ENGlobal Corporation (ENG) on Q2 2022 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the ENG 2022 Second 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 46147. This replay will be available shortly after the completion of this event through to 9:00 a.m. Eastern on August 11, 2022. At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications. Rick, over to you.
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. 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?
Darren Spriggs: Thank you, Rick. I would also like to extend my welcome and appreciation for those on the call today. For the quarter, we showed improvements in all our income statement metrics compared to the same period last year. Our 2Q results are in line with the trend we have been seeing for the past 3 quarters. We expect this progress to continue in the second half of the year and into next year. Highlights for the quarter compared to the same period last year include: revenue increased by $276,000 to $11.4 million; gross profit increased by $1.3 million, primarily due to increased utilization of our staff and reduced expenditures on proposals. Excluding the $1.4 million bad debt write-off last year, our SG&A remained comparable with last year. Net loss improved by $2.7 million to a $1.5 million loss -- net loss or a negative $0.04 per share. Backlog increased by $7.4 million to $19 million for the quarter. All these positive signs are an indication that the investments we made last year are starting to pay off. As a reminder, last year, we completed a rebranding campaign, relocated our corporate office to be closer to our client base, redesigned our website and hired key business development personnel with strong relationships to clients in the industry. We also completed the acquisition of Calvert Energy and began our field services business in the Permian Basin in Q2, which Roger and Mark will elaborate on later. Our cash balance was $14.1 million as of the end of the quarter, a decrease of $5.1 million over last year's balance of $19.2 million. Our working capital decreased $6.9 million from $26.3 million to $19.4 million. The change in cash and working capital was primarily related to the net loss of $5.2 million for the year. We believe this cash on hand, along with internally-generated funds, availability under our 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.
Roger Westerlind: Thank you, Darren, and good morning, everybody. For us, who lives in the southern part of U.S. we know that heat is an issue. For all our people across our business unit, heat has been a focused multiple initiative across all sites with a focus on hydration and stress management. I'll start with oil and gas operations. Our Houston office's morale is high, the high utilization of project manager, engineering, procurement. A lot of project is going on. We're building a multiple projects and adding additional people to the team. We are continuously adding additional clients, new equipment have been purchased like new scanners, fabrication. We're working through our backlog with a goal to increase that to the end of the year. We're setting up a stainless fabrication in our port office facility for clients. Space becomes more of a daily issue. We intend to sign additional lease for extending our module fabrication in the West part of Houston. Several inquiries, both from Denver and Tulsa received and several bid works have been done on more schedules. We continue refining our MSAs. We have over 150 active MSAs. As Darren mentioned, we are starting our West Texas operation and rest of bus crews is active. And we have -- we're bidding additional bids for pump booster stations. The modern office, which Darren mentioned, the ribbon cutting ceremony is scheduled for October 22. On the project side, we're building additional booster stations, expansion of pipe racks, separators, engineering services, flare studies among many other projects. For the EPC opportunities for EPC, work in oil and gas, we have received this week bids for compressor stations, process studies infrastructure. For our energy and renewables, the focus remains on sustainable airplane fuels and renewable diesel as a core pillar of our activity forward. Our strategy is to be among the leading engineering, procurement and fabrication for renewable diesel and sustainable airplanes. The talks are ongoing with several new players in North America regarding these projects. Our main project, as reported earlier, is to build a new grassroot sustainable airplane fuel plant in North Dakota. We expect to get engaged in an EPC agreement in Q4 this year. A large portion of that plant will be built in our new fabrication shop in West Houston. We're also active in waste to energy in hydrogen and methanol. We expect a great result in this. For our government service, we have been awarded from the Tulsa Public School, a SCADA system. We are working on several other bids in this area. Our automation group is also very active with several main clients. The integration, we continue our fabrication of the trailer program. We're hiring key people and training people for this. And generally, activities looks really good for the later part of this year and continuing in 2023. Over to you.
Mark Hess: Thanks, Roger. As you've just heard, there are many opportunities in our business that we are very excited about. I'd like to highlight some of the progress that we've made over the last 12 months or so. Through the efforts of our team, we have steadily increased our backlog from $8.4 million at the end of Q3 last year to $19 million -- over $19 million at the end of this quarter. That represents over 120% improvement in our backlog. At the same time, we have steadily increased our revenue over the last 4 quarters from $5.9 million in Q3 of last year to $6.9 million in Q4, $7.3 million in Q1 and $11.4 million this quarter. The Q2 increase over Q1 this year represents a 56% sequential increase. Our gross profit increased this quarter, as Darren mentioned, due to our ability to utilize our people more efficiently and reduce expenditures on proposals, as he mentioned. This is a testament to the quality of the people that we have attracted and retained throughout COVID and during our rebuilding process. We could not have achieved these results without our people, and I could not be more proud of our employees. As you've heard from Roger, our prospects for awards in Q3 and Q4 of this year look very good. So our outlook for the remainder of the year also is very positive. In addition to our core businesses that Roger touched on, we announced in May that the acquisition of Calvert Group Belgium, which has a license for proprietary small-scale gas to liquids technology, utilizing a gliding arc plasma in a modified process. This acquisition fits well within ENGlobal's core capabilities of engineering, design, fabrication, automation and commissioning, but more importantly, broadens our offerings to now include a technology solution. We are currently incorporating this technology into standard GTL trains of various sizes, ranging from 25 barrels per day to 100 barrels per day designed to process 250,000 to 1 million standard cubic feet of gas per day. We expect to complete the 25-barrel per day design soon and deliver one mid next year due to lead times on major components, and we'll begin working on larger 50- and 100-barrel per day designs in the coming weeks. We expect these trains to sell for between $4 million and $9 million per train and we expect that we could build -- that we could produce as much as 1 per week when we are in full production. Last year, over 143 billion cubic meters of gas was flared worldwide, according to the Global Gas Flaring Reduction Partnership in World Bank. One solution to reduce the amount of gas flared each year is to convert it in an economical way to synthetic fuel, diesel or naphtha, and we believe our GTL plants will accomplish this. Our initial approach to distribution of the GTL trains is through partnerships with service companies and countries with the highest levels of gas flaring. To date, we've signed an exclusive marketing agreement with OiLSERV, which we announced in July, covering the countries of Iraq, Algeria, Libya and UAE. These markets alone represent 34 billion cubic meters of gas flared per year or roughly 1.2 trillion standard cubic feet of gas flared annually. As you can imagine, the market for this solution is very large. I'm pleased with where we are today and what our outlooks are for the near future and the coming years. I think we have a very strong base to build from, and we have a lot of opportunities in our pipeline. So at this point, I'd like to turn the call over to questions. Operator?
Operator: Your first question is coming from Jeffrey Campbell of Alliance Global Partners.
Jeffrey Campbell: Congratulations for the upward trend in the business. First question I wanted to ask was how is the North Dakota location chosen for the plant that Roger described in his opening remarks?
Roger Westerlind: Sorry. Can you repeat that?
Jeffrey Campbell: Yes. I said, how, maybe I should say why. I'm just wondering how or why North Dakota became the location for the plant that you described in your opening remarks, the one that you said, I think it's going to come online in the fourth quarter.
Roger Westerlind: I think a combination of feedstock and that the operator owns the land.
Jeffrey Campbell: Okay. What's your current forecast or what's the range, if you prefer, for progressing from the first GTL plant that you've identified as happening sometime fairly early next year. And the 1 unit per week scale manufacturing guidance? Just trying to get a sense of what kind of time you see for that rollout.
Mark Hess: Yes. I would say within 12 to 18 months, we could be on that pace.
Jeffrey Campbell: Okay. That's helpful. Sticking with the GTL. My impression -- initial impression was that Oman was going to be the center of activity for these new modules. But the recently announced marketing deal with OiLSERV certainly expands the potential footprint for their sales. I was just wondering, was this seemingly rapid expansion of interest a surprise? Or was this an expectation?
Mark Hess: No, it was an expectation. We -- in our diligence, we met many of these players.
Jeffrey Campbell: Okay. And then finally, we recently saw that the EPA is intensifying scrutiny in methane lease in the Permian with an eye supposedly with an eye for imposing penalties for infractions. I understand the logic of first focusing on the Middle East due to the high level of commissions enforcement in the area. I was just wondering, have you had any contact with any potential future of Permian customers? Is that an area of interest over time, particularly now that you're manning your presence in the area?
Mark Hess: Yes. We have had contact with customers in the United States, not just in the Permian, but in other places. Obviously, the economics of the wells in the United States are different than the economics of the wells overseas. U.S. is #4 country when it comes to flaring annually. The -- and as you mentioned, the more scrutiny and the more regulations that get promulgated on flaring will only make this solution more attractive. But I think we're going to have to come up with a different marketing philosophy and solution for the clients here in the United States due to the well life and the gas produced on wells over their life. So we're going to have to look at that. But I do think that the market -- there is a big market here, and I think we can satisfy a significant portion of it.
Jeffrey Campbell: And just to follow up on that, I think you just touched on it, but when you're talking about the different economics, you're talking about maybe longer lives, conventional wells in the Middle East as opposed to the live hard and die young unconventional wells that we have here. But if I remember correctly, there was at least schematically a mobile or a mobile solution for this GTL that you're building. So is that what you mean when you say you need a different solution, you have to develop something with mobility as opposed to maybe you're going to stick and stay in one place for a longer time in the Middle East?
Mark Hess: Well, the way we're designing these units is that -- I wouldn't call them mobile, but they're transportable. They're skid-mounted trains. They're on -- I don't remember how many skids for a small 25-barrel train. I think there's 10 or 12 skids. And so they are placed at the well site. And so they can be picked up and moved, but it's not mobile in that you can mount it on the back of an 18-wheeler drive it from flare to flare. So -- but what I'm talking about is more the economics of how that product is sold into the marketplace. Whether it's done as a sale or a lease or a day rate, I don't know exactly how that would be. We have to explore that.
Jeffrey Campbell: Okay. So it's less to do with something on the hardware side, more on the marketing side? Got it.
Mark Hess: Correct.
Operator: Your next question is coming from Rob Brown of Lake Street Capital.
Rob Brown: First question is just on the kind of the pipeline for the back half of the year and into next year. I know you said it's improving quite a bit. Could you just give us some characterization about sort of the opportunities you see? Is it across the board? Or are there certain markets that are doing better? Maybe just a sense of how that pipeline is shaping up and what it consists of.
Roger Westerlind: The strategy, if you go back to maybe mid-next year when we invested in oil and gas, petrochemical was back on kind of seeing the future of the oil price. It was, as we remember, very low, and we took the opportunity to invest. So we see that simply paying off that the not mention, not forgotten XTO to Oxy, obviously investing heavily. Proof of that is just what we have talked about, but also then serving our clients, for example, setting up our West Africa -- sorry, West Texas operation so we can supply an EPC solution to the XTOs, to the Oxys, to the Chevrons. But also, the renewable is coming strong. So in my humble view, I think the segment we selected mid-last year is all firing.
Rob Brown: Okay. Great. And then on the renewable business, you've got a number of projects you said. What's your sense on the new energy bill? Will that accelerate these projects? Are there sort of incremental projects you see there? And maybe -- is there -- could you just go about the opportunity from that bill?
Roger Westerlind: Absolutely. USDA have allocated, as you probably know, $3 billion. So the North Dakota project has applied for the USDA financing, which is capped to $250 million. I think the overall here, as we know, if we take sustainable airplane fuel, we're going to shift from jet to SAF, roughly 30% by 2030, and if you translate to that number of plants being built, that is many, many. We're talking well over 50 plants. The issue is that the field SAF is not just like solar was in the beginning, competitive when it comes to compare with the jet fuel. So I think what we see is a lot of interest, and I think we're working really hard on -- really try to gauge who of those developers and operators will really do it. And I think the North Dakota has done a great example of somebody we believe in would be able to award an EPC contract. But there is many others. If you talk to Haldor Topsoe Services, one of the technology provider, they have 120 opportunities in their pipeline, which we are close connected to. I think the that was about. I don't think it will be as quick as maybe the government things are going to happen. These plants are small refineries, and they are quite complex, quite expensive to build. If that answers your question.
Rob Brown: It did, absolutely. I'll turn it over.
Operator: Your next question is coming from Alan Oakley, who is a private investor.
Unidentified Analyst: Great. Congrats on the trends on revenue margins and backlog. Great to see it. Number of employees today and if you could tell me the billable versus overhead and then the utilization on the billable?
Mark Hess: So I think -- well, we're hiring every day. So I think currently, we're at about 300 employees, of which I'm going to guess 260 are billable and our utilization rate is somewhere around 90%, I would guess. But we work -- we also have high-value, low-cost engineering centers that we work with. So not all of our revenue is generated from our employees, right? And we also work on fixed price work, more and more of our work is fixed price work, in which case we can leverage our employees greater than we can with just T&M work. A lot of between revenue and employees.
Unidentified Analyst: And on the backlog at $19 million, what's the target margin that -- looks like you're a little over 11% for this quarter, what are you targeting on that $19 million backlog?
Mark Hess: We're at about 11% or 12% probably on the backlog.
Unidentified Analyst: Okay. And then the on-site construction services this quarter, was there any revenue from that in these numbers? Last quarter, you -- I think you indicated that would be a meaningful number this quarter. Has that been pushed back to kind of third quarter or fourth quarter?
Mark Hess: Yes. We haven't seen any -- in this quarter, we didn't have any construction services or field services included in our numbers. And so we do expect both of those in the third and fourth quarter.
Unidentified Analyst: Okay. And then the $100 million renewables plant that was mentioned previously, did I hear that correctly that, that contract will be signed in the fourth quarter?
Roger Westerlind: That -- it's well above $100 million, and yes.
Unidentified Analyst: Okay. So you feel certain that will be signed in the fourth quarter. Is that still subject to investment decision by the client?
Mark Hess: Absolutely.
Roger Westerlind: Correct.
Unidentified Analyst: Okay. And then the small gas, scale gas, it looks like you bought it for $937,000. Some of that was a cash, some of stock issuance. Are you able to talk about the contract with OiLSERV, the financial impact of that contract?
Mark Hess: Well, the -- what I would focus on with OiLSERV is the amount of opportunity that they represent. So OiLSERV services currently in those 4 countries that I mentioned. And they have many clients within those countries that are very interested and have initiatives in place to reduce their flaring and they're getting penalized for their flaring. And they're being -- the wells are being choked in because of their -- because of the flaring. So in order for them to produce more, in order for them to reduce their flaring penalties, they have to have a solution. So to me, what the marketing agreement with OiLSERV represents is the total market availability. Now granted, we're not going to be able to service 1.2 trillion cubic feet of gas a year. But that is -- I mean we're not going to capture all of that, OiLSERV is going to capture all of that. But there's just a huge marketplace, and we have a number of opportunities within that market already on the table. So to me, the way to look at it is how many of these plants, how many of these trains can we build and supply to OiLSERV to satisfy that market.
Unidentified Analyst: Okay. A couple of questions on liquidity. $14 million in cash today, when do you expect to collect the payroll tax receivable of $2 billion? Is that a third quarter, fourth quarter?
Darren Spriggs: We're expecting to collect on that -- get that from the IRS in the third quarter.
Unidentified Analyst: Okay. Great. And then...
Mark Hess: Let me just add to that, Alan, that we expected to get that this quarter. And we received one in the -- was it the first quarter?
Darren Spriggs: First quarter.
Mark Hess: We received one in the first quarter. We expected one in second quarter, and so that didn't come up. So to some extent, we are beholden to the IRS for that payment.
Unidentified Analyst: Okay. That certainly would help on liquidity. So -- and then on the revolver, it's now gone current. I think it matures May '23 as I read it, it's really somewhat restrictive. It's a borrowing base. And so you really don't have access to the full $6 million. Have you had any discussions with them about potential renewal increase and maybe less restrictions? I mean, you've got $14 million of cash in the bank there. Is that -- what do you see on that?
Darren Spriggs: Yes. So we've had preliminary conversations with our lender about increasing that. So those are ongoing conversations, but that's something we're looking into and considering. And obviously, we want to increase that availability under our revolver.
Mark Hess: And Al, I know that you've sent me some suggestions and observations, and I appreciate that. And obviously, we're looking into that.
Unidentified Analyst: Great. And then last question, I apologize. But the last quarter, I think your new business number that was in the margin was $859,000. I wrote it down, I may not have written it down correctly. This quarter, you said you reduced that. Could you confirm the $859,000 from the last quarter? And then what is the number this quarter?
Mark Hess: Not familiar with what you're asking, Alan.
Unidentified Analyst: I guess in your gross margin, I guess it's the new business proposals where you're spending a lot of money making off replied RFPs. Seemed like last quarter, you referenced an $800,000 to $900,000 number, but I think you said that number was less this quarter, but I didn't hear a number.
Darren Spriggs: Yes. So the proposal was of this quarter, I think it was approximately $450,000.
Operator: Your next question is coming from Jeffrey Campbell of Alliance Global Partners.
Jeffrey Campbell: First one was just regarding the backlog. What's the time length of the backlog? Is it the standard 12 months? Or is there a different timing on it? And do you see that increasing over the next 12 months with all the projects that you -- potential projects that you're talking about?
Mark Hess: I think -- I mean I don't know of anything off the top of my head in our backlog that we wouldn't complete in 12 months. And so -- and the answer to your second question is absolutely, we're trying to push our backlog up every month. That's a big focus for us. Bookings, our booking ratio or booking-to-burn ratio for this year so far is over 1.4%, and we really want that to increase. So that's our big focus.
Jeffrey Campbell: Okay. And regarding the OiLSERV discussion, just not to put words in your mouth, but it sounds like that the real value there is that they already have a business and they've got a lot of relationships, and you don't have to reinvent the wheel in those markets, which probably would be expensive and time consuming. But just wondering, of the countries that are -- that you've identified, is there any one in particular that you think can have a tendency to move on units a little bit sooner than later? Or is -- there are not really any big distinguishment between one country and another?
Mark Hess: I think Iraq has the greatest opportunity. I mean they're the second largest flaring company -- country in the globe. So they have the biggest opportunity. We have some opportunities in Iraq that we're working with OiLSERV on right now. And I don't want to downplay Oman. So as you mentioned earlier, we've been working with a company in Oman to do the same thing that OiLSERV is doing in the other countries. And so that may actually be the first place that we put a unit.
Operator: It appears we have no further questions in the queue. Okay. I will now hand back over for any closing remarks.
Darren Spriggs: No closing remarks from ENG. Thank you. Thank you for your time. Thank you, operator.
Mark Hess: Thank you.
Operator: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
