ENGlobal Corporation (ENG) Earnings Call Transcript & Summary

Good morning, and welcome to the ENGlobal Second Quarter 2021 Financial Results Conference Call. Your host for this morning is Chief Executive Officer, Mark Hess. At the request of ENGlobal global today's call is being recorded and will be available for replay on the Investor Relations section of the company's corporate website at englobal.com. You may access the replay by dialing toll-free on (877) 481-4010 domestically; or (919) 882-2331 internationally and referencing ID 42162. This replay will be available shortly after the completion of this event through 9 a.m. Eastern Time on August 12, 2021. [Operator Instructions] At this time, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications.

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 I'll turn it over to ENGlobal's CEO, Mark Hess. Mark?

Thank you, Rick. Thank you, everyone, for joining us today. To begin this morning, you're going to hear from Darren Spriggs, our CFO; Roger Westerlind, our President; and myself. Darren is going to speak about our performance to date, and Roger is going to speak to you about who ENGlobal is today, how we deliver value to our clients, the markets we serve, and the outlook for those markets. Darren?

Thanks, Mark. Our revenues in the second quarter of 2021 were $11.1 million. This is down $6.8 million from the comparable period in 2020. Year-to-date, revenues declined $37.1 million -- declined from $37.1 million to $23.5 million. While we are seeing improvement in the broader energy market, our performance typically lags the broader market by 6 to 9 months. The decrease in revenues was due to completing several large projects, primarily in our Automation segment. These projects were included in our backlog at the beginning of 2020 and replacement projects have not yet been awarded. This has resulted in to current backlog of $11.7 million at the end of the quarter. Our gross profit in the second quarter was 0.7% compared to 13.7% for the same time period last year. On a year-to-date basis, gross profit declined from 15.4% last year to 4.6% this year. The decline is primarily the result of investing in our essential workforce, necessary to execute projects when awarded. The cost that we anticipated, unanticipated price increases for raw material to one of our large pipelines also contributed to it. The labor cost to maintain our essential workforce made up approximately 1/3 of the gross margin declined at the end quarter and almost 1/2 of the decline is year-to-date. SG&A costs rose by $2 million this quarter compared to last year and $2.4 million year-to-date compared to last year. This increase was primarily due to a $1.4 million reserve related to one of our customers who suspended activity during this quarter. Investment in key staff to support our enhanced business development activities is most of the remainder. The company recorded a net loss of $4.3 million in Q2 compared to $68,000 of net income last year. And a loss of $4.2 million year-to-date compared to net income of $1.2 million last year. The decrease in net income is primarily a result of the decrease in sales volume, the reserve for bad debt, both during the quarter and investment in our people as previously mentioned. I will now turn it over to Roger.

Thank you, Darren. I would also like to extend my welcome and appreciation for those who are on the call today. Mark, mentioned, delivering value in the introduction, and that is our complete focus as a company, delivering value. Our strategy centers around 2 major components. Those components are: safety and our vertically integrated project delivery model. I intensely mentioned this an overall priority because the leading driver of our value proposition is safety. In order to achieve our goals, we needs to be safe for the company, and we are a safe company. We have an excellent safety performance record. We have done over 22 million man-hours with a lost time injury. This is a very impressive -- this is very impressive and provides a solid foundation for growth. Even though we have a strong safety record of goals is to even be better. We're increasing our effectiveness through all our combined safety programs and initiatives. But in those that we are building on our zero impact program, and we have created the safety awareness this campaign called First Things First. This campaign keeps safety priorities as by highlighting our culture and responsibility, planning integrity and most family. Taking care of first and first, both on the job and our personal lives. This campaign was launched internally in June with the planned emphasis through quarter 3 and quarter 4 this year. So we'll be watching for more when this is fully implemented. The other component of our delivery strategy is a worthy integrated project delivery model. So what does this mean? This means that we can create a more significant and sustainable opportunity within the market we're focusing on. The focus markers are automation integration, oil, gas and petrochemicals, government services and renewables. We have specifically chosen those market focus to closely align with our 35 years of legacy experience and client base with a projected growth in all of these 4 focused markets. We have well over 200 MSAs in place resulting from serving our customers with safe, comprehensive and timely projects. Automation and integration has served as a core offering for ENGlobal for many years, and we are well positioned with an experience and tenured staff along with several key alliance partners like Schneider Electric, Rockwell Automation and Wonderware. The global automation market is forecasted to grow to nearly $6.5 billion by 2027 representing a combined annual growth of almost 6%. This market was valued at $3.6 million in 2020. So the growth is very real. The opportunity that exists within this sector alone is monumental. Our delivery model allows us to take specific energy clients, leveraging experience and cross-marketing resources, control system engineering, programming, design and field support will represent major opportunities for ENG. The traditional oil, gas and petrochemical market is another market reserving to this vertically integrated strategy. We are seeing strong signs of recovery in an increased number of opportunities as well as key market indicators as the buying price, the increased number of operating drilling rigs and other factors has continue to uplift this market is the transmission of the products. These lingering demand for increased pipeline capacity requires our core services for both engineering and fabrication. These ingredients we present the recipe for future growth, not only production and refining but in pipeline transmissions as well. Our focused approach, combined with our broad offering across these markets is a solid foundation to capitalize on opportunities. Our strengthening leadership is position our focus to do just that. Government service market continued to drive a stable based over opportunities. In addition to this project-based load or government service leadership team is utilizing the vertical delivery mobility that provides opportunities within the government. Following the same strategy, providing more sustainability in the surface opportunities and cross-pollinating our strength to those opportunities. Opportunities within our renewables work has continued to surface. The recent completed [ 27 ] modular hydrogen plant has been a catalyst of experience. This project strengthen our relationship with our alliance partners and serve as a spring for additional opportunities of the same. The current pipeline of targeted opportunities is over $500 million, which indicates -- which is indicative of the global retention of alternative fuels. With each of those markets, we self-perform approximately 80% of our scope which is crucial because delivering the value mentioned earlier -- to deliver the value I mentioned earlier. Additionally, because of the performance [indiscernible] we steer the ship, meaning we control our own destiny, delivering a high level of safety and predictable schedule, both which represent significant savings and value over our competitors. ENG is positioned with a strong and positive outlook on this market because of vertically integrated strategy as well as the fact that we have a meaningful exposure to significant energy clients that deliver a predictable, focused and larger spans across multiple end markets. Obviously, the most critical is our new strength in management team or business development teams. This group is an integrated and aligned with each market strategy, which is creating an extremely focused activity and client engagement. Our new logo website and re-branding will tell and a clear story of ENG. In addition to the first new look, it provides a solid platform for profitable growth and a solid cash flow. In addition to growing our base business, we are also equally focused on improving margins, expanding service offering and remain disciplined to our core values. Our high-value low-cost engineering alliance is another component that we have successfully engaged and implemented. This partnership is crucial in a competitive market that allows ENG to leverage resources and focus on more opportunities. At least but not certainly the last, is our people. ENG is fortunate to have some of the brightest talent in our industry. I believe that one of our differentiating factors is our understanding and use of technology in both processes and automation. Our team is knowledgeable and experienced at the following state-of-the-art technology to reroll problems that results in safe, practical, cost efficient and innovative solution for our clients on a predictable time line. We are committed to investing in the development of our team both personally and professionally, including ENG is well positioned in key energy markets and in the government sector. We have planned and implemented and our exclusive approval winning strategy build around realistic goals, solid core values and meaningful objectives.

Thank you, Roger. As you know, we have been transitioning ENGlobal global from an engineering consulting firm for this vertically integrated complete project delivery company in response to our customers' needs. And since the recent changes in senior management, we have accelerated that transition by strengthening our management team and BD team, tightening accountability, increasing the sense of urgency among other things. I'm also encouraged about the increased quality of the opportunities in our pipeline, particularly in the traditional oil, gas and petrochemical and renewables markets. In addition to the tremendous work Roger has been doing operationally, we have been busy positioning the company to maximize these opportunities as they are awarded. Working with our financial advisers. This year, we filed a shelf registration statement with the SEC, which assists the company's capital raising activities. Under that shelf registration statement, we received approximately $19 million in a registered direct offering. We also put a facility in place where we may sell shares up to $25 million into the market from time to time at the then market price. This is called an ATM facility. Under this facility, we received approximately $1.5 million this year. In addition, in July, we were notified by our bank that the SBA has forgiven our PPP loans of approximately $5 million. This will be recognized in the third quarter. As a result of these activities, strengthens our balance sheet. We ended the quarter with about $20 million stronger in our net assets and working capital, adjusting for the PPP loan forgiveness. So at the end of the day, ENGlobal is a company with a very strong balance sheet with almost no debt, access to our working capital facility and the capital markets as needed. This is very important to our customers as it provides them with greater comfort that we have the financial strength to complete their sometimes very complex projects. Most of the technology we deploy today is through our technology partners. We continue to seek complementary technologies by adding technology partners or acquiring our own technology. To accompany the changes that ENGlobal has been going through over the recent past, pivoting from an engineering consulting firm to an innovated complete solutions provider working in both the traditional hydrocarbon energy sector and now more in the emerging renewable energy space, we are refreshing our image, as Roger mentioned. We now refer to ourselves as ENG instead of ENGlobal. We have a new, more progressive logo, a new, more progressive website that better portrays what ENG is today in our capabilities. If you haven't seen our new website, I encourage you to take a look at it at www.englobal.com. This concludes our prepared remarks, and I'll now turn it over to the operator for questions. Operator?