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Furmanite Corporation (NYSE:FRM)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET

Executives

Joseph E. Milliron – President and Chief Operating Officer

Charles R. Cox – Chief Executive Officer

Robert S. Muff – Chief Financial Officer

Analysts

Matt Duncan – Stephens Inc.

Tristan Richardson – D.A. Davidson

Operator

Good morning and thank you for joining the call. Before I introduce today’s speakers, allow me explain the format of the call. For your convenience, we have a set of slides available on our website that will closely follow the speakers’ presentation this morning. Following the presentation today, we will invite questions from active analysts and fund managers. At that time, I will explain the procedure for indicating that you wish to ask the question. The questions will be taken in order. In the interest of time and to allow everyone an equal opportunity, we request that you ask your primary question and limit yourself to one follow-up question, so that the next participant’s question maybe taken.

Now, I would like to introduce Mr. Joseph E. Milliron, President and COO of Furmanite Corporation. Mr. Milliron, you may begin.

Joseph E. Milliron

Good morning everyone. Welcome to our second quarter call and thank you very much for joining us today. Charlie Cox, our Chief Executive Officer is here today along with Bob Muff, our Chief Financial Officer. Charlie had expected progress on the voice issues he mentioned and made to be well underway by now, but unfortunately the test and waiting are still continuing. With this being the case, he has asked Bob and I to do most of the talking today. On today’s call Bob will first cover the financial results in more detail and then I will give you report on operations. We will wrap up with Charlie’s concluding comments before opening up the call for questions.

Now, let’s get things started with Bob’s review of the numbers.

Robert S. Muff

Thank you, Joe. Before I begin let me mention that we’ll refer, during our comments, the slides, which maybe found on our investor website under the title labeled events and presentation. For those who following along with those slides, please note the Safe Harbor statement on slide 2, which applies to this call. For those not doing the slides, please note that certain remarks that the company may make about future expectations, plans, beliefs or intentions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

A variety of factors that set forth in our Form 10-K and other SEC filings could cause actual results to differ materially from those communicated or anticipated in the forward-looking information. Also to the extent, the company utilizes on a non-GAAP measures, reconciliation of any such terminology to U.S. GAAP measures will be provided and related company press releases, which can be found also on our website.

Looking at second quarter results on a consolidated basis, our revenues were $37.9 million, higher than the prior year second quarter with an increase of $73.8 million for the first six months of the year. Operating income for the quarter was $8.3 million and $10.8 million for the first half of the year versus $11.6 million and $15.7 million in the previous same year periods. A net income of $4.5 million for the quarter, $5.5 million for the year versus $6.8 and $9.3 million in last year’s quarter and six-month period.

As the trending operating results are not comparable to prior year due to the addition of our Engineering and Project Solutions segment in the second half of last year, we’ll move on to the next slide to look at comparatives best segment. In the technical services segments revenues were up approximately $2.4 million in the quarter; however, the gross margin percent of 32.4% was down, 2.6% from prior second quarter, due to combination of service mix and this year’s quarter on an unusually good margin percentage in 2013.

As mentioned previously, the major revenue growth in the quarter was on the engineering and project solution segment, which increased $35 million, but with margin percentage of 6.5%, only slightly improved over prior year, resulted in lower overall margin reduction versus prior year.

Selling, general and administrative expense dollars increased compared to prior due to the company’s growth, up slightly as a percent of revenues in the Technical Services segment that 3% improved as a percentage of revenues compared to the prior year with the lower overhead burden associated with the Engineering and Project Solutions segment.

Income tax rates for the current quarter are 39% consistent with prior quarter, but still a bit higher than our estimated annual effective rate and anticipate a long-term normalized effective rate in the mid 30% range. As you can see on the next slide our six-month results versus prior year, very similar three-month comparison but with a severe weather conditions in the America is primarily driving the unfavorable operating income differential in the first quarter.

On the next two slides, we’ve broken our revenue by region to both show revenue competitors by region as well as illustrate the foreign currency impacts on revenue, specifically the highlight that the increase in revenues in the APAC region were somewhat tampered due to currency rate impacts, while the EMEA increased for the quarter and year-to-date was somewhat bolstered by currency changes. Excluding the currency impacts, APAC has seen the revenue growth of 42% for the quarter, 26% year-to-date with EMEA growing at 15% and 21% over those same periods.

In contrast, the Americas technical services revenue decreased 9% and 7% for the three and six month periods and part due to strong prior results in the region versus current near quarter and the first quarter – previously matched. Foreign currency impacts at the operating income level are insignificant therefore are not presented here.

Moving onto the balance sheet, you will notice a general increase in cash receivables, inventories, and current liabilities, which were within expectations and attributable to the overall increase in activity levels and jobs and progress at the end of the second quarter versus the year end.

And finally looking into cash flow statement on the next slide, you’ll note our increase in cash is a function of year-to-date net income and non-cash items more than offsetting our cash needs for working capital requirements, capital expenditures and the scheduled pay down of debt. Our cash balance of $37.8 million at the end of the quarter combined with approximately $38.7 million of availability under our credit facility provides the company with approximately $76.5 million of liquidity as of June 30.

That concludes my remarks on the financial results and I’ll now turn over to Joe for his discussion on operations. Joe?

Joseph E. Milliron

Thank you, Bob. As Bob has already mentioned compared to same period last year, we had excellent revenue growth in both the second quarter 34.9% year-to-date and 37.4% through the end of June. In the second quarter, this growth was fueled by our Engineering & Project Solutions primarily at $35.5 million, while our Technical Service group was $2.3 million. Within the Technical Service group, EMEA revenues grew, as Bob has spoken about and also Asia-Pacific, while the Americas retracted. I will share more details on this after I discuss our online service, off-line service and our Engineering and Project Solutions segment, but I’d like to first update you on our global service delivery network.

Beginning with the Americas, they generated 71% of the year-to-date revenues with 2,017 technicians and engineers from 45 locations. EMEA generates 21% of our year-to-date revenues with 421 technicians and engineers from 24 locations and our APAC region generated 8% of our year-to-date revenues with a 144 technicians and engineers from 16 locations.

Now let me speak with you about our services and how they performed both our online and off-line services are reported as our Technical Service segment. Beginning with second quarter on our online services, overall, our online services business second quarter was $37.2 million, down approximately $1 million or 2.5% compared to last year. The decline was spread pretty evenly across all three regions. The Americas was $23.3 million, down $500,000, EMEA was $10.9 million, down $200,000 and APAC was $3.1 million, down $200,000.

Now moving over to our year-to-date June 30 online services. Overall, online services was $71.6 million, up $2.1 million or 2.9% compared to same period last year. The Americas was $42.3 million, down $700,000, EMEA was $23.8 million, up $4 million, and APAC was $5.5 million, down $1.3 compared to the same period last year.

As moving over to our off-line services for the second quarter; overall, off-line services for the second quarter was $54.5 million, up $600,000 or 1.1% compared to last year. The Americas was $32 million, down $6.5 million, EMEA was $13.2 million, up $3.6 million, and APAC was $9.2 million, up $3.5 million. Now, moving over to our year-to-date off-line services as of June 30; overall, off-line service was $98 million, up $3.8 million or 4% compared to last year. The Americas was approximately $59.8 million, down $7.5 million, EMEA was $24.4 million, up $7.1 million, and APAC was $13.8 million, up $4.2 million.

Now, let’s move over to our Engineering and Project Solution business segment. Our specialty Engineering and Project solution business segment was $40 million for the quarter, up $35.5 million compared to the same period last year. $30.1 million of this increase was as a result of the acquisition of the specialty engineering Gulf Coast business from ENGlobal that we acquired last August. The other $5.3 million increased as year-over-year growth compared to the same period.

Now moving to our year-to-date June 30 in this segment. Our specialty Engineering and Project solution business segment was $77.1 million, up $67.4 million compared to the same period last year. $59 million of this increase was as a result of the acquisition of specialty engineering Gulf Coast business. The other $8.4 million as year-over-year growth compared to the same period last year, of which approximately 60% came in the second quarter.

Let’s get into what these results really mean. While first class may look like we have lost ground in the Americas, this is largely attributable to projects that were delayed, downsized or canceled, coupled with a different business mix in margin percentage associated with our Engineering and Project solution group. Several owning companies have exceeded their budgets in 2013 on maintenance projects, which impacted our spending for our services in Q2 of this year, while the delays impacted our latest results.

The real story as this work is largely still schedule, only push back to Q3 and Q4, as well as a Q that’s moved into spring of next year. While our new Engineering and Project Solution group has proven to be a good revenue stream. We’re still going through the process of capitalizing on all the synergies it represents. Establishing consistent margins that differentiate us from the previous business model, prior to our acquisition and right sizing G&A, so that we meet the objectives of profitability for this group by the year’s end. When you look at the short-term results of the Americas, the story is really about the success of our global company.

Global, not local, stability and sustainability has been our mantra under the Orange Way and you can clearly see our efforts, as we see here show a really signs of this bearing fruit. We just concluded our second quarter board meeting in mid July which took place locally at our EMEA headquarters, Rotterdam, Netherlands, where our EMEA management team supported by our global leadership was able to provide an overview on the pass of momentum that is underway as well as our plans to ensure sustainability, sustainable results going forward.

Both EMEA and APAC now has a firm foundation in the Orange Way on approving that what we said was possible when we institutionalized or standardized and centralized business processes. Specifically, we had begun the implementation of unified global workforce and global equipment groups that drives increased technician and missionary utilization on a global basis. A centralized administration group that drives standardization to all our invoice practices and a global business development group after the first time in our recent history – for the first time in our recent history connects our worldwide sales force and truly promote selling the full range of Furmanite capabilities without limitations.

We all know our strength in the Americas and probably expect these recent results to rebound, but the extreme part of the story (indiscernible) realization with single global organization that allows our larger results to be repeatable and consistent through the broad scale adoption, believed in these best practices and the transformation of our local business functions into globally standardized business processes. We’re diving that culture and infrastructure then power us to be a much more efficient organization. From an SG&A perspective with specific focus on our Engineering and Project Solution group and without sacrificing growth, in fact these initiatives will further facilitate our long-term growth and sustainability.

That concludes my report in operations and I will now turn it back over to Bob, who will read Charlie’s closing comments. Bob?

Robert S. Muff

Thanks again, Joe. Now, reading Charlie’s comments. Let me first add my welcome as well as my thanks for your understanding and patience regarding my voice challenges. Hopefully, we will get this resolved soon. Bob and Joe have already given you a thorough and detailed understanding of our second quarter results and progress, so I confined my remarks to the overall perspective and messages we want to be surely conveyed.

First of all, while we’re recently pleased with the top-line number, it was still short of our expectations particularly in the proportion made up by our higher margin services. Certainly 10% of our Technical Services revenue in the Americas would have made a dramatic difference in our bottom line results, but we understand these kinds of variations are part of the normal nature of our business. We know we must keep our fixed costs and overhead expenses at levels well below those potential normal swings and become more agile to find additional revenue when awarded a plan work has rescheduled.

Second, the answer is yes. We believe we can close the significant remaining gap in our earnings gap in our second half. Our industry has a highly leveraged structure and just as a small downward variation reduces the bottom line significantly, small improvements can also increase the bottom line significantly. We believe we can make that leverage work for us in the second half of the year.

Third, we’re not just hoping these needed improvements happened. We have targeted specific actions established within every unit, service line and function in the company to create positive leverage and have granular plans and specific personnel accountabilities established to close the gap. As Joe has already discussed a few – a number of these actions already on the call and all of which are in alignment with the full implementation of our five Orange Way work process improvement initiatives, marketing and sales, workforce utilization, equipment utilization, project administration, and project management.

Finally, we know that we have built the strong company. And with our Orange Way one single global team concept, now taking hold across all three of our major regions and with potential well beyond our past financial results. Certainly, we have learned together over the past four years that culture change and company transformation is not an easy or fast process and the progress does not always come in a straight line. We thank you again for you confidence, support and patience as we have worked through this transformation process.

This concludes Charlie’s comments and I’ll turn this back over to Joe.

Joseph E. Milliron

This concludes our prepared remarks, so we will now open up the line for questions from analysts covering Furmanite and our institutional investors.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line Matt Duncan of Stephens Inc. Please go ahead.

Matt Duncan – Stephens Inc.

Good morning guys.

Robert S. Muff

Good morning, Matt.

Joseph E. Milliron

Good morning, Matt.

Matt Duncan – Stephens Inc.

I want to dig in a little bit on sort of what you guys were seeing in Technical Solutions in the quarter? Joe on the deferrals and downsizings that you guys saw versus cancellations, if you looked at in terms of revenue dollars to see how much has been canceled, how much has been pushed to the back half of this year, and how much has been pushed to next year? I just want to try and understand sort of how much has shifted versus how much may have gone away?

Joseph E. Milliron

Yes, Matt, in the second quarter we’ve quantified somewhere between $5 million to $7 million that moved out into the second quarter, most of that has moved in, I shouldn’t say that, a part of that has moved into the third quarter. The large project that we did in the Midwest last year, I think I’ve reported earlier that we had picked up three additional turnarounds at same location for this year and I shared with you in the last call that one turnaround started later than originally planned because of the weather. This company now has decided to defer that work into the first quarter of next year. As a result (indiscernible) from 2013, they realized they spent more money they intended. So they’re not spending their capital always this year, but they’re scheduled to go back into the first quarter of next year. But overall, I’d say $5 million to $7 million has moved out of our second quarter.

Matt Duncan – Stephens Inc.

Okay. And to help us just get a sense for, it sounds like you guys were seeing improving business trends in the back half, I would say almost have to be to raise the revenue guidance. Can you give us a little feel for what’s driving that? And as you look specifically at July so far, are you seeing good growth in the Americas region and can you maybe quantify that for us?

Robert S. Muff

I would say specifically in July, we’re not seeing a large growth in the July numbers in the Americas, but I’ll tell you what we have on the books can confirm for August and September, just on the Technical Solution piece here in the Americas, we’re going to have – we’re expecting to have a very good third quarter. And then when we look at our both our EMEA and APAC, we’ve had very good numbers in the first two quarters of the year and we’re anticipating that to followup during the third quarter and also in the beginning of the fourth quarter.

Matt Duncan – Stephens Inc.

Okay. So on the revenue guidance increase of $20 million, can you bifurcate that for us, how much of that is Technical Solutions versus the Engineering and Project Solutions segment?

Robert S. Muff

I would tell you more than 90% of it is Technical Solutions.

Matt Duncan – Stephens Inc.

Okay. And that – is that just the shifting of revenue or is that new work that you’ve picked up since you last gave us guidance? I would assume its new work to increase the guide?

Robert S. Muff

It is new work coming through.

Matt Duncan – Stephens Inc.

Okay. That helps. And then on the in global acquisition, it sounds like it did lose a little bit of money this quarter. Can you quantify that for us and then when do you think it will be break-even?

Robert S. Muff

Let me answer when I think it will be break-even and I will let Bob to quantify the numbers on it. We expect by the end of the year to have this thing to a break-even to make the money

Matt Duncan – Stephens Inc.

Okay.

Robert S. Muff

Matt to quantify we had about $0.5 million of operating loss in the quarter. So that’s a bit of an improvement over first quarter, but again tracking to break-even we’re not quite there yet.

Matt Duncan – Stephens Inc.

Okay. And then last thing for me Charlie, I know you there. This is the first conference call you guys have held since you announced your plan of retirement. So congrats on getting right into enter the next chapter in your life.

Charles R. Cox

Thank you, Matt.

Matt Duncan – Stephens Inc.

You bet. Can you guys give us any update on the search for your replacement, how is that going?

Joseph E. Milliron

Yes. Matt, I can give you an update on that. When as Charlie announced his – the board put together (indiscernible) on succession planning, so the board is leading this and they’re looking at both internal and external candidates and they have a – we’ve been engaged with search firms out there and prior to the end of the year, we intend to be able to announce who the new CEO will be.

Matt Duncan – Stephens Inc.

Okay. Thanks, guys.

Joseph E. Milliron

Thank you.

Operator

Thank you for your question. (Operator Instructions) And your next question comes from the line of Tristan Richardson of D.A. Davidson. Please go ahead.

Tristan Richardson – D.A. Davidson

Hey, good morning, guys.

Joseph E. Milliron

Hi, Tristan.

Robert S. Muff

Good morning, Tristan.

Tristan Richardson – D.A. Davidson

Just curious, could you talk a little bit about what’s driving the results in Asia-Pac, obviously even currency adjusted, the growth was pretty attractive. And I’m curious was it in line with your expectations or do you see some projects come in either earlier than expected or that maybe you aren’t anticipating?

Joseph E. Milliron

I would tell you Tristan that probably a little better than we’re originally anticipated and that’s really a result of one of our customers down there and made a decision to remove their general contractor for maintenance down there and they’ve asked Furmanite to step in and take on additional services that we didn’t have in the past. And so as a result of that we enjoyed a good second quarter and we’re working with that customer to build a longer-term relationship. And so, that’s part of our vision and we see a growth in the revenue in the second half of the year.

Tristan Richardson – D.A. Davidson

So that even wasn’t necessarily just implications for Q2, but also what specifically with that customer you see some sort of incremental benefit out into future quarters including the second half, is that fair?

Joseph E. Milliron

We do, we do. And the other thing down there is – we’ve had some projects that we expected to come through and those projects did come through in the second quarter down there.

Tristan Richardson – D.A. Davidson

Great, and then could you talk a little bit about the Engineering business. I mean sort of on a standalone basis, I mean is that business growing year-over-year?

Joseph E. Milliron

I would say that business is – revenue is basically flat, roughly as you’ll see the numbers, it roughly about $10 million a month in revenue on average. We’ve got to grow the business and we’ve also got to address the cost structure within it. We have begun to do that earlier this year and we’ve been working on it. But we have a clear plan forward to deal with this so it’s profitable by the end of the year. So it’s not losing, when we report December numbers, it won’t be losing numbers, money in the fourth quarter.

Tristan Richardson – D.A. Davidson

Sure. And then I guess you’ve had it in the business for a couple of quarters. Now, I am curious, could you give us an update on the growth potential that you see in that business sort of year in and you out?

Joseph E. Milliron

I think that right now we’re looking at the growth potential and we’re looking at the same as the Technical Service group. We believe that should be a double-digit growth on an annual basis at a minimum – they will be corners sometime to future that we may land a larger project, larger engineering project they could expand that number to pass 10%, but overall we’re looking for a 10% minimum per year growth.

Tristan Richardson – D.A. Davidson

Great, thanks, Joe. And Bob just real quickly if you wouldn’t mind, and I’m sorry if I missed it earlier, but I didn’t see it in the deck, could you layout operating income by geographic region in the Technical business?

Robert S. Muff

On the technical side, yes, I believe we did have that. You’re just looking for the quarter or for the six months?

Tristan Richardson – D.A. Davidson

For the quarter, I may have missed it. I can go back and look at if it is in the deck.

Robert S. Muff

I will put. So for the second quarter, we had on the Technical Services side in the Americas, we had operating income of $7.6 million, within EMEA it was $4.2 million, within Asia it was $2.5 – just under $2.5 million and then netting that with the corporate cost and the $0.5 loss on the E&C solutions gets you to the $8.3.

Tristan Richardson – D.A. Davidson

Got it, okay great, thank you guys very much.

Robert S. Muff

You welcome.

Joseph E. Milliron

Thank you.

Robert S. Muff

Thank you.

Operator

Thank you for your question. There are no questions at this time. (Operator Instructions)

Joseph E. Milliron

Steve, there appears to be no more questions. We will sign off with our, thanks to each one of you for joining our call this morning. We appreciate your interest in Furmanite. I look forward to sharing our third quarter results with you in November. Thank you again and good bye.

Operator

Thank you for joining today’s conference. Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.

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