ENGlobal Corporation
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good morning and welcome to the ENGlobal First Quarter 2020 Financial Results Conference Call. Your hosts for this morning our Chief executive officer, Bill Coskey and Chief Financial Officer, Mark Hess. At the request of ENGlobal, today's call is being recorded and will be available for replay on the investor relations section of the Company's corporate website englobal.com. You may also access the teleconference replay by dialing toll free 877-481-4010 domestically or 919-882-2331 internationally, referencing conference ID 34133. The replay will be available shortly after the completion of this event through 9 am Eastern Time on May 14, 2020.I would now like to inform all parties that your lines have been placed in a listen-only-mode until the question-and-answer segment of this call begins. To ask a question in that segment, you'll receive instructions from the operator. At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communication.

[Rick Eisenberg:]

Thank you, operator and thanks everyone for joining us on this call. Before we begin, I'd like to review our forward-looking statements provision. During today's conference call, company representatives may make forward looking statements.Any statements made in this presentation about future operating results, or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please note that actual results achieved by the company may differ materially from such forward-looking statements. A discussion of factors that could cause such differences appears in the risk factors section of the Company's 10-K.And now ENGlobal CEO, Bill Coskey will present an analysis of the Company's performance in the first quarter of 2020 and provide some outlook for the rest of that year. Bill?

[Bill Coskey:]

Thanks, Rick. Good morning, everyone. And thank you to our investors for joining our conference call this morning. It's been exactly 6 weeks since our last conference call and our [proxy] would be interested in knowing ENGlobal has been operating in the midst of the coronavirus pandemic. Like most other serving the broad energy industry. We are deemed to be a critical supplier by the Department of Homeland Security. Therefore our [indiscernible] facilities located in Texas, Oklahoma and Colorado have reminded open throughout the various state and local and government’s stay-at-home orders.This being said, activity in our three offices has been very limited and most of our office staff has been working from home for around 4 weeks. Importantly, this past Monday most of our office staff in Houston and Tulsa were able to return to work and we have implemented many additional protective measures to keep our people safe. In contrast to our office staff, both our mechanical and fabrication shop in Henderson, Texas and our automation integration shop in the East Houston have been fully staffed and functioning throughout this time again with strict protection procedures being observed.The biggest impact to our company during the stay-at-home time has been some of inefficiencies in executing design work and also constraints on selling new business. It's difficult at this time to quantify the impact from these two items. Overall though I'm very proud of how we have as a company have managed through this dynamic and uncertain time in the level of productivity, our offices and fabrication shops has maintained. Congratulations to all of our team here in ENGlobal. Great job everyone.Now to a summary of our financial results. As you may have read in our press release this morning, in our first quarter ended March 28, 2020, the company recorded earnings of $1.1 million or $0.04 per share compared to a loss of $1 million or $0.04 per share in the first quarter of last year.As ENGlobal also reported positive net income in the fourth quarter of last year of $0.03 per share, this means we have now achieved our second consecutive profitable quarter. It's been a little over four years since our company last accomplished consecutive profitable quarters, so it's a success worthy of noting. Also in the first quarter of this year, our company grew revenue to $19.3 million, which is a 58% improvement of the revenue of $12.2 million in the first quarter of 2019. At the same time, we have improved our gross profit margin significantly to 17% compared to 11% in the first quarter of last year.In a few minutes, our Chief Financial Officer, Mark Hess will provide more details on these results, but I can tell you now in our view these numbers today provide additional evidence that our revised strategy of pursuing larger value modular project is gaining further traction and hoping to reshape our company’s future.So to recap this strategy, ENGlobal history has been a lot of working on hundreds and thousands of relatively small consulting assignments each year. Our business in the past counted employee thousands of people in our consulting and staffing services were primarily build on a time and materials reimbursement basis. Today as we said, we are focused on supplying and commissioning larger modular process and automation systems on a turnkey basis with larger skills of work that can be valued from $10 million to $200 million.Doing business in this way, we are best able to leverage the talents of a core group of people. Now that we have a much smaller staff, it is also much easier to build our company around what we call the A team by attracting and retaining the best talent in the industry. We've also built the business models and vertically integrated with capabilities ranging from engineering, detail systems design, mechanical fabrication to automation systems integration.ENGlobal’s new model is to deliver our solutions on a turnkey basis and a growing share of our work is now performing this way. My belief and Mark’s as well, is ENGlobal new business model is largely responsible for our last two profitable quarters, our increase in quarterly revenue as well as our healthy backlog which currently totals around $53 million.Now looking at a broad view of the energy industry, it's certainly true that the industry as a whole has experienced a significant contraction of life. However, we believe that ENGlobal is well positioned to benefit from our nation’s accelerating dependence on renewable energy and also like continued need for automation systems. Also, we performed much of our business for downstream related projects such as refineries and petrochemical processing plants, which is more active than upstream exploration and production at present.From our advantage point, we have not yet seen much of a letups in main areas of activity. While ENGlobal has served well as a business thus far this year, we all know that the severity and duration of the COVID-19 pandemic and the difficult energy industry environment are possible to predict. Therefore, while we may give you our best estimates relating to what we expect for this year. It is impossible for us as a management to make any projections of our future financial performance with any degree of certainty.However, we do fully expect that the strategic relationships our company has built over the past several years will continue to provide us with good opportunities for new business. These alliances would process technology firms, original equipment manufacturers, engineering and construction firms and end-users such as pipeline, refinery and petrochemical plant operators has grown in number and we believe this trend will continue throughout this year.At this point, I'd like to turn the discussion over to our CFO, Mark Hess, who will provide greater details on our first quarter financial performance. Mark?

[Mark Hess:]

Thanks, Bill. As you mentioned our revenues in the first quarter of 2020 increased by 58% to $19.3 million, a $7.1 million improvement on revenues, $12.2 million in the first quarter of last year. This increase is due to a 116% increase in revenue from our automation segment, which contributed $14.1 million compared to $6.5 million for the first quarter of 2019. As a result of favorable mix of projects being executed currently, our automation segment has had a gross profit margin of 21% compared to 10% in the first quarter of the last year.Revenue from our engineering procurement construction management segment decreased $0.5 million to $5.1 million for the first three months of 2020 with a gross profit margin of 5% compared to 12% for this segment in the first quarter of 2019.Should be noted that unlike our automation segment clients who are primarily in the downstream or processing sector of the market or ECCM segment clients are in all three market sectors of the oil and gas meaning the first spending decisions will be much more depended on the price of those commodities and as resulted in this significant reduction in revenue from the upstream clients. Thus the current depressed price of oil and gas contributed to a decrease in revenue in gross profit in our EPCM segment which was somewhat offset by the $22 million downstream renewable diesel project that is currently underway.Overall, therefore due to the increase in gross profit margin achieved by our automation segment ENGlobal’s overall gross profit margin in Q1, 2020 improved to 17% compared to 11% at the same quarter a year ago. And thanks to a tight control over SG&A expenses for Q1, 2020, SG&A decreased by $171,000 compared to Q1 a year ago, primarily due to a reduction in both salaries and facility costs. As a result, our bottom line had over a $2 positive swing from last year’s first quarter to this year's first quarter.We ended the quarter with $6.8 million in cash. During the quarter, our working capital increased by approximately $1.2 million excluding adjustments for lease accounting and currently is at $11.9 million.In addition in April, we applied for and were granted a loan under the CARES Act commonly referred to as a PPP loan and the amount $4.9 million. There's been a lot of discussion in the media lately about the need for a PPP loan by a public company. So I thought I would address our position and reasoning.First of all, as you know, not all public companies are the same, because our relatively small size, lack of volume in our stock and our depressed stock price. We simply do not have the same access to Capital Markets as larger public companies do. Also we do not have a financial sponsor to provide access to funds when needed. Because of these factors, we are in many ways more like a small privately held companies than a public company.Additionally, we have almost 300 employees with families over 1,200 shareholders and hundreds if not thousands of vendors. We have a responsibility to all of them to do everything we can to ensure the financial stability of the company. We did not know the full impact of COVID-19 on our current OEM future business at the time nor how long its impact would be felt. We still do not know today what the full impact will be.Some impact is already causing ENGlobal to suffer inefficiencies, these include the diminished ability of our business development personnel to [serve] new business due to their need to work from home as well as our need to pay significant premiums to those workers obligated to work in the field.We have also experienced postponement and loss of business. The severity of the reduced demand for oil as a result of COVID-19 is very concerning and the effect it will have on our customer base is also not fully known.These effects are likely to go -- likely to be long-lasting possibly much longer than the term of this loan. Access to the PPP Capital was open for a very short period of time plus access to other capital may not be available in the future if needed. Therefore, it was in the best interest of our employees, our vendors and our shareholders to take advantage of the availability of the PPP funds when the opportunity presented itself.We understand these loans are highly scrutinized and companies that we see more than $2 million in loans may be audited. However, stand firm in our belief that we are using these funds for the purpose in which they were intended and are prepared for those discussions if necessary. We expect a portion of a loan to be forgiven and fully intend to repay the remaining funds within the terms of the loan.At this point, I'd like to turn the discussion back to Bill and afterwards, we'll be happy to take your question.

[Bill Coskey:]

Thanks, Mark. We all look forward as I'm sure you do for the day when the current pandemic will be behind us and our families, loved ones and our work will return to normal. In closing, I'd like to thank each of you and the rest of our loyal patient shareholders for your support. With that, Mark and I are happy to take your questions. And I'll turn it over to the operator.

[Bill Coskey:]

Thanks again everyone for joining us on today's call. Please note that we are always here to answer your questions, which you can direct me or Mark at [e-mail]. Thanks. Stay well and have a great day. Thank you.

[Operator:]

Ladies and gentlemen that will conclude today's call. You may disconnect at this time. And have a great day.