ENGlobal Corporation (ENG) Earnings Call Transcript & Summary

Good morning, and welcome to the ENG 2022 Third Quarter Financial Results Conference Call. At the request of ENG, today's call is being recorded and will be available for replay on the Investor Relations section of the company's corporate website, www.englobal.com. You may access the replay by dialing toll-free (877)481-4010 domestically or (919)882-2331 internationally, and referencing conference ID 46868. This replay will be available shortly after the completion of this event through 9 a.m. Eastern Time on November 15, 2022. [Operator Instructions] At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications. Rick, over to you.

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. Presenting on the call today will be Darren Spriggs, ENG's CFO; Roger Westerlind, ENG's President; and Mark Hess, ENG's CEO. Following the presentations, Darren, Roger and Mark will be available for questions. And now I'll turn it over to Darren Spriggs, Darren?

Thanks, Rick. I would also like to extend my welcome and appreciation for those on the call today. For the quarter, we reported approximately $13.1 million in operating revenue, a 121% improvement compared to $5.9 million for the same period last year making this the fourth consecutive quarter revenue has increased. Gross profit margin increased 18.8% from negative 13.7% to a positive 5.1%. This increase is attributable to the improvement in underutilized staff, which is lower by $766,000 compared to the same period last year. Our overall gross margin is driven by relative sales volumes from our different lines of business. Although our gross margin percentage may vary from quarter-to-quarter depending on the composition of the segment revenue, we expect our margins to continue to improve. SG&A decreased $169,000 compared to the same period last year. We continue to keep an eye on our overhead costs. We held our fixed cost in line with previous quarters, notwithstanding the recent acquisition and the start-up costs of our 2 new facilities. Operating loss improved by $1.7 million to $2.3 million from $3.9 million. For the quarter, we recorded a net loss of $2.3 million or a negative $0.07 per share compared to a net profit of $2.4 million or $0.07 per share last year. Last year's net income of $2.4 million included nonrecurring other income of $6.4 million, which consisted of $5 million for our PPP loan forgiveness and $1.4 million foreign employee retention tax credit. Backlog increased by $2.9 million to $15.7 million compared to $12.8 million at the end of last year. It also increased by $7.3 million compared to $8.4 million at the end of the third quarter last year. The improvement in backlog is an indication that our recovery is continuing and that the key strategic initiatives we implemented last year are producing the desired results. We expect our bookings to be significantly higher in Q4 compared to the previous quarters and to carry a healthy backlog into 2023. Our bookings increased $6.3 million for the quarter to $9.6 million from $3.3 million for the same period last year. For the year, we have been awarded 106 POs for new work with an average PO value of $227,000. For the quarter, we received 35 POs for new work with an average value of $181,000, the largest being the recent $2.6 million task order from the $20 million contract with the Army Corp Engineers. And this was the only press release issued during the quarter for new awards. For the first 9 months of the year, revenue, gross profit and operating income all improved compared to the same time period last year. Revenues increased by $2.4 million to $31.8 million from $29.4 million. Gross profit increased by $1 million to $1.3 million from $300,000. Operating loss improved by $2.3 million to $7.3 million from $9.6 million. Our working capital decreased by $9.6 million from $26.3 million to $16.7 million. The change in our working capital was primarily related to the loss for the year of $7.5 million. We are expecting to increase our working capital early next year as we generate positive cash flow when we return to profitability. We are pursuing additional financing alternatives in the event we need additional working capital to fund our current operations. We believe our cash on hand, along with internally generated funds, availability under the company's revolving credit facility and other sources of working capital will be sufficient to fund ENG's current operations and expected near-term growth. And now to you, Roger.

Thanks, Darren, and good morning, everyone. Our strategy for the chosen market is picking up speed. As discussed before, ENG's focused markets are oil and gas and petrochemicals, where we provide project management, engineering, procurement, fabrication and also field construction services for train -- midstream -- mid and upstream clients. Our automation group is focused on control system for both the public market as major international companies, the DOE and DOD segment. Our energy and renewables is focused on a mix of larger public operators as well as developers. And as Darren mentioned and announced before, our GTL is a gas to liquid for standard and flare gas is picking up speed. We have several opportunities, especially in the Middle East area. Since we last spoke, ENG has in O&Gs, they have petrochemical signed, a number of major MSAs with major international companies, completed our first construction contract. And finally, we see a lot of opportunities created by Doug and his team. Kevin, focusing on automation for government and industry, and his team is focusing on the integration and automation market and making steady progress, both with the DOD, DOE and major operators. Energy & Renewables under Marc delivered our first renewable diesel plant for Seaboard as earlier announced. This plant was successfully handover in late October. We also finalized our feed estimate for a new sustainable airplane fuel plant in North Dakota in end of October. Client is working on funding, and the award is delayed to 2023. Gas to liquid [indiscernible] is making headway, especially Middle East. Several promising opportunities is currently under negotiations. As Darren mentioned, we signed a new lease in Brookshire, West of Houston for our state-of-the-art fabrication facility, which we announced before. We also got our field service organization in Monahan, which is 45 minutes roughly west of Midland, Texas, which is really promising for field service and roustabout crews. Since we last spoke, we have booked a number of new work. A few examples. If you start with oil, gas and petrochemicals, we're doing a solar farm in Texas. We have signed an MSA with one of the largest IOCs. We generated immediately a construction work in the shale. We continue working with other major IOCs. We have been awarded EPC project for meters -- for metering of upgrades. We were also awarded engineering for methane upgrades, the fabrication of vessels and compressor station upgrades. In Energy & Renewables, we have expanded our strategy as earlier discussed to also service the chemical companies and the downstream opportunities. Of course, we are still focusing on the renewable diesel and especially the sustainable airplane fuel segment, which is very active with several opportunities. In automation, DOD, as Darren mentioned, we have been awarded by the Army Corps of Engineers. We were awarded Friday 2 remote instrument enclosures for a major IOC here in Houston. We continue working with SCADA system PLCs for several clients. As also mentioned for GTL, we have several 50-barrel proposals out, which we are very hopeful to receive the PO soon. We're using our CRM to forecast the rolling 90 days. A few highlights in the oil and gas and petrochem group. We have some 30 hard bids outstanding with a total value of approximately $50 million. Market is picking up. Several new MSAs are signed in place, and it looks like a very strong 2023 for us. Automation integration, both for IOCs and DOD and DOE has several opportunities. We have some 60 proposals out, valued just under $100 million. For Energy & Renewables, we have a mix of chemicals and renewable projects, some 20 prospects valued totally over $100 million. And lastly, and not least, gas to liquid, as said before, mainly in the Middle East, for major operators some 10 opportunities with a total ENG value of plus $100 million. Thank you.

Thank you, Roger. Just as a reminder, several years ago we started this journey to redefine ENG. Since that time, we have a new leadership team. We've rebranded. We've moved our Houston office. We've expanded our capacities and our capabilities with field construction and field services in West Texas as Roger and Darren both mentioned. To realize the benefit of these investments, we've had to modify or sign many new MSAs, providing for the new service offerings that we now have. While client acceptance has been a bit slower with these new services, we've started executing these for our current and new clients. Additionally, we acquired a new GTL technology, as Roger mentioned. We are now working to complete the designs. I'm pleased with where we have been able to accomplish over the last 20 months or so. We are now very well positioned to take advantage of the increased workload we expect in West Texas and other basins as well as our renewable business and other business units. Darren mentioned our bookings were on the upswing, and we have increased our revenue each quarter over the last 4 quarters. With the increase in revenue comes increase in utilization of our people, which helps our gross margins. And while holding our fixed costs steady, points to profitability in the near future. We have increased our backlog 4 out of the last 5 quarters and have made a healthy start on Q4. Q4, the start for Q4 will help the Q4 revenue, and it will also give us a much better start to the new year relative to where we started this year. Looking forward into 2023, we should see activity in our oil and gas segment increased significantly. The small field service and construction projects we are working on in 2022 should come at a quicker pace and in larger amounts in 2023. There's still a lot of activity in the renewables and green energy market. We will continue to be relevant in these markets as well as other markets, as Roger mentioned. The continual improvement of the industry outlook for both traditional oil and gas and green energy should continue for the foreseeable future, which will be a significant tailwind for us. We have a long list of opportunities in each of our business units. Roger just touched on many of them. And we expect to close on many of these in the coming months, which will continue to increase our bookings, our backlog and our revenue. And finally, today is Election Day, make sure your voice is hurt. I'll now turn the call over to the operator for questions.

[Operator Instructions] Your first question for today is coming from Jeffrey Campbell at Alliance Global Partners.

I'm just going to mainly ask some questions to probe some of this a little bit more. The third quarter '22 revenues grew quite nicely quarter-over-quarter, but the gross profit declined approximately 50%. I just wondering if you had some color on this quarter's gross margin result and how you think this is going to trend over the next several quarters.

So Jeff, you had mentioned that a decline. We're comparing it to the second quarter or third quarter of last year?

No, second quarter, quarter-over-quarter.

Okay. And like I mentioned in the script earlier, those -- our gross margin or gross profit is driven by the composition of the segment revenue and the utilization of our people. So that's been improving. And with the Q3, we had some projects that had low gross margins in our OGP segment in Q3 compared to Q2. And so I think that was driving most of the decrease.

Okay. Good. So it was essentially mix?

Yes.

Okay. Darren, you mentioned and Mark reiterated expectations for meaningful booking growth even in fourth quarter 2022. Are these bookings expected to be from the ongoing business lines? Or does this start to represent contributions from new initiatives such as the Permian expansion?

It's coming from both. So some of it is from the expansion in the Permian, both in field services and the construction services, but there's also increased bookings from our current business. Does not include anything for GTL though, by the way.

Yes. Well, I was going to get there. But before that, can you add a little color on the new fabrication facility in Brookshire? Is this an expansion levered to any of the specific new lines of business such as the small-scale gas-to-liquids units? Or is this more just an expansion of your broad fabrication capacity?

The Henderson facility, we start with, call it the old one, it's not optimally set up for doing modules. And for example, crane capacity space is very limited. So the strategy forward is the new facility will do bigger modules. We get our MSA signed actually yesterday. Sorry, SME. Thank you. [indiscernible]. So the strategy forward is for Henderson, the existing older facility will do the smaller pipe racks, nicks and nacks and our Brookshire facility, the new one, will do the modules, for example, including GTL.

Okay. That's very helpful. Regarding the small-scale GTL opportunity, I just want to know, is the 12- to 18-month time line to full capacity still intact? And do you still expect to have testing ready sometime in first half '23?