp (ENG) 2011 Q2 法說會逐字稿

Greetings, ladies and gentlemen, welcome to the ENGlobal Corporation second quarter 2011 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, Corporate Vice President, Investor Relations and Chief Governance Officer. Thank you. This Hairston, you may begin.

Thank you, Tanisha. Good morning, everyone, and thank you for joining us today. With me on the call are Ed Pagano, President and Chief Executive Officer; and John Beall, Interim Chief Financial Officer. In a moment I will turn the call over to Ed, who will highlight management's perspective on our financial results for the second quarter, ended June 30, 2011. John will then review other financial points of interest and, in particular, those topics that relate to our balance sheet and cash flow.

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

And now I would like to introduce our CEO, Mr. Pagano. Ed?

Thanks, Natalie, and good morning, everyone. In the past six months we have seen gradual improvements in our business from the prior year's economic climate. We ended the first quarter 2011 on a note of cautious optimism sparked by a strong margin that produced operational net income for the first time since September of 2010. This optimism now seems justified as our positive results continued through each month during the second quarter of 2011. In addition to four months of positive net income, we recorded our first quarterly profit since the third quarter of 2009.

Today, ENGlobal announced continued improvement in operational earnings during the second quarter ended June 30, 2011 as compared to the comparable prior-year period. Our results are still not where we strive to be, but they indicate that our turnaround is progressing and that our strategic plan is becoming a reality. We reported net income of $0.1 million or $0.01 per diluted earnings per share for the quarter ended June 30, 2011. This represents an increase of 103% over a net loss of $4.5 million and an increase of 106% over diluted earnings per share of negative $0.16 for the same period last year. Sequentially, our consolidated gross profit margins increased to 9.4% in the second quarter 2011 compared to 7.4% in the first quarter of 2011.

While we have seen some tough times and we've made some difficult decisions, we believe we have turned the corner and our economic future is looking brighter. Shortly after our first quarter conference call we announced we had been awarded an engineering procurement and commissioning services contract from the Caspian Pipeline Consortium, CPC. The three-year award is expected to have a total value of approximately $86 million over four years.

Our operational results remain solid as demonstrated by our key metrics that continue to improve moderately. Our employees count has remained steady at approximately 2100. During the second quarter we actually reduced our workforce in inspection and electrical divisions by about 140, which was offset by a gain of the same number in other areas of our business. The ultimate impact on our operations was reducing headcount in our lower-margin businesses and increasing headcount in our higher-margin businesses.

Changes in our project mix had a positive impact on gross margins. However, project performance can negatively impact profits. Our second quarter was impacted by poor performance in our electrical division of the Automation segment. Overall, however, our gross margin increased in the quarter because the declines were offset by increase in work from higher-margin projects.

ENGlobal's long-standing emphasis on balance sheet strength has served us well and will continue to serve as well. We recently announced two significant banking arrangements that John will discuss later. This additional funding has enabled us to stay well-capitalized in preparing ENGlobal for future growth, given proposal activity, market activity and, although none have been strategically identified at this time, possible acquisition activity.

Since my arrival in May 2010, ENGlobal has confronted challenges fully, directly and realistically and we believe the second quarter is a testament to the efforts of our management team. Our results demonstrate that we have been focused on key areas requiring our attention and providing solutions to strengthen our future for ENGlobal and for all of you, our employees, clients and stockholders.

One area of considerable focus for our team over the past year has been to reinforce our internal processes. For example, choosing the right proposal, bidding them properly and then providing quality execution are vital to our turnaround, which is one of our foundations of our strategic plan. Having tied our procedures around projects and proposals gives us the confidence that our results will be more predictable while making a solid impact on our bottom line.

Now I would like to give you an overview of each of our business segments. Our Engineering & Construction segment continues to experience an improving marketplace for small capital improvement projects, especially in the refining, chemicals, petrochemicals and fertilizer sectors, as clients continue awarding projects as budgeted for the year under many of our existing agreements. These projects cover a spectrum of work including client expansions to enhance or add new product lines, prepare for planned turnaround projects in 2012 and 2013, increase energy efficiency and in taking steps toward the restock of process units that were previously shuttered in the last decade.

The midstream market sector also continues to exhibit strength with recent project awards for gathering terminals, blending facilities and new pipelines related to the growing domestic unconventional oil and gas discoveries and to support enhanced recovery techniques.

Our Automation segment is benefiting from increased project activity from both large international projects and projects associated with US-based shale plays.

On the international front, the Caspian Pipeline Consortium project is off to a very good start. In addition, proposal activity for projects both in the Middle East, Africa and Brazil has increased significantly since January. The Automation segment is also benefiting from the development of several client-driven projects such as industrial HVAC systems, power islands and universal master control systems. ENGlobal is currently pursuing patents for several of these products.

Our Field Solutions segment continues to benefit from active shale plays around the US. This segment is particularly active in the Land division, which provides lead-in work to our other business segments. This right-of-way work on new pipeline construction is picking up, particularly in the Marcellus region. Historically, our inspection group has slowed in the second quarter, and this has held true in 2011. However, we expect that division to increase volume in the third quarter.

ENGlobal continues to move towards its one ENGlobal philosophy by empowering our business development group to sell our capabilities across all business segments. Accordingly, our new sales indicate the following. One, our January awards exceeded the entire fourth quarter, and our first-quarter awards more than doubled the fourth quarter.

Two, we have experienced quarterly increases in contract awards since the third quarter of 2010.

And three, in our second quarter of 2011 we recorded approximately $168 million in new awards. While we believe these are notable achievements, we certainly know we have more work to do. We are working towards consecutive and multiple quarters of profitability. We expect a steady flow of domestic work to continue, and we are particularly excited about large international project opportunities like CPC.

We intend to pursue additional international projects and expand our portfolio of services in order to differentiate ENGlobal in the marketplace. As we move forward we will continue to benefit from our skilled and experienced management and our capable and professional employees. We believe our actions and changes will pave the way to a profitable future. We're conscious of how macroeconomic conditions can impact our client spending, but we are hopeful that market conditions will continue to improve, and we believe that we are well positioned to take advantage of the opportunities presented to us.

Thanks for your time this morning. I'm going to turn the call over to John now. John?

Thanks, Ed. Good morning, everyone. Most of the specific details for the second quarter results were disclosed in our press release this morning, but I would like to highlight a few other selected items. Unless we otherwise state, the financial comparisons I will compare second quarter of 2011 results to those of the second quarter of 2010.

Operations produced approximately $700,000 in net cash during the second quarter compared to approximately $2.4 million produced during the same period of 2010. The $1.7 million decrease in cash provided by operations is primarily due to the increased accounts receivable and other working capital components. Non-cash items in the second quarter impacted cash flow by $383,000 in depreciation of fixed assets, $548,000 in amortization of intangibles and $98,000 in stock-based compensation. Overall, we had a decrease of approximately $300,000 in non-cash items for this past quarter compared to last year.

The $3.3 million positive impact to our working capital in the second quarter was primarily the result of an increase in trade and tax receivables offset by an increase in current liabilities. Total capital expenditures during the second quarter totaled $265,000 compared to expenditures of $632,000 in the second quarter of 2010. We do not expect our third-quarter capital investment -- our fixed assets to materially increase, as we expect our annual investment in fixed assets to be well below our credit facility's annual limit of $3.5 million.

Long-term liabilities net of the current portion decrease from $1.9 million to $5000 at June 30, 2011. The decrease is due to the elimination of certain past long-term obligations. Our debt-to-equity ratio increased slightly from 0.46 to 0.71, primarily due to the increasing current liabilities. But the Company does maintain a very low leverage position, still.

At the end of the second quarter, we did enter into an agreement with Wells Fargo Bank to amend our existing credit facility, which resets certain financial covenants and increased the underlying credit limit. The revolving line of credit increased from $25 million to $35 million and includes more workable financial covenants. In addition, with the support of Wells Fargo Global Banking Group, and Export-Import Bank, we did agree to a $9.5 million facility to support our Caspian Pipeline project.

The Company is confident the amended credit facility is sufficient for our current liquidity needs. However, we are aware that each country's requirements are different and we may need to pursue broader insurance and bonding capacity to support our international growth.

Our average days sales outstanding was 65 days for the second quarter, which is up a few days compared to last year. We intend for this figure to improve over the next few months, and we have made some internal process changes to make this happen.

Our income tax provision for the second quarter of 2011 was higher percentage of net income, due to the impact of a Texas gross margin tax on our level of earnings. However, it would be normalized on an annual basis.

Thanks for the time this morning. I will now return the call to the operator.

(Operator instructions) Matt Tucker, KeyBanc Capital Markets.

Good morning and congrats on the profitable quarter. You know, I was a little surprised that the revenues, a little stronger this quarter, just given the momentum, you know, on the award side. So I was curious -- one, I know you guys were doing a lot of work on the Ruby Pipeline that's winded down. So maybe if you could quantify the kind of impact of that when you look sequentially versus the first quarter.

And then also have the awards you guys have been winning recently had longer durations, maybe, than you typically see? And kind of what are your expectations for the revenue trajectory going forward?

Well, certainly we have been coming down on the Ruby Pipeline. We are down to just a handful of folks, probably under 10, on that job at this point. So specifically, I don't have the numbers, quarter one and quarter two, on that project, Matt, but it is certainly down.

We have also -- in general, our inspection group is down, and generally we have a lot of folks out there. So that has driven some of the revenue down, if you will, in that segment. So that's probably why our revenue numbers aren't quite where you thought they would be.

Going forward, though, a lot of the awards we are seeing are bigger projects and longer-term projects. So we are hoping to get more visibility on future quarters, based on the backlog that we are now putting -- we are winning, if you will. So again, we had thrown some projections out earlier on that we were looking at about a 20% increase in revenue year on year. We are still thinking that's where we are going to wind up at the end of the year.

Great. And then you guys were able to expand operating margins despite SG&A actually being up a little bit. And you had commented last quarter that you had taken out some additional costs in the first quarter that would flow through the rest of the year. But I'm curious; it seems like we didn't really see that. So were there any unexpected costs that came up in the second quarter, or should we see more of the benefit from those cuts going forward?

Well, yes; it would have been just one quarter of it, if you will. We did write down some costs in the first quarter that we talked about. The margin improvement is certainly the direction we are trying to push in. So what we are seeing is less legacy issues coming through, if you will, and just pure results hitting the bottom line. So we are expecting to see that margin continue to improve.

From a G&A perspective we are actually pretty comfortable. Our G&A numbers were pretty low for the quarter. So we will have to take a look and maybe talk to you later on about the variances.

Okay, great. You know, you commented on the electrical division of the Automation segment. The performance has been a little weaker than you had hoped there. Is that still something that you have been able to address and resolve, or do you continue to expect that to be a drag going forward?

Well, actually, being a little more specific, we actually had some projects that -- or a project, I should say, that went bust on us. And that cost us some money in the quarter. So that was more what I was referring to, as opposed to the whole division. The division does have a backlog of work. There are a bunch of people out there working in the division. But we did have a project that kind of hit our negative -- brought negative results to our gross margin line.

And that project is completed?

The project is just about done, but we've recognized a loss on the project, as we are supposed to, so -- according to GAAP.

Great, thanks. Just one more -- and I'll jump back in the queue. You recently announced a new head for your international business. I was hoping you could comment a little bit on why you picked him, while he was the right guy and your expectations for that business going forward. And you mentioned some strong bidding activity. So if you could comment on whether you have any more near-term opportunities that you -- just to drive probability?

Yes, certainly. The gentleman we selected has got 30 -- well, probably close to 40 years of international experience in the European, Middle East and Africa and markets and is actually the exact person we need to help us expand into those markets. We certainly talked to a whole bunch of folks, and Dennis kind of came to the top of the list for us. So we are real excited about having him join our team. As a matter of fact, he will be here Monday. So we're real excited about that, and we are looking for some real positive activity in the regions he's very comfortable in and very knowledgeable in.

We do have a handful of opportunities that are international in our proposal list, if you will, and our opportunities list that we are pursuing. So again, we are seeing some of that activity coming up, and we kind of noted the regions in the press release -- in the speech. So I think the international market is going to have a bigger play on us going forward. That's certainly part of our strategic plan is to grow that part of our business.

Thanks a lot, I will jump back in the queue, thanks.

Graham Mattison, Lazard Capital Markets.

So turnaround is still definitely making great progress, and you have done -- you've accomplished quite a lot over the last 12 months. If you could sort of categorize where you are in the long-term plan of the turnaround of ENGlobal -- how far along do you think you are, and what exactly is left to be done?

I think, frankly, we have pretty much identified everything that needs to be done and we are in the process of implementing those things. So implementation is -- you implement today, and it takes time to kick in, if you will. So there's really nothing else to do, per se, except implement all the new procedures and policies, etc., etc. And we are -- I would say, if I had to guess, we are probably around 60% of the way through all that implementation. The ones we tried to do first and foremost, as I noted in the speech this morning, was around the projects and our execution, which is obviously a very, very high level of importance for us.

And then looking at the recent awards, you have now booked about $230 million in new awards this year, which is close to what your backlog was at the end of the year. How did the timing of those awards -- somebody touched on this question a little bit earlier. But, I'm just trying to get a sense of, is there a duration you could put on average for the typical project coming out of there?

Well, you know, we've talked about this before, I'm sure, and -- with you, and we used to have about a 6- to 9-month window on our projects, and that window is now expanding. We are starting to see bigger pieces of work being awarded to us, which, of course, was our goal. And again, if I had to average, I'd say right now we are over that 12-month period pretty comfortably in some of these awards, on average. And it's continuing to grow.

The other thing that's growing is also the size of the awards. We are tracking that as well and we are starting to see that increase as well. So again, this cross-segment strategy that we've had and getting a bigger piece of the pie is starting to pan out for us, and we are starting to see some of that, fruits of our labor, if you will.

And then one last question, just to follow up on Matt's on SG&A -- you obviously brought those costs in line with the business. As you ramp up and these new awards start to come in, and particularly as you move more overseas, are we going to see a meaningful jump in the SG&A line? Or have you got it to the point now that you can grow around it?

No, I don't think you will see a meaningful jump. I mean, will we spend a few more bucks here and there? Yes, probably. I mean, we might need to get a little more expertise in certain areas, but not a meaningful jump. I think the SG&A the way it is now can run the business. And some of these awards that you're referring to would be project related and would be in the segments and would probably be more of a direct cost to the project. So we won't see an SG&A jump, per se. But again, there might be a few people here or there we might need as we start getting into different markets.

All right, great. Actually, one last question, if I could, just in terms of hiring new people -- I know you have been adding some -- just comment on the overall market for hiring new employees. Are you seeing any tightness there, or is it still pretty much an employer's market, if you will?

You know, it's probably -- we are starting to see it probably turn a little bit, you know. But we are still able to hire people and we are still bringing in some very good, high-quality folks right now. So, so far, so good, if you will. I would expect, if the market continues to progress the way it is now, that will start getting a little more difficult as the year goes on. As of right now, everything is still okay and resources are available.

All right, great, I'll jump back in queue, thanks very much.

Craig Bell, [Americap] Partners.

Just wanted to touch on your gross margins. Obviously, you had a nice improvement in the quarter. And as you think about it going forward, do you expect that you will see incremental improvements over time in that? Or do you think you're going to get to a point where you're just going to see sort of a step up overall in margins?

Well, I think for the rest of this year we will see incremental improvements in that area, and then we will kind of set a new level, if you will. We are shooting for kind of mid-to high teens there. But it's not going to just jump there tomorrow.

And do you see any differences in how the trend would be among the segments, or do you think it will be sort of the same across all?

Well, I would have to say same across all because each one of our segments does kind of have a lower-margin business in it. You know, we've talked about that before. And so I would probably -- on average, I would probably say it's going to be the same across all. Some might be a little higher than others, but pretty close.

Okay, and then just one follow-up on your international opportunities. Obviously, you really started pursuing that a while ago. With the new hire here, is that making you change the way you view the market or opportunities that you're looking to pursue? Or is this just a natural extension of where you were already at?

I think it's a natural extension. I think it's going to -- what we were doing before was kind of following our US clients, if you will, international. And this will allow us to start accessing some of the international clients. So this is just the next step, if you will, just like it's an extension of where we are today.

And then, lastly, what was the cash position at the end of the quarter?

Cash positions at the end of the quarter was $34,000.

Okay, thanks.

Matt Tucker, KeyBanc Capital Markets.

Just a follow-up on the hiring question -- can you give us a sense for where you expect headcount to trend during the third quarter? Do you think it will finish the quarter higher than second quarter?

Based on what we are seeing in the opportunities, I would have to say yes. We will be trending up. We have some nice opportunities out there that we feel very good about. So yes, I would like to say that would be up.

Can you give us any sense of the magnitude of increase?

Kind of difficult to say. It depends on what hits when. If we are talking the end of the year, maybe 2400, 2300 -- hard to say. Really depending on what comes in and how fast it ramps up.

Sure, that makes sense. And then I was just -- I just wanted to ask about your comments that you are seeing stronger opportunity in higher-margin markets. Can you give some more color on what those higher-margin markets would be?

Well, yes. Actually, maybe I should look at it the other way -- the lower-margin businesses we had were, as you know, inspection and electrical services. And those are actually going down, and we are adding people in our Engineering disciplines, and that's where we are seeing higher margins. So it's not a particular segment, per se. But it's really dropping the lower-margin businesses, if you will.

Great, that's all I had. Thanks a lot, guys.

Graham Mattison, Lazard Capital Markets.

Just to follow up on the markets out there, can you give us some commentary and what you're seeing in the chemical market, just given, with the ongoing low natural gas prices, hearing a lot with chemical producers coming -- you know, thinking of expansions in the US market, just what you're seeing there?

Yes. We're seeing a good amount of activity there. That's kind of driving our -- certainly, our downstream business right now in the E&C sector. So there's just a lot of opportunities and a lot of activity in that sector right now. And we are starting to see a lot of proposal activity, due to it.

But is it fair to say you haven't seen the awards yet?

We have seen -- we have announced some, and we expect to see more.

All right, great, thank you very much.

(Operator instructions). There are no further questions at this time. I would like to turn the floor over to management for any additional question or closing remarks.

Thank you, operator. 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.