ENGlobal Corporation

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, 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 access the replay by dialing toll-free on 877-481-4010 domestically or 919- 882-2331 internationally and referencing conference ID 42162. This replay will be available shortly after the completion of this event through 9 a.m. Eastern Time on August 12th, 2021. I would like to now inform all parties that your lines have been placed on the listen-only mode until the question and answer segment of this call begins. To ask a question in that segment, you will receive instructions from the operator. 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 InGlobal'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 Westerlin, our president, and myself. Darren is going to speak about our performance today, and Roger is going to speak to you about who InGlobal is today, how we deliver value to our clients, the markets we serve, and the outlook for those markets.

Eric? 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 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 six to nine 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 a 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 overruns due to Unanticipated price increases for raw materials and material in one of our large projects also contributed to it. The labor costs to maintain our essential workforce made up approximately one-third of the gross margin decline during the quarter and almost one-half of the decline 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 activities during the 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 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 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 two major components. Those components are safety and our vertically integrated project delivery model. I intentionally mention these in the overall priority because the leading driver of our value proposition is safety. In order to achieve our goals, we must be a safe company, and we are a safe company. We have an excellent safety performance record. We have logged over 22 million man hours with a lost time injury. This is very impressive and provides a solid foundation for growth. Even though we have a strong safety record, our goal 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 a safety awareness campaign called First Things First. This campaign keeps safety prioritized by highlighting our culture and responsibility, planning, integrity, and most family. Taking care of First Things First both on the job and our personal lives. This campaign was launched internally in June with a plan emphasis through quarter three and quarter four this year. So we will be watching for more as this is fully implemented. The other component of our delivery strategy is a vertically integrated project delivery model. So what does this mean? This means that we can create the most significant and sustainable opportunities within the market we're focusing on. The focus markets 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 the projected growth in all of these four 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 in global for many years, and we are well positioned with an experience and tenure 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 target specific energy clients, leveraging experience and cross-marketing resources. Control system engineering, programming, design, and field support all represent major opportunities for ENGs. The traditional oil, gas, and petrochemical market is another market we're serving through this vertically integrated strategy. We are seeing a strong signs of recovery in an increased number of opportunities as well as key market indicators as the oil price, the increased number of operating drilling rigs. Another factor is continued uplift for this market is the transmission of the products. These lingering demands for increased pipeline capacity requires our core services for both engineering and fabrication. These ingredients represent 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 strength in leadership is position and focus to do just that. Government service market continues to provide a stable base of opportunities. In addition to this project baseload, our government service leadership team is utilizing the vertical delivery model to identify 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 renewable markets continue to surface. The recent completed 27-module hydrogen plant has been a catalyst of experience. This project strengthened our relationship with our alliance partners and served as a springboard for additional opportunities of the same. The current pipeline of targeted Opportunities is over 500 million, which is indicative of the global attention of alternative fuels. With each of those markets, we self-perform approximately 80% of our scope. This is crucial because delivering the value mentioned earlier. Additionally, because of the performance method, we steer the ship, meaning we control our own destiny. high level of safety and predictable schedule, both which represent significant saving and value over our competitors. ENG is positioned with a strong and positive outlook on these markets because of vertically integrated strategy as well as the fact that we have a meaningful exposure to significant energy clients, deliver a predictable focus and larger spans across multiple markets. Arguably the most criticized are new strength and management team and business development teams. This group is integrated and aligned with each market strategy, which is creating an extremely focused activity and client engagement. Our new logo, website, and rebranding all tell a clear story of ENG. In addition to a fresh 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 least, it's 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 applying state-of-the-art technology to real-world problems that result in safe, practical, cost-efficient, and innovative solutions for our clients on a predictable timeline. We are committed to investing in the development of our team, both personally and professionally. In closing, ENG is well-positioned in key energy markets and in the government sector. We have planned and implemented and are excused from a proven winning strategy built around realistic goals, solid core values, and meaningful objectives.

Thank you, Roger. As you know, we have been transitioning and global from an engineering consulting firm to 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 DD team, heightening 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 advisors, 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 markets from time to time at the then market price. This is called an ATM facility. Under this facility, we've 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 if 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 innovative, 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 and 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?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset, if listening on speakerphone, to provide optimum sound quality. Once again, please press star 1 on your phone if you have any questions at this time. Please hold while we poll for questions. And we did have a question come in from Philip Oppenheimer. Philip, your line is live. Please announce your affiliation and pose your question.

I have two questions. Number one, could you be more specific about the bad debt reserve and if there's any recovery and who it might be and what the nature of it is? Was it an overbidding or just a bankruptcy? And the other is, Mr. Klasky used to be involved in the company. Is he no longer involved? Is he well? Is he engaged in any way?

Hello, Philip. This is Mark Hess. Yes, Bill is still the chairman of the board. He's still involved in the company in that regard. He's not involved in the company in the day-to-day operations, however. That falls to me, Roger, and Darren, as you've heard. With regards to the bad debt reserve, that is for a company called Lime Tree Bay. It's a facility that's down in St. Croix. It was acquired back in 2019, I believe, from the old Hovenza facility. and they wanted to restart that facility and we were working with them to get that facility restarted. Once the facility tried to restart, they had an EPA issue and were shut down and then subsequently suspended operations. This was in June. When they suspended operations, we put the reserve on the books. They subsequently filed for bankruptcy in July and so that's where they are today. It's very early in the process. It's very difficult to know at this point if there's any recovery of that reserve. We're hopeful that there will be. We are an unsecured creditor in a long list of unsecured creditors. I think it's If you read the bankruptcy filing, I think there's about 105 million of unsecured creditors, and we're one of the smaller ones. I don't know what else I can tell you about that at this point.

Thank you.

Thank you. Once again, ladies and gentlemen, if there are any questions, please press star 1 on your phone at this time. And there were no other questions from the lines at this time. I'd like to hand the call back to the management team for any closing remarks.

Well, thank you all for joining us today. Appreciate it. And I look forward to speaking to you in the future.

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.