ENGlobal Corporation
Q4 2019 Earnings Call Transcript

Published: 26 Mar 2020

[Operator:]

Good morning. And welcome to the ENGlobal 2019 Year-end 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 Web site 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 is 33183. The replay will be available shortly after the completion of this event to 9 am Eastern Time on June 26, 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 Jimmy Caplan, Investor Relations Director with Market Makers.

[Jimmy Caplan:]

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 provision 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 Form 10-K.And now ENGlobal CEO, Bill Coskey, will present an analysis of the company's performance in both the fourth quarter of 2019 and for the rest of that year, Bill?

[Bill Coskey:]

Thanks Jimmy. Good morning, everyone. And thank you for joining our 2019 year-end results conference call. It's really exciting once again to be able to speak with our investors on this conference call.Before we will begin, I would like to send out our best wishes to all of you and your loved ones during this time of national emergency. It’s obviously a very dynamic time that is impacting every part of our lives, including our business and work life. Job number one for all of us is to take all actions that are necessary to stay safe and well as we are doing everyday here in ENGlobal.Our company's prayer this morning is for all of our country's governmental leaders, all national, state and local leaders of every stripe. We simply pray that God will give our country's leaders the wisdom and strength that only he can provide and through his power and divine guidance that we will all be left through these uncertain times.Now onto ENGlobal's business. As many of you may have read in our press release issued this morning, we have turned the corner to profitability. In the fourth quarter of last year, the company recorded earnings of $729,000 or $0.03 per share. The real cause for excitement is that this represents our first quarterly profit in roughly three years. We also did much better on an annual basis, cutting our net loss from $0.21 a share in 2018 to only $0.05 a share in 2019.In a few minutes our, Chief Financial Officer, Mark Hess, will provide more details on these financial results, but I can tell you now in very simple terms the reason for our success, just being that we are successfully pivoting toward a new strategy. At the same time, we are reshaping our companies in order to successfully execute our new strategy. What's exciting to me is that we are really just now gaining traction on our new mission.ENGlobal’s legacy business had been one of working on thousands of low revenue engineering consulting assignments per year for thousands of employees. Instead, we are now concentrating obviously on high revenue modular process and automation systems, supply contracts for these. In simple terms, we are pivoting from pursuing $20,000 to $200,000 project and we're now bidding and executing on $20 million to $200 million projects. That's a really good change for us that our new business model suits us very well.ENGlobal has built an impressive core group of 300 or so team members and we are quickly gaining the respect of our customers and alliance partners. Just as important, we have built a vertically integrated model with capabilities from multi-discipline and process engineering, detailed system design, mechanical fabrication to automation system integration. We now have the technical skills and in house capabilities to deliver these modular systems of varying types on a turnkey basis. This is a very important selling point for us having turnkey capabilities.As a result, our backlog at the end of the year was up to about $59 million and the total amount of jobs in various phases we are currently tracking is an impressive $483 million. Through all of our strategic efforts and successful execution, we not only turned the corner in quarter four of last year but we are currently on track for continued profitability in the first quarter of 2020. It’s very important that our shareholders understand what we mean when we talk about modular processes and in modular automation systems.The modular process system we work on typically utilizes third party technology and involves the conversion of natural gas or natural gas liquids, bio-mass feed stocks into various chemicals and fuels. These outfits can include transportation fuel, such as diesel, hydrogen, ammonia and methanol for other examples. The modular automation systems we speak of involve three main areas of activity, electronic plant wide control system, online process analytical system and electric power distribution systems. These three types of automation equipment are designed to be packaged in the portable cabinets and modular building, which again is performed in our shop and then trucked to the site.So why does modular project execution in the fabrication facilities so often [Technical Difficulty], the answer is that modular execution of the size we target typically has many benefits over [sick] building plants in the field. The business that can be realized include; number one, lower total installs costs; number two, improve project schedule; number three, higher quality; and finally, number four, a much safer environment for our people to work in. Each of the modules fabricated in our shop is designed to be [truckable], and then erected together in the field to form and complete plant.So instead of talking this morning about specific project opportunities, I believe it is more important for you to understand how we, at ENGlobal, expect to receive an ongoing stream of opportunities and business in the years to come. In this regard, our focus is very much on building strategic relationships and alliances. It is much better to have a relationship that will provide a continuous stream of business as opposed to seeking one-off bid opportunities. There are five general categories of strategic relationships that we have already entered into, and that we are working to expand on.And these include number one, process technology firms, because they provide the basic proprietary process technology that require our project execution capabilities. Number two is strategic relationships with original equipment manufacturers, or OEMs, who often have opportunities to sell their equipment in large installations but they need our complete integration capabilities. Number three is strategic relationships with engineering and construction firms, which these large firms give us access to be a provider on the largest multibillion dollar projects in the world. Number four is end users, such as pipeline companies, refineries, petrochemical plant operators, because they often outsource their requirements directly to a single source alliance provider. And number five finally is construction firms.They are needed by us to be the C and EPC, and ENGlobal has lot of construction contractor. EPC stands for Engineering, Procurement and Construction. ENGlobal to perform engineering, we can handle procurement. We can do fabrication. We can do automation. But again, we're not a construction contractor that's why we partner with construction firms.For some projects, these firms are also more capable of providing the financial guarantees and bonding required by our customers on some projects. We expect to get part of our business to come primarily from these relationships, and our list of preferred project partners is growing rapidly. Going forward, we believe we're also well positioned to benefit from several external trends, especially the nation's accelerating dependence on the production of alternative and renewable energy. We see today renewable energy projects continuing to ramp up, while projects from traditional oil and gas sectors maybe on the decline over the near to mid-turn.We have intentionally increased our business mix toward the clean and renewable energy sector, which we expect will be much less affected by the low price of crude oil. Of the three oil and gas sectors our largest participation by far is in downstream processing, which we expect will fare better than upstream and midstream during the low crude price environment.We’re also seeing continuing demand resulting from large process control and analytical equipment installations, which seems to remain in demand through the energy cycle, as well as the U. S. military's increasing need to upgrade or place its fueling systems at installations around the world. By far, our largest projects today involve renewable diesel, large process analytical installations and upgrading military fueling systems, and all of these have drivers that are outside of traditional oil and gas.At this point, I'd like to turn the discussion over to our CFO, Mark Hess, who will provide greater detail on our 2019 financial performance. Mark?

[Mark Hess:]

Thanks, Bill. In 2019, our revenues increased by approximately $2.5 million to $56.5 million, which came in the fourth quarter in our automation segment. In this segment, we worked on 156 projects for 44 customers with an average size of 833,000 during 2018. In 2019, we worked on 129 projects for 40 customers with an average size of 935,000. Average revenue recognized per project was $287,000 in 2019 versus $191,000 in 2018. So we worked on 27 fewer projects that yielded $96,000 more in each project.Working on fewer larger projects is more cost effective and contributes to increasing increased profit margin in the segment. Most of these projects are for downstream clients. One example of the result of this focus is a project we are currently working on for downstream client that involves procurement, integration and commissioning of analytical systems within a plant. While this project began in May of 2019, it expanded in the fourth quarter. We recognized $10.3 million of revenue on this project during 2019 of which $6 million came in the fourth quarter.The current timeline for this phase of the project goes through August of 2020 and there maybe additional phases or scopes of work at that time, or between now and then. This type of automation commissioning services generally cement higher margins work as the work is more complicated and requires a higher skill level, which contributed to our increased profit margin in 2019. Unlike in our automation segment whose clients are primarily in the downstream market sector, in our EPCM segment our clients are in all three market sectors of oil and gas where commodity prices have a larger influence on our client spending decision in the mid and upstream sectors.In our EPCM segment, in 2018, we worked on 375 projects for 44 clients, which have an average size of $129,000 in 2019. In 2019, we worked on 412 projects for 43 customers with an average size of $171,000. Average revenue recognized per project was $47,000 in 2019 versus $64,000 in 2018. So we worked on 37 more projects that yielded $17,000 less per project, which contributes to the lower profit margin in 2019.We added, in addition to the discreet bidding opportunities we have in the automation segment, we also benefit from master services agreements under which it is much easier for us to receive work releases or POs as the commercial terms have already been negotiated. Generally, the sizes of these POs are smaller but received more frequently. During 2019 we received more POs with smaller contract values than we did in 2018. This was due in large part to the consolidation of certain of our upstream customers whose awards were significantly smaller in scope in 2019 than they were in 2018. This also contributed to the overall decrease in revenue in this segment and gross profits in 2019.However, we were also awarded a large downstream project in the fourth quarter of 2019 in this segment, which is a renewable diesel project. We currently expect to recognize $22.4 million of revenue over the life of this award. About $800,000 of this revenue was recognized in 2019 and we expect to recognize most of the remainder in 2020 with a small amount rolling in 2021. Therefore, we expect to see these statistics migrate towards the larger projects for 2020.Another contributor to our gross profit decline in 2019 was an increase in the amount we spent to retain employees that were not fully utilized on projects. This contributed 3% of the 4% margin decline in this segment. We continue to monitor our D&A cost and reduce them whenever possible. Our D&A costs decreased by about $740,000 in 2019 as compared to 2018. We had non-recurring charges in 2018 of about $466,000 primarily for litigation settlements, along with decreases in our facility costs in 2019 depreciation and labor related costs.Our cash fluctuates based on the billing and collection cycles associated primarily with our fixed price projects, as well as the timing of payments for goods and services. During the year, our cash flow from operations benefited primarily from the timing of payments from our customers. Our working capital declined by $2.4 million during the year, $1 million of this decline was due to the adoption of the new FASB lease accounting standards, and the remaining decrease was due to the net loss for the year. We believe our working capital is sufficient for our current level of operations and growth.So at this time, I'd like to turn the discussion back over to Bill and afterwards, we'd be happy to take your questions.

[Bill Coskey:]

Thanks Mark. One question being asked of almost every company today is how they are impacted by the coronavirus. This answer has multiple parts. First, to our knowledge and thankfully, none of our employees have contracted the COVID-19 virus as of today. As of late last week, our number of project hours and utilization of our personnel remained at very high level, consistent with what we've been seeing year-to-date.It's also important to know that ENGlobal is classified as an essential provider of critical infrastructure to the energy and defense industries. Therefore, our two fabrication shops continued working on the critical projects our office personnel in Denver, Tulsa and Houston are all under stay at home orders by local and state governments. However, we are allowed to travel to our offices for essential business, but the majority of our office staff is productively working from home. It's also important to know that we have seen no cancellations or delays on our currently booked projects as of today.In the last two weeks, we have booked around $2.5 million worth of new business, so we're still booking business. As it currently stands, we expect the impact from the coronavirus to be manageable for our company. The recent drop in crude oil pricing is much more likely to have a greater impact on our energy clients and their spending plans going forward. A very small amount of ENGlobal's business is derived from upstream exploration and production spending, which we expect will be the hardest hit. However, our customers' reaction to low commodity pricing will also spill over to the midstream and downstream areas that we mainly do operate in, and this reaction really cannot be quantified at this time.We're fortunate that the backlog, our biggest areas of backlog and opportunities are in the renewable energy, automation and government areas, which we expect will continue to perform better than the oil and gas sectors. In closing, I'd like to thank each of you and the rest of our loyal and patient shareholders. I know I speak for all of our management team and board of directors and the team that we are thrilled by our return to profitability and by the successful shift in our business that has laid the groundwork for an exceptionally successful period of growth and profitability going forward.With that, Mark and I are happy to take your questions.

[Operator:]

[Operator Instructions] We'll go first to Richard Smith, a Private Investor.

[Unidentified Analyst:]

For 2020, does the company expect to be profitable for the full year and does the company have ample cash to initiate a stock buyback program since your stock is pretty well? Thank you.

[Bill Coskey:]

I would have to say that prior to the events of the last couple of weeks, we were very bullish on 2020 and being profitable the entire year. We're going to have to see how the events of the last couple of weeks play out, and how that's going to impact our 2020. We do have a very high backlog rolling into 2020. Our challenge is keeping our people productive, while they're away from the office. So the longer the stay at home orders stay in place, the more challenging that's going to be.As far as buying back stock, we currently have between $11 million and $12 million of working capital, and we think that we are going to need that working capital this year for the projects that we currently have ongoing and some projects that we think we're pretty close to landing. So I don't think that stock buyback is in our cards at this point.

[Operator:]

[Operator Instructions] We'll go to [Mitchell Metson at Metson Capital].

[Unidentified Analyst:]

Just a quick question as it relates to the drop in oil prices, in terms for your bio-diesel, some of your alternative energy customers. Have you seen like reevaluations to weather the economics to make sense to get into the business given the low price of prevailing pricing in WTI? And what’s the thought process involved strategically for these customers as they look down the oil curve and pricing to make these decisions on these big CapEx projects?

[Bill Coskey:]

I would say as of today, we’ve seen no reevaluation of ongoing discussions we're having on renewable energy projects. They continue to proceed along and that can always change. But we're having good discussions on renewable energy projects. I guess much of the drivers are biofuel tax credits and things that are not always tied to the price of crude oil, although, competitor is crude oil produced [vehicle]. So that's not going to answer your question, Mitchell, as we've seen no drop off in the activity for renewable projects.

[Operator:]

There’s no other questions holding. I'll turn the conference back to Mr. Coskey for any additional or closing comments.

[Bill Coskey:]

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

[Operator:]

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.