IES Holdings Inc (IESC) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the IES fiscal fourth quarter earnings conference call. At this time all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero on your push button phone. As a reminder, this conference is being recorded today, Tuesday November 11, 2003.

I would now like to turn the conference over to Mr. Ken Dinard, Managing Partner of DRGNE please go ahead.

Thank you Jeff, and good morning, we appreciate you joining us today for IES's conference call to review fiscal 2003 fourth quarter and year-end results.

We'd also like to welcome our Internet participants listening to the call being simulcast live over the web. Before I turn the call over to management, I have the house keeping details to run through. You could have received an e-mail of the earnings release yesterday afternoon. Occasionally, though there are technical difficulties experienced during these broadcasts. So if you didn't get your release, please call our offices at 713-529-6600 and we'll get that right out to you.

Also if you'd like to be on a permanent e-mail distribution list, please relay that information to us. There will be a replay of today's call available via web cast by going to www.IES-CO.com. A recorded instant replay will be available telephonically for the next seven days at 303-590-3000 using the pass code of 558948. That information is also in yesterday's press release.

Please note that information reported on this call speaks only as of today, November 11, 2003, and, therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay.

Also, as you know, today's conference call includes certain statements, including statements relating to the company's expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on the company's expectations and involve risks and uncertainties that could cause the company's actual results to differ materially from those set forth in the statements. Such risks and uncertainties include but are not limited to the inherent uncertainties related to estimating future results, fluctuations in operating results because of downturns in the level of construction, incorrect estimates used in entering into fixed price contracts, difficulty in managing the operation of existing entities, the high level of competition in the construction industry, interest rates, general level of the economy, changes in the level of competition from other major electrical contractors, and due to seasonality.

The foregoing and other factors are discussed in the company's filings with the Securities & Exchange Commission, including in the company's report on Form 10K for the year ended September 30, 2002.

Please note that we have slides of the company in this presentation. You can access them by going to the company as IR site on the website, www.ies-co.com and click on the web cast for today's call. These slides will be available following the call as well.

Now, with me this morning are Roddy Allen, the company's President and Chief Executive Officer and Bill Reynolds, the company's Chief Financial Officer. Now I'll turn the call over to Roddy.

Thank you Ken, and good morning to all of you and, thank you for joining us today. If you turn to slide 2, our diluted earnings per share were 20 cents which includes the reversal of a $2.8 million tax valuation allowance in the fourth quarter. Excluding that allowance, diluted earnings per share were 13 cents within our revised guidance range of 12 to 16 cents per share.

Bill will spend some time giving you debt tails of this allowance later in the call. As you probably remember, on September 16, we revised our guidance based primarily on a specific contract and the timing of the beginning of work on that project. Although the work did not progress as quickly as expected in the beginning, our scope of the contract was increased from our original expectations and is now well underway and positioned us well for fiscal 2004.

Net income for was $7.8 million for the fourth quarter and revenue were 318.5 million. We completed our two million share buy-back program during the quarter and announced a new share repurchase program of a $13 million.

Turning to slide 3, we continued to benefit from the back to basics and one company, one plan integration initiatives and are entering the final phase of our three-part strategy continued growth. We have completed the first phase, back to basics. These goals have become and will remain at the core of our daily operations. We are approximately 75% complete with our integration initiatives, which fall under one company, one plan. And we will continue to focus on integration. All these initiatives have laid the groundwork for us to continue to grow the business successfully and we are beginning that process.

Turning to slide number 4, our total back log is $708 million, which is down about 12% from where it was at the end of fiscal 2002. We do see shifts in the makeup of our back log from time to time. Last year, we added some very large contracts that spanned two to three years in duration and significantly increased our backlog.

These larger projects are nearing completion, which lowers the total backlog. Our backlog of significant longer term contracts, defined as contracts in excess of $7.5 million, has decreased from 25% of our backlog a year ago to 17% today. This means the duration of our backlog is slightly shorter and is comprised of smaller projects that are generally completed more quickly. Today, we have 7,000 contracts in backlog, versus 6,500 at this time last year.

During fiscal 2003, our average contract size was approximately $500,000 and lasted approximately six months. We have also changed our backlog calculation method for many industrial long-term maintenance contracts, which has removed about $29 million from our backlog calculation. They are still a source of revenue for us.

Moving to slide 5, you can see that our costs continue to come down. Overall, selling general and administrative expenses for the year were 153.6 million, versus 174.2 million last year. This is a 12% reduction and overall SG&A expenses as a percentage of revenue was 10.6% in fiscal 2003, versus 11.8% in fiscal 2002.

Turning to slide number 6, we generated 31.4 million in free cash flow for the year. Defined as cash flow from operations, less capital expenditures. This cash generation has allowed us to end the year with $40.2 billion in cash on our balance sheet. No outstanding balance on our credit facility, and our two million shares repurchase program completed. Our one company, one plan integration initiatives continue to support and improve IES's performance.

I'll come back and provide details on these initiatives as well as the details of our continued growth phase, and our outlook for 2004 after Bill provides a more detailed review of our performance and the current market conditions. Bill?

Thank you Roddy. As he stated, our diluted earnings per share for the quarter were 20 cents, which includes 7 cents per share or $2.8 million related to a deferred tax valuation allowance that was established when we adopted [AFAS] 142 during fiscal 2002. The remainder of the tax valuation allowance of $6.3 million will be evaluated periodically to determine its adequately

Before recognition of this tax valuation allowance, our fourth quarter earnings per diluted share were 13 cents, within our revised guidance range from mid-September, compared to six cents in the fourth quarter a year ago, including one-time charges of approximately 16 cents per share. As we discussed in our last call current projections by FW Dodge are for commercial industrial construction spending for calendar year 2003 to decline 3.9% after declining 17.9% in 2002.

Dodge projects a recovery in commercial and industrial spending for calendar 2004, with 11% growth. Based on these Dodge estimates and our current mix of backlog, we expect a number of our more profitable markets to be stronger in fiscal 2004.

Overall construction spending was up 6.5% for the month of September, versus last year, according to the U.S. commerce department. This is a positive sign, and may be the beginning of the recovery we've been expecting. In commercial and industrial, there were some pockets of strength as well. Lodging and manufacturing were the strongest, up 12% and 5.7% respectively. Another positive indication for the future.

The residential sector remains strong, up 10.7% in the month of September, versus the period one year ago, according to the U.S. commerce department. We believe continued low interest rates are driving the demand for new single family homes.

Turning to slide 7, our fiscal fourth quarter revenues rose 3.4% to $381.5 million from $369 million last year. Gross profit was 53.4 million for the fourth quarter, compared to 51.2 million for the same period last year, which is a gross margin of 14%, versus 13.9% last year. For the fourth quarter, revenues in our commercial industrial segment increased 7% from a year ago to 310.4 million, from 290.3 million. Commercial industrial gross profit for the fourth quarter of 2003 was 39.3 million, versus 35.4 million in 2002. This translates to a gross profit margin of 13% for 2003 versus 12% in last year's fourth quarter.

Although the residential market remains strong, our residential revenues decreased by 10% from last year, to 71.2 million, from 78.7 million. This decline was due to a drop in multi-family residential projects and high value custom, single family homes, offset by an increase in single family residential work. Residential gross profits were 14 million in 2003, versus 15.8 million in 2002. This translates to stable gross profit margins of 20% for both the fourth quarter of 2003 and the fourth quarter of 2002.

Operating income for the fourth quarter was $14 million compared to $10.1 million a year ago. And the operating income margin was 3.7%, versus 2.7% in the fourth quarter of 2002.

Turning to slide 8, at the end of the quarter and the year, we had $40.2 million in cash on the balance sheet and no outstanding balance on our $125 million credit facility. Our $248 million of outstanding senior subordinated notes are callable in February of 2004. And we are currently reviewing alternatives to use a portion of our available cash to reduce the outstanding debt. [inaudible] sales outstanding were 77 days in the fourth quarter. Relative to 75 days in the third quarter and 73 days for the period one year ago. One of the reasons the DSOs are up in the current quarter, the payment terms we have on the large government project.

Back log is $708 million compared to 801 in the fourth quarter of 2002. IES added $148 million of new larger product work which is define as projects greater than $300,000 to the back log during the fourth quarter, compared to $232 million added in the fourth fiscal quarter of 2002.

New project work is down from last year for a number of factors, including four large projects that were added in the fourth quarter of 2002, changes in the way industrial long-term maintenance contracts are accounted for, which remove them from the back log calculation, and the work associated with the government project, which is not fully reflected in the backlog due to the nature of the contract.

Our new work includes $41 million hotels, condos and apartment buildings, $22 million of work associated with institutions, including schools, $21 million of work at hospitals and healthcare centers, $21 million of new projects on utility and highway projects. $9 million of manufacturing facilities. $8 million of electrical work and retail centers. $8 million of new office building work and $4 million of new distribution centers.

Turning to our yearly results, revenues for fiscal 2003 were 1.45 billion, versus 1.48 billion in fiscal 2002. Net income for fiscal 2003 was $20.4 million, or 52 cents per diluted share, including the reversal of the tax valuation allowance, compared to 9.9 million or 25 cents per diluted share before cumulative effect change in accounting principle for 2002.

Before recognition of the tax valuation allowance, net income for fiscal '03 was $17.6 million or 45 cents per diluted share. Net income from fiscal '02 before one-time charges in the adoption of FAS 142 was $19.9 million or 50 cents a share.

Just to refresh you on the accounting changes of last year, IES adopted FAS 142 in fiscal 2002, which resulted in a non-cash charge of 283.3 million. Or $7.11 per diluted share and reported as a cumulative effect of change in accounting principle in the first quarter of 2002. The net loss for 2002 after one-time charges in the adoption of FAS 142 was $273.4 million or $6.86 a share.

SG&A expenses for the full year decreased $20.5 million and were 10.6% of revenues compared to 11.8% of revenues last year. Operating income for the year was 53.6 million this year, compared to 47.4 million last year. Operating income as a percent of revenue improved to 3.7% for the year, versus 3.2% a year ago before charges. With that, I'll turn it back to Roddy.

Thanks, Bill. I want to spend a few minutes updating you on our initiatives and then provide our outlook for the first quarter and year.

On slide 9 is lace of all of our one company, one plan initiatives. I would now like to highlight the most recent successes within these initiatives. Forefront, our enterprise resource plank system is implemented in all but 12 subsidiaries. Three of these subsidiaries are currently be converted and the remaining nine will follow shortly.

As we near the final implementation phase of the project, we're seeing ever-increasing benefits. We continue to realize reductions in selling general and administrative expenses as a result of this system's efficiency, both in the field and in the corporate office. As well as improved operations management as a result of fast track -- faster access to operational performance data. We continue to focus on employee unification. One of our most successful programs has been a company-wide training program for project and operations managers.

This customized training program which includes the functionality of forefront, helps standardize and further improve our project management abilities across the organization. Part of this program includes a customized action plan on a subsidiary by subsidiary basis to improve processes.

As of today, substantially all of our project managers have completed the first phase of this training program.

Our safety initiative continues to be a bright spot for us with recordable accidents down to 3.82 incidents per 100 employees. This is down from an already low level of 4.65 incidents per 100 employees last year. We are continuously improving in this area, and our record is already less than half the national average of approximately 8 recordable accidents per 100 workers.

Our national purchasing program has produced positive results and there's one reason we've been successful in these difficult markets. We save $2.5 million in 2003 as a direct result of this program.

Turning to slide 10, I would like to spend a couple of minutes updating you on our continued growth strategy. I'd like to call it planning the future. We made our first acquisition since 2000 in February of this year, Rivera Electric in Colorado. This acquisitions that been a success for us and was a accretive to earnings in 2003.

As we look forward to the future we have identified key growth markets where we want to be the market leader. In some of these markets, we need to expand our existing service offering and in other markets, we need to establish a presence. Through Greenfield expansion, our acquisition.

We plan to use a portion of the free cash flow we generate in 2004 to fund these growth initiatives and I'll keep you updated on our progress and plans throughout the year.

On slide 11, we have outlined our guidance for fiscal 2004. We expect earnings per share in the first quarter to range between 10 and 15 cents per share. Based on our current analysis of market conditions, we expect full year earnings per share to range between 55 and 75 cents. With that, I will open it up for your questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you'd like to decline from the polling process, please press the star followed by the two.

You will hear a three-tone prompt acknowledging your suggestion. Please ask one question and one follow up and require for future questions. If you're using a speaker phone, lift the hand set. Our first question is from Jeff Beach with Stifel Nicolaus.

One of the things I think you could help us understand a little bit, I was surprise, a little bit surprised with your first quarter guidance of 10 to 15 cents, when I look at some of the friends of seeing a pickup in some of the markets, smaller projects that seem to have higher margins, a ramp-up of the Navy project.

Looks like you've increased your backlog in the residential area that should be coming out here with some better profitability. A lot of positive trends happening and yet, maybe the 10 to 15 cents looks good to you, but it doesn't look like, I mean , is there some drag, some headwinds you're hitting against here that would not cause the earnings to be a little better?

Well, I think there's a number of things, Jeff, that enter into that. First thing is 15 cents would be a 50% improvement over ten cents last year. That's a pretty good quarter over quarter increase, I think. There's also, still a lot of uncertainties in the marketplace.

We're seeing improvements in a lot of areas. We're seeing a lot of areas that are stagnate. I can tell you that it's still a very competitive marketplace, even though the quantity of work is picking up at this point. We haven't seen very much increase in the margins.

Okay. Second, can you provide any additional details or information on this Navy contract? I guess, in particular, whether the work is still planned to be largely contained within about a six-month period or whether that's stretching out with the scope?

Well, right now, today, what I expect the work to be substantially complete by the end of our second quarter. It's been a very good project for us, as we mentioned earlier. I'm not prepared to go into the details of size, et cetera, et cetera, than to say that today, we have about 50% of our subsidiaries engaged in the work and we're working in various amounts on about 40 bases across the country.

Thanks.

Thank you. Our next question comes from Alex Regal with Friedman Billings Ramsey please go ahead.

Thank you very much. Can you go back to your explanation of back log being down year over year and how the mix shift has changed from fast-paced, or from slower paced to faster paced projects? Can you circle back to that again?

Sure. There's really about three or four things that account for most of the change in our backlog.

First thing is most of you recall in our third quarter of last year, we lost a large project we were doing with Health South. That was about a $17 million decrease out of our backlog. Second thing is we mentioned that we have changed the way we account for a lot of long-term maintenance P and M projects. That accounted for a $29 million reduction in backlog. Third thing is we're doing more smaller projects. Last year, in the third and fourth quarter of 2002, we picked up four very large projects. The largest being about $50 million.

Those jobs are starting to play out now and are coming out of the backlog. We have not replaced them with any more projects of that particular size. We do have -- we have, though, increased the total number of projects in our backlog considerably. 7,000 today versus 6,500 today. We feel very good about where we are today with our backlog, what we're seeing happening there and the way that's playing out.

To follow up, can you talk a little bit about margins within your back dog and how they've been affected by the shift mix?

Margins in our backlog are very nearly the same today that they were a year ago. I mentioned earlier, we aren't seeing very much improvement as of yet in margins in the backlog.

That's typical with what happens as you're coming out of what has been a fairly severe recession in the construction industry. And where it starts to get a little more plentiful, it's a little bit easier to get the work, but it's not much easier to get it with more money in it.

Hopefully, as the year goes on, we'll see margins improve and typically, it takes a year or so after the upturn for margins to start to improve drastically as far as availability.

Alright, thank you.

Thank you. Our next question comes from Philip Volpicelli with CIBC World Markets.

Good morning. Congratulations on a good year. My question, with regard to two things. You mentioned acquisitions were on the agenda for 2004. Maybe you could give us a little color on the size that you'd be looking to make in terms of the acquisitions or the number of acquisitions, something to give us a sense what was you may spend on that.

We will never again be out in the marketplace making a lot of acquisitions consecutively or quickly or whatever. We will evaluate all of the opportunities. We're looking for a few good opportunities spread out over the next two to three years that are compelling from the standpoint of being a accretive to earnings in the right place where we want to be and fairly significant size.

We're not interested in small acquisitions and, by small I'm talking the 5, 10, 20 million dollar revenue type companies. We want the typical company we'd be very interested in would be a $50 million plus company that would be accretive to our earnings and helps us establish the marketplace rapidly.

If I think about free cash flow with your EPS guidance, it sounds like free cash flow at a minimum should be about $30 million next year? You've got $13 million of stock buy-back and then the remainder, I guess, would either go to acquisitions or, I think you mentioned something about repurchasing bonds.

Does that make sense in terms of the uses of cash?

Yeah, we've really got a three-prong program, you know. We've got about -- we ended the year with $40 million of cash in the bank. We expect the free cash flow this coming year to be somewhere in that range again. And we want to do three things.

We want to reduce our debt, buy back equity and grow the company.

Okay. Look forward to 2004. Thank you.

Thank you. Our next question comes from [inaudible] Cove with J.P. Morgan. Please go ahead.

All of my questions have been answered. Thank you.

Thank you, sir. Ladies and gentlemen if you have an additional question, please press the star followed by the one on your push button phone. If you're using speaker equipment we remind you need to lift the hand set before pressing the numbers. Our next question is a follow-up question from Jeff Beach. Go ahead, sir.

Yes. Can you review again, particularly since the last the preannouncement was about two months ago.

What you're seeing happening in some of your geographical markets. Then you'd talked on the conference call about, in terms of the national numbers, starting to see a pickup in lodging and manufacturing. What are you seeing in some of the segments in terms of any pickup in activity or planned pickup?

Well, yeah, and we basically, you know, have five geographical regions, not counting the residential. West, part of the west is starting to pick up some. The northwest is still very, very depressed. We are -- we have not enjoyed much pickup in the northwest yet. Our central region, which is primarily Texas, Oklahoma, Colorado, things are starting to look considerably better.

Our Gulf region, parts of it are looking better. Parts are still fairly tight. In the southeast, Florida is starting to get a lot better for us. Georgia has not improved much as of yet. The northeast, for the most part things along the coast are getting better inland, the further inland you go, the less improvement we've seen. So in general, Jeff, that's what we're looking at the moment.

From a type of work, on the commercial side, Jeff, we mentioned we're seeing a pickup in office building work and, also, a pickup in institutional work, compared to our backlog at the end of September of last year.

We are seeing declines -- declines in retail, you know, big box retail stores and kind of year over year decline in hotels and condos. On the industrial side, wave seen a pretty steep decline in manufacturing that's been offset by work for the utility companies, and the -- of course, the military.

So some of your markets are going kind of against the national trend, you said your manufacturing is down. But you're just starting to see a pickup in awards. So some of the clients, for instance, in manufacturing where you've had relationships, are they talking about expansion coming in the next several quarters?

They are. In fact, you know, there's a lot of talk going on, which is a considerable improvement over where we were a year ago, about projects coming up during the year, Jeff. And as I said, in a lot of places, things are doing much better.

40% of our companies have increased their backlog from a year ago in excess of 20%. So, you know, if we can get 100% of our companies doing that, things will be clicking along pretty good.

Thanks.

Thank you, sir. Gentlemen, we have no further questions at this time. I'd like to turn the conference back over for any concluding comments.

Okay. Well, thank you very much for being with us. This morning. I'd like to say that we're trying to be relatively conservative in our outlook. We certainly -- our object is to be as accurate as we can, and taking what has happened over the last couple years, be a little conservative in looking forward.

But we do appreciate y'all being with us today. We look forward to you being with us three months from now and we'll be able to report on how these things are improving and looking for us. Thank you very much.

Thank you, gentlemen. Ladies and gentlemen, this concludes the IES fiscal fourth quarter earnings conference call. Thank you for participating in today's conference. You may now disconnect.