ENGlobal Corp (ENG) 2012 Q1 法說會逐字稿

Good morning and welcome to the ENGlobal Corp. first-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference call is being recorded. It is now my pleasure to introduce you host, Ms. Natalie Hairston, Corporate Vice President, investor relations, and Chief Governance Officer.

Thank you, Rachel. Good morning and thank you for joining us today. With me on the call are Ed Pagano, President and Chief Executive Officer, and John Beall, Chief Financial Officer. In a moment I will turn the call over to Ed, who will highlight management's perspective on our results for the first quarter of 2012. John will then review other financial points of interest and how, in particular, those topics relate to our balance sheet and cash flow. Before we begin would I like to reminds 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 factor 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 at SEC's website at SEC.gov. I would like to turn the call over to Ed Pagano, ENGlobal's President and Chief Executive Officer.

Thanks, Natalie, and good morning, everyone. While from an operational perspective, the first quarter of 2012 was a step in the right direction, a number of internal issues presented several challenges to our Company. As the Chief Executive Officer of your Company I believe you deserve a candid and objective view of the current state of ENGlobal. As you know, since I arrived in mid 2010 we have been acutely focused on reengineering ENGlobal to become a more efficient and effective enterprise. While the evolution of a dynamic organization is an ongoing process, we have made significant progress. We continue to focus on operating in execution excellence in each of our operating divisions, as well as promoting a culture of exceptional client service. Those tenets have produced better client relations and retention, more robust opportunities for new business and a trend, albeit it promising, towards better operating metrics.

While there are challenges a plenty ahead, we are excited about the progress made on the operating front and future opportunities. In fact, our first-quarter results were on budget. Moreover, in the first two months of the quarter, we were in line with our new sales budget and beginning to feel more hopeful about our business prospects in the months ahead. However, in March, we were forced to turn our focus to internal matters after our current lender determined we are no longer a welcome borrower. While we disagree with the bank's rationale, we had no option but to search for a new credit facility to meet our working capital needs, especially as we focused on growth in the months ahead.

Unfortunately, the internal focus, while necessary, was also counter productive to our business development momentum. As a result, both March and April sales were modestly weaker than expected. The good news is, we are in the process, as announced recently, of completing a substitute credit facility that we believe will provide additional flexibility to fund ENGlobal's future growth. We expect to close the new line of credit by the end of May. As a result of the temporary credit turmoil, we have also had to spend valuable time reassuring our stakeholders that ENGlobal remains a viable enterprise with a robust future.

As we complete our new credit facility our top priority will be to rebuild credibility and confidence with all of our stakeholders, our customers, vendors, clients and employees, and most importantly, you our shareholders. Moreover, we continue to focus on other key repositioning goals, including assuring our organization is sized appropriately for our current and future business needs, that we are utilizing our resources as efficiently as possible, and that we are continuing to develop best-in-class service programs to set ENGlobal apart as a leader in engineering service. I'm pleased to be the Chief Executive Officer of your Company and look forward to working with our dedicated team, our clients and all of our stakeholders as we continue to reach for profitability and beyond. While there's a lot of hard work ahead of us I am certain our team is up for the task. We thank you for your patience and support and look forward to sharing our progress in coming months. I will now turn the call over to John.

Thanks, Ed, and good morning. While the details of our 2012 first-quarter results were disclosed in this morning's press release, I would like to highlight a handful of key items. Unless otherwise stated, the financial comparisons I'll make are comparisons to the first quarter of fiscal-year 2011. ENGlobal reported $75.4 million in revenue and recorded a net loss of $0.01 per share in the first three months of 2012. This compares to the revenue of $69.1 million and a net loss of $0.07 a share for the same period last year. Operations used approximately $819,000 in net cash during the first quarter compared to approximately $6.8 million produced during the same period in 2011. Non-cash items for the first quarter totaled $606,000 and included $274,000 in depreciation of fixed assets, $246,000 in amortization of intangibles and $86,000 in stock-based compensation. Overall, we had a decrease of approximately $443,000 in non-cash items quarter over quarter.

Total capital expenditures for the first quarter totaled $166,000 compared to expenditures of $109,000 in 2011. We still anticipate an increase in capital investments for IT assets during 2012, as we continue to upgrade our systems and technology support. Total liquidity, which includes unrestricted cash and availability under our credit facility, was $1.6 million at the end of the first quarter for 2012 compared to $9.7 million at the end of 2011. Our average day sales outstanding was 61 days for the first quarter just ended, compared to 63 days at the end of the first quarter of 2011 and 70 days at the end of fiscal 2011. We do expect our average DSO to decrease to the mid 50-day range in the middle of this fiscal year. Our leverage ratio as measured by total debt to stockholders equity remains low for the first quarter of 2012 at 0.86-to-1 compared to 0.68-to-1 for the same period in 2011. Our effective tax rate for the quarter was 49% compared to 32% for 2011 same period. So with that, I'll turn things back over to Ed.

Thanks, John. We'll provide a closer look at our complete financial and operational results for the quarter-ending March 31, 2012 in our quarterly report to be filed with the Securities and Exchange Commission later today. In the meantime, I'd like to point to a handful of operational highlights for our segments during the quarter. The Engineering and Construction segment reported first-quarter revenue slightly below budget, while still 20% ahead of the same quarter in 2011. This increase is due to continued strength in the midstream sector and in our downstream in plant business in response to increased CapEx spending in the chemicals and petrochemicals sectors. Our operating results for the first quarter were more than 50% ahead of budget as a result of high utilization rates and delays in planned SG&A spending on strategic initiatives that are now scheduled for later this year.

While the bottom-line results for the quarter represent a 253% growth compared to the first quarter of 2011, we remain cautious in our view for the remainder of 2012 as there appears to be a leveling in the downstream markets, as scheduled facilities turnaround projects are currently in construction, delaying new project awards as the plants are focused meeting commissioning and start-up schedules. New project awards should begin to accelerate late in the second quarter or early third quarter, as downstream refining, chemical and petrochemical clients he return to production operations and focus on meeting CapEx plans for the remainder of 2012. Our Government Service division performed slightly below budgets for first quarter of 2012 due to project schedule slippage while still posting a 14% revenue growth compared to the first quarter of 2011. Proposal activity remains strong, primarily in the midstream sector and in the international markets, as we continue to execute on our strategy to grow internationally. As expected with increased industry CapEx, we are experiencing a tightening of the resource market, as competition for project managers, engineers and designers grows.

In our Automation segment, the Caspian pipeline work continues. However, given the delays, as previously announced, expect that 2012 revenues will be pushed into future quarters. A major focus on Caspian has been to improve our cash flow position on this project by expediting our clients approval of our work, which is a precondition to invoicing for milestones. We are making some progress with these efforts and have cut our negative cash flow position on this project by approximately 50%. Since the first of the year, the Field Solutions segment has increased billable staff headcount by approximately 20%. Although revenues are 5% behind budget, we have improved our profitability throughout the quarter and are 86% above our NOI targets. The shale plays continue to play an important role in these increases, as well as expanding client base that should help us continue this growth into the future.

Again, thank you for your interest in ENGlobal. Moreover, thank you for your confidence and trust as we work to reposition a great engineering franchise. We pledge to continue to be disciplined in our approach but enthusiastic in our efforts as we, alongside our stakeholders, create value to you, our owners. Now I'll turn the call back to our operator to conduct our question-and-answer session.

Thank you. (Operator Instructions) Your first question comes from the line of Matt Tucker with KeyBank Capital Markets.

Hi, good morning,.

Hey, Matt, how are you?

First question, just a few housekeeping items. Could you comment on the trend in your backlog during the first quarter and how much work you booked?

Yes, actually I don't have that back -- the new sales award number handy, Matt, I can get that for you. The backlog -- the bookings for both January and February were spot on our target and then we fell off in March and actually a little bit in April, so overall I would say the new sales for the first quarter were a little below our original budget number, but I believe our backlog is still pretty firm at where it was when we started the year.

Got it, thanks. And then where is your headcount today, or at the end of the quarter and could you give the average biweekly billable hours for the quarter?

The -- yes, the headcount is roughly about 2,000 folks and our biweekly hours I want to say is about 150,000 hours.

Great, thanks. And about your comment about the sales slowing down a bit in March and April, I understand how the credit facility negotiations would be a bit of a distraction for senior management. But could you help me understand how that filters down through your business development efforts and impacts the overall sales effort of the Company?

Sure. Actually it's not as much a filtering into business development as being a public company is filtering into our clients. We've received a lot of calls from our clients to come and chat with them about where we are with our line of credit, so there's some concerns out there that we are running around reassuring our clients on, so that's taken our eyes off of some things.

Got it, that makes some sense. And then since -- I guess we're halfway through the second quarter here, halfway into May, have you started to see the sales pick up and are you getting -- do you think you can get to your budget for the second quarter?

We haven't seen the sales pick up yet. Again, I'm not saying there aren't any sales. We had a pretty aggressive target for this year for sales and we're behind that budget number, so we haven't seen a trend of a tick-up yet. We still -- again, we still don't have that line of credit in place so our clients are still asking questions about that, so I suspect in a week or so, once we get that finalized, things will start picking up again.

Got it, and just one more follow up on that. You mentioned turnaround activity delaying some new project awards on the downstream side, can you talk a little bit about how your Company participates in turnarounds and how Company's project plans fit around turnaround activity, just help us understand the dynamics there a little better?

Well, yes. When you're in a turnaround situation you have all hands on deck on a facility site and they're not -- they're focusing on getting their plant back up to production as opposed to working on new work so it slants that a bit to get everything up and running and, again, generating revenue for the client. From a turnaround perspective, we really are not on the turnaround side of the business. We do some engineering -- some in-plant engineering to assist with that, but we are not -- we really don't have turnaround resources -- blue-collar turnaround resources that are out there helping with those projects.

Got it, thanks. I do have some more questions, but I'll jump back in the queue for now.

Thanks, Matt.

Your next question comes from Craig Bell with Enerecap Partners. Please state your question?

You talked about some of the challenges that you have ahead and you obviously touched on one part is restoring credibility. Once you get through the finalizing of the credit facility and all that, what do you see as your biggest operational hurdle this year?

Operational hurdle?

Or what's your biggest challenge that you think you have to get through this year once you get the credit facility done?

Well, I think, as I stated in the call a few minutes ago, it's really to get that credibility restored with some of our clients and our stakeholders, some of our vendors, and this has been a bit of a strain on them as well. So that's something we're working today but we'll continue to work and you just don't earn that overnight so you've got to work that and continue to work that. So that'll be our biggest goal from, certainly the executive side of the business here, to get in front of our clients and talk to them and make sure they understand where we are and where we're going.

Looking at the automation side of the business, do you have any expectations that later this year we're going to start to see a ramp-up in that business, or is it still going to be 2013?

Well, frankly that business has been a bit of a disappointment for us this year, it's pretty far behind plan for the first quarter, both from a revenue and a bottom-line perspective. So there is -- certainly, as you know, there is some fabrication work that's on the heels of -- on Caspian, so we have to progress that further down so that being delayed is delaying some of that fabrication work so that's all in the automation segment. So again, yes, we're hoping for certainly a better second half of the year for that segment and some new awards to come in, but things have been pretty slow across the board in Automation and, again, pretty far behind year-to-date results -- or year-to-date budget, sorry.

Okay. And then do you have any update on looking for someone to head that up permanently?

We're still working on that and, frankly, we hope to have that resolved by the end of this month.

Okay, great. Thanks a lot.

Sure, thanks, Craig.

Our next question comes from Matt Tucker with KeyBank Capital Markets. Please state your question.

You guys gave a liquidity number of, I believe, $1.6 million, does that number change at all when you get the new credit facility done?

Absolutely. We have -- there's an increased availability that comes with the new line of credit and, John, I believe it's somewhere in the $5 million range, correct?

If not greater.

Yes. So it'll be $6.6 million roughly.

Great. And do you have a sense that you can share with us for the length of the new facility; i.e., can we be seeing a similar situation a year from now? Is this going to be a recurring thing where you have to get a new one done?

The new facility is a three-year term.

Great, thanks. Throughout last year, your backlog really seemed to be trending up for the most part, I think it finished the year about 24% higher, yet your revenues have not ramped up to the same extent. Can you talk a little bit about the quality of our backlog and is it still Caspian being stuck in there that's creating this discrepancy?

Well, certainly Caspian is a big part of our backlog, Matt, as you know and that being delayed is certainly just delaying the revenue coming out of the backlog, so that's certainly a big piece of it for sure.

Can you give a little more color on the status of where that stands?

Again, progressing. We're out of the early stages of it. As you know we had a little false start as we had to go back and help the client with basically getting the deliverables -- or the package to us properly and that -- we're beyond that stage now so we're into the actual project that we signed up for. And again, I think overall, we're probably about a six-month delay, if you will -- a six-month push, if you will, so again, progressing well. We had given out a revenue target this year of about $15 million -- $15 million, $16 million on that job. So again, it's moving well, the job is moving well progressing well now. The only issues with it, as we've mentioned before, is on the cash flow, which we're working pretty hard.

Got it, thanks. And then when you look at each of your segments and what you have in backlog, which segment would you expect to see the most ramp going forward this year and which one would be flatter or down?

Well, right now I would say -- in order I would say Engineering and Construction segment is our strongest right now, Field Solutions is doing well. They're behind budget but their profitability is good, so they're running a pretty efficient business and they have some nice sized prospects that are coming in. The one right now that's a problem for us and we're working hard is the Automation segment. That's the one that needs a little more backlog.

Got it. And then you had pretty nice margins across the board in each of your segments relative, at least, to last quarter. Where do you still see the most opportunity for margin expansion when you look at your segments?

Well, frankly, the highest or the best margins business we have is our Automation segment so if we can get that where it belongs and up to speed and more utilized, if you will, we'll see a nice overall expansion in our gross profit there. Other than that, of course as you know, the other two segments have high and low margin businesses, so it becomes a matter of mix. If you look at the Engineering and Construction business, it's how much is in-plant versus in-office and the in-office margin's are higher than the in-plants, so it's a mix situation. And in the Field Solution same thing. We have a land business, which runs a higher margin than our inspection business. So right now on the land -- the Field Solutions side we're seeing land moving quicker than inspections so we're seeing slightly better margins there because of that. [So it's really tough to say, it's really more of a mix situation in both aspects.]

Got it. As a follow up to that, if you look back to 2007, 2008, ENGlobal enjoyed margins well above the levels of the past two-or-three years and it's probably true for most of your peers, as well. Can you talk a little bit about what ENGlobal is doing differently today, what type of work you're doing today that maybe you weren't then and what you were doing then that maybe you aren't today?

Well, frankly, comparing to 2007, 2008, those are pretty unprecedented times in my opinion and ones that you probably won't see again in this industry and we were -- frankly we were paying pretty high rates for people. There was a lot of money out there, projects were going and there really weren't issues about rates as there were -- once the crash came in 2008 everything came back to (inaudible) squeezing rates. So we're coming outs of that squeeze, if you will, where we're able to start to firm up our rates again -- starting to firm up our rates again. So it's more about timing than anything. I don't think we're doing anything different today. We did have, certainly, more projects in our office back then -- again getting back to the mix issue I mentioned -- so more projects in the engineering construction office will certainly run your rates up higher than in-plant business, so our mix of people at the time was more leaning towards in-office work.

Got it, thanks. And then you mentioned that you're seeing resources becoming constrained in some areas, are you having any trouble passing on those costs to customers and are there any areas where you're seeing bid margins improve?

Generally speaking, we work into our bids the cost of our employees, so that's not too much of an issue for us. The issue, of course, just comes to getting the employees in time, so that's the one thing that becomes a wild card in this situation when the market starts heating up, is people have options, so when you present an opportunity to them they have sometimes one or two other opportunities they're looking at. So again, it's just a matter of getting somebody on board. As you know, we're a people-oriented company, so we don't make any revenue until that guy starts putting hours -- or that person starts putting hours onto a project.

Got it, thanks. And then as you look out to end markets and opportunities you're seeing today, what do you view as the most exciting opportunity for ENGlobal?

Well, I think the most exciting one, Matt, is the international opportunities and that probably closely followed by the midstream what's going on in all these shale place because we're dabbling in that in almost all of our sectors -- segments, so those two markets are probably the most exciting. And, of course, international being new to us for the most part that's pretty exciting to start looking to some of the Middle East projects that we've been biding on.

Any progress on the registrations that you were going after in some of those middle eastern countries?

Yes, we have -- most of the Kuwait ones are all in place and the Saudi ones are about half way there so we're looking pretty good. And again, we have started seeing some opportunities to bid into Kuwait already, so we're pretty excited by that.

And just to follow up on the pipeline side and I believe last year was a relatively weak year for the industry in terms of pipeline construction. You indicated that you're optimistic on some opportunities you're seeing this year. I think that's consistent with what a lot of your peers have been saying recently. Do you see it as a growth opportunity, the pipeline side this year versus last year? Have you already started to see that, or are we in the early innings?

No, actually we have started to see that. We've seen a couple opportunities already and a couple we've done pretty well on, I think, as far as bidding. So we're seeing that activity picking up and there's some really nice opportunities out there on the pipeline side. So I think it's more robust this year at this time than it was last year at this time.

Got it, thanks, and then last question. Were there any execution issues on materially under-performing projects or projects losses in the quarter?

Any execution project losses? There were a couple of minor ones, but nothing major.

All right, thanks, that's all I had.

Thanks.

(Operator Instructions) And there are no further questions at that time. I would like the turn the floor back over to management for any additional or closing comments.

Thank you, operator. I'd also like to thank everyone for being on the call today and for your continued support of ENGlobal.

Ladies and gentlemen, that does include today's conference call, you may now disconnect your line.