IES Holdings Inc (IESC) 2004 Q1 法說會逐字稿

Please stand by for realtime transcript. Integrated Electrical Services conference call will begin soon.

Good morning, ladies and gentlemen, and welcome to the Integrated Electrical fiscal first 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 star followed by the 0. As a reminder, this conference is being recorded today Wednesday, January 28th, 2004. I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG& E. Please go ahead.

Thank you,(Mobby) and good morning, everyone. We appreciate you joining us for Integrated Electrical Services conference call today to review fiscal 2004 first quarter 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 normal housekeeping details to run through.

You could have received an e-mail of the earnings release but occasionally there are technical difficulties experienced during these broadcast. So, if you didn't get your e-mail release , call 713-529-6620 and we'll get that right out to you. Also if you would like to be on e-mail distribution list, relay that information to us. There will be a replay of today's call, and it will be available via webcast by going to www.ies-co.com, or there will be a telephonic recorded instant replay available for the next seven days by calling 303-590-3000 using the pass code of 567989.

Please note that information reported on this call speaks only as of today, January 28th, 2004, and, therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay. And as you know, this conference call includes certain statements, including statements related 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 of 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, interst rates, the general level of the economy, changes in the level of competition from other major electrical contractors and fluctuations due to seasonality. The foregoing and other factors are discussed in the company's filings with the Securities & Exchange Commission, including the company's annual report on form 10-K for the year ended September 30, 2003.

Please note that we do have slides that accompany this presentation, and you can access them by going to the company's investor relations site at www.ies-co.com. Then click on the webcast where the webcast portion for today's call. These slides will also be available following the call. Now with me this morning are Roddy Allen, the company's President and Chief Executive Office and Bill Reynolds, the company's Chief Financial Officer. I'd like to turn the call over to Roddy.

Thank you, Ken. Good morning to all of you and thank you for joining us today. If you look at slide three, our revenues were $359.8 million, up 3.2% over the first quarter last year. Diluted earnings per share were 16 cents, which includes the reversal of a 1.4 million tax evaluation allowance in the first quarter.

Excluding the that allowance diluted earnings per share were 12 cents. Operating income was $14.3 million, up 12.5% over last year's first quarter. We re-purchased 449,200 shares of our stock during the first quarter, under our new $13 million buyback program, which we announced on our fourth quarter conference call. Turning to slide four, our total backlog is $714 million compared to $708 million last quarter and $766 million a year ago.

IES added $189 million of new project work, defined as projects greater than $300,000 to our backlog during the first quarter. This compares to $148 million of work added during the fourth quarter of fiscal 2003, and $155 million added in the first quarter one year ago.

The increase in project awards is another indication that the construction spending market is recovering. Moving to slide five, you will see that our costs continue to come down. Overall SG&A expenses for the quarter were $36.3 million versus $38.6 million in last year's first quarter. Overall SG&A expenses as a percentage of revenue were down to 10.1% in the first quarter, compared to 11.1% a year ago.

When IES initiated its three-phase plan, the long-term goal was for IES to achieve SG&A expenses of 10% of revenue, and I am encouraged that we have basically achieved this target. Moving to slide six, we generated record first quarter cash flow from operations of $6.4 million, resulting in free cash flow of $4.7 million, defined as cash flow from operations less capital expenditures. This cash generation enabled us to end the quarter with $44.2 million in cash on the balance sheet.

Our back to basics, and one company, one plan integration initiatives have prepared us for the third phase of our strategy, continued growth. The initiatives of phase one and two of our strategy remain at the core of our daily operation, and we will continue to benefit from them in the future. Our focus on the basic business drivers and integration initiatives, as well as our national footprint allow us to compete effectively on multi-site national projects.

I will come back and provide more details on our continued growth plan going forward, as well as our outlook after Bill provides a more detailed review of our financial performance and the current market conditions. With that, I will turn it over to Bill. Bill?

Reporter: Thank you, Roddy. Turning to slide seven, as Roddy stated our diluted earnings per share for the quarter were 16 cents, which includes a 4 cent per share or $1.4 million related to deferred tax evaluation allowance. As we discussed on our fourth quarter call, this relates to a deferred tax evaluation allowance that was established when we adopted FAS 142 during fiscal 2002.

The remainder of the tax evaluation allowance of $4.8 million will be evaluated as events require to determine its adequacy. Before recognition of this tax evaluation allowance, our first quarter earns per diluted share were 12.4 cents our guidance was 10-15 cents and IES earned 10 cents per diluted share the first quarter a year ago.

On our call at the end of fiscal 2003 we mentioned the strength in September numbers for overall construction spending up 6 1/2% year over year, and we see strong numbers again according to the most recent data from the U.S. Commerce Department. Overall construction spending for November was up 7.4% year over year and nonresidential spending was up 1% year over year with particular strength in hotels, growth, and highways.

This is another positive indication of a recovery ahead in construction spending. Our first quarter revenues rose 3.2% to $359.8 million from $348.6 million last year. Gross profit was 50.6 million for the first quarter of '04 paired to 51.4 million for the same period last year.

Gross margin was 14.1% versus 14.7% in last year's first quarter. Continue to see pressure on gross margins as a result of competition in both our commercial, industrial, and residential segment. Operating income was 14.3 million for the quarter an increase of 1.6 million dollars. Operating income margins increased 30 basis points from last year's first quarter to 4%. As a result of continued savings due to the success of our integration initiative.

For the first quarter revenues in our commercial industrial segment increased 6%, from a year ago, from 271.6 million to 288.2 million. This quarter includes the revenues from Riviera Electric, which was acquired in February of 2003. Commercial industrial gross profit for the first quarter was 35.6 million versus 34.4 million in the first quarter 2003.

The increase is a result of added revenues from the Riviera acquisition. This translates into gross profit margin of 12.4% for '04 versus 12.6% in last year's first quarter. Our residential revenues decreased by almost 7% in the first quarter to 71.6 million from 76.9 million in the quarter one year ago. The decline was primarily due to softness in multi-family construction in Florida.

Residential gross profits were $15 million in the first quarter of '04 versus 17 million in the first quarter of '03. This translates to gross profit margins of 20.9%, in '04 versus 22.1% a year ago. Residential margins are coming under pressure because the sustained high level of residential construction spending that's attracting additional service providers, which has created some pricing pressure.

Additionally, increases upper prices have impacted margins. Turning to slide eight, at the end of the first quarter, we had 44.2 million in cash on the balance sheet and no outstanding balance on our $125 million credit facility. As many of you know, our senior subordinated notes were callable in February with a call premium of 4.7%.

We are currently exploring alternatives to reduce our overall leverage and reduce our interest expense. We will get back to you in the coming months with an update. Day sales outstanding were 80 days in the first quarter relative to 76.9 days in the first quarter of '03 and 77.4 days in the fourth quarter.

Our goal for DSO is well below current levels. The company will continue to be focused on bringing that number down in the coming quarter.

As Roddy mentioned backlog is $714 million, and we added $189 million in new work. We added a significant amount of new backlog from wastewater -- water and wastewater projects, hotel and condo projects, office and apartment buildings. With that I'll turn it back to Roddy.

Thanks, Bill. I want to spend a few minutes discussing the progress of our three-phase strategy, and then I will provide our outlook for the second quarter. Turning to slide nine, we have an overview of our three faced strategic plan. I've already updated you on our back to basics performance metrix.

I would like to take a few moments to discuss the status of our one-company, one-plan integration initiative. Forefront, our enterprise system is approaching completion with only 12 entities left to enter the conversion process. We are seeing ever-increasing benefits from this system.

We can't continue to focus on employee unification with the primary focus in 2004 being increased training and cross- utilization of employees with specialized skills or experience in certain market segments. Such as hospitals or high-rise construction.

Our project managers and subsidiary leaders have completed the first phase and we are starting the second phase of our project management training and enhancement initiative. Additionally, as the market begins to grow, we will be prepared for the additional workforce requirements.

A number of our subsidiaries have their own approved apprentice training programs. and in other locations we use association programs. We support and incent our employees to participate in these training programs and obtain their journeyman designation. Our safety initiative continues to improve and is really a bright spot for us. Recordable accidents are down to 2.99 incidents per 100 employees through the first quarter of fiscal 2004.

This compares to the already low level of 3.8 incidents per 100 employees reported in fiscal 2003. As you recall, the national average is in excess of 8. Our national purchasing program continues to grow. We saw a significant increase in purchases through our alliance vendors in Q1 versus Q1 a year ago.

And this is the fifth straight quarter of increased purchases through the program on a year over year basis. This increase translates to increased savings in costs of goods sold. Moving to slide 10, I want to update you on our continued growth strategy, or what I call "planning the future." The economic environment seems to be turning with commercial and industrial construction spending projected to increase 10% in 2004, and 15% in 2005, according to F. W. Dodge.

Institutional spending, which includes schools, hospitals, and public buildings is projected to be down just under 1% in 2004, and to increase 6% in 2005. This positions IES well to continue to expand our business with our integration process nearing completion. We have implemented programs to grow organically as well as through greenfield office expansion.

We will investigate acquisition opportunities where we feel we need additional service expertise or added geographic market presence. We have targeted several markets based on their overall size and projected growth over the coming years where we plan to open and/or expand offices.

Additionally, our national project focus will be a significant source of organic growth, given the national footprint IES already has in place. Moving to slide 11, we have outlined our guidance. We expect earnings per share in the second quarter of fiscal 2004, the range between 10 and 15 cents per share. And as we stated at the beginning of fiscal 2004, we expect full year earnings per share to range between 55 and 75 cents. For 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 star followed by the one on your push button phone. If you would like to decline from the polling process, please press star followed by the two. You will hear a three-tone prompt acknowledging your selection. Please ask one question and one follow-up and re-queue for additional questions. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Jeff Beach. Please state your company name followed by your question.

Good morning, and good quarter, Roddy.

Thanks, Jeff.

My two questions. My first one is, can you provide any information at all on your Navy project in terms of revenues, profitability, whether you're on track with that program, whether it's going to extend into the second half of the year. And along with it, you had talked about getting clearance to be able to pursue some more programs similar to this. Can you just talk in general about this?

Okay, Jeff. I can. I can tell you that from a volume standpoint, revenue standpoint, our first quarter was significantly under what we originally expected. All this work will continue to go on, and will eventually be completed, but it now looks like it will probably stretch out through most of our fiscal year this year for the completion of it.

So it's moving along well. We're doing well on it. We're just doing less of it on a given quarter than what we had expected to do. The completion date got extended out. I can tell you that we're actively pursuing a number of projects similar to this, and feel good about the opportunities for IES going forward on these types of projects based on our national footprint. As you know, we are the only game left in town that really has the footprint to perform this type of work across the country. We're pursuing it hard and expect good things to happen going forward from this.

Okay. As a follow-up, you're beginning to move into a growth strategy, and you talked about some markets. Can you expand a little bit on markets, even if it's states or regions that are attractive, and then give us an idea of what might be encompassed here if you're looking at adding, you know, five or ten new branches a year, greenfield, and are you going to start looking at acquisitions as your debt levels come down? Can you expand a little bit on the growth strategy?

Yeah. Well, you know, and as I said, we've basically got kind of a three-pronged growth strategy. Number one is organic growth. You know, we expect all of our entities to at least grow at the level the economy is growing. So that can range, you know, from 0 to several % a year in our local offices depending on what the opportunities are.

So that in itself will give us fairly significant growth over the next three years, just based on what expectations are in the construction economy. The second way is through greenfield offices. We have a number of companies that have the capacity and the ability to open branch offices. And as you probably know and are aware, it's much cheaper to open an office in an area than it is to go and acquire one.

You could look at the economics of it as to which one is the best. And it varies depending on what you can do. Obviously if you can get an opportunity like our Riviera acquisition last year, then that is -- that exceeds anything else you could do. And we're always looking for an opportunity like Riviera. And we will continue to search and look for acquisition opportunities in the areas that we feel like we need expanded presence.

However, the only way we'll make an acquisition is if it's immediately accretive to our earnings. So we constantly look at deals and constantly look at things. And we will do some of that in the future. But our main emphasis will be on growing through organically and through greenfield opportunities in the short-term. And there are a number of places that we feel like, based on our assessment of the market places that we need to be in that we aren't in, but I'm not ready to discuss those at the moment.

In terms of number of branches, can you -- could you grow as much as 5 to 8% a year organically or is that too aggressive, or through greenfield.

I would say depending on the office and where it is and what the construction market is doing on an individual office basis, somewhere between 0 and 8%.

Thanks.

Our next question comes from Craig Irwin. Please state your company named followed by your question.

Good morning. First Albany. Just wanted to ask a couple of questions about the guidance. Obviously you've put out the range 55-75. But, could you share with us a little bit of your thought process of how you might end up at the top of the range versus the bottom of the range, if this is sort of -- you know, if there's margin pressure on residential or, you know, rate of winds with those projects you're out there bidding. Can you talk a little about that?

Well, and the reason for the range is because over the last two or three years we've had several what we considered to be false starts in an improved construction economy. We're seeing things improve in a lot of areas. We're seeing some areas that haven't improved much yet, but we get indications that they are going to improve. The range is basically guided by how much improvement we get, how fast it happens, and where it happens and when it happens.

Okay. And what do you think will be the major contributor to the improvement in '04 versus '03.

The commercial industrial sector and our margin improvement.

Okay. And are there any particular things we should look for commercial, industrial, to see progress for you guys in.

Well, primarily from the private sector. The private sector has been what has really lagged behind. We're starting to see a good bit of activity there, office buildings in some places, hotels in a lot of places, all the various and sundry things, shopping centers, retail stores. As the economy is improving, then those things are starting to pick back up. Again, you know, as a function of how quickly it comes about and how much of it we can actually perform this year.

Great. Great. And then if I could ask a question about the cash flow or what your outlook is for cash flow in 2004. What sort of expectations do you have, you know, with regard to depreciation, working capital requirements, Cap Ex, things like that.

Our Cap Ex is basically about from flat to 10% over what it was a year ago. We expect our cash flow to improve over where it was a year ago, and the outlook on that is good, as we reported a few minutes ago, we've had the best first quarter cash flow we've ever had in the history of the company by a significant amount.

Ladies and gentlemen, if there are any additional questions, please press star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our next question comes from Jeff Beach. Please go ahead with your question.

Yes. Can you talk a little bit about the SG&A? It was a pretty impressive number. And what happened to see that reduced in the first quarter from what it's been running at. And can you continue to drive this number down or hold this number down to a small increase, as you go forward here over the remainder of the year?

That's certainly our goal, Jeff, as you recall. My goal for the last couple of years or so has been to get our SG&A down to 10% of revenue. We're for all practical purposes within striking distance of that at 10.1. Going forward, my goal is to hold SG&A at 10% of revenues.

And if we do that, then I think we will have accomplished a pretty significant event, as far as being able to maintain profitability, et cetera, et cetera. You all have heard me talk a number of these calls about turning over rocks and searching for savings and getting the low hang improved and the middle hang improved and those kinds of things. We've got all the low hangs improved, I think, opportunities.

We've got the majority of the middle hang improved, but we're still turning over rocks and looking. So we'll continue to be aggressive in pursuing savings in SG&A wherever possible through improvement and cost of benefits, et cetera, et cetera. Improvement in safety performance. Improvement in procurement and all of the various and sundry things that allows us to maintain a low SG&A and increased increase the spread of out profitability.

One other question I had. You had a pretty good amount of wins in the water in utility projects. Can you -is that divided evenly? And what are the prospects there, particularly on the utility side looking ahead here over the next 12 months or so.

We expect that business to increase, as the housing market has boomed over the last several years, it has put a tremendous demand on our infrastructure in a lot of places as far as water and wastewater treatment and all these types of things. We see a lot of those projects on the drawing board and expect to continue to participate in the execution of those things at a higher level over the coming year or two.

All right. Thanks.

Our next question comes from Paul Kerry. Please state your company name followed by your question.

Yes, Paul Kerry, from Fountain Capital Management. I was wondering if you could offer more detail in terms of your gross margin, and the [inaudible] takes from benefits you're receiving from your procurement and yet being offset by the price of copper, kind of how that works out during this quarter and what you expect for the rest of the year.

Well, you know that's really a couple of different things. Copper, unfortunately in all the years I've been in this business has been one of those unpredictable things that can spike up unexpectedly on short notice, and it can also decrease unexpectedly on short notice. Unfortunately over the last couple of months, it's spiked up about 40%. We don't anticipate this to be a long-term phenomenon.

It could last one more month, one more day or several more months. Obviously, we hope it's one more day. But it has gone up about 40% over the last 60 days unexpectedly. You look at the marketplace, and there's no reason for it. You know we haven't closed down any copper mines. We aren't using that much more of it. So it's a function of the futures market, primarily, in my opinion.

And some of you all out there know a heck of a lot more about that than I do. I do know at the end of the day it affects what we have to pay for copper wire, and it can affect on a short-term basis our cost. There's not a whole hot we can do about that in procurement. We do have blankets in place that protect us. But at the same time, those blankets expire all through the year.

Unfortunately most of them expired at the end of the calendar year. And so we got caught short-term with our blankets expiring and copper wire spiking. We don't want to go out and write new blankets at the higher price, because we really believe in a short period of time that will decrease.

Our procurement program helps us you know establish the blankets. It also helps us do lots of other things. I can tell you that our goal for our procurement program is to obtain an additional 50% in purchasing incentives this year over last year. And our first quarter was significantly above our first quarter of last year. So we're kind of on our way to obtaining that. We've still got some work to do, but we're working hard at making that better for us every day and every week and every month and every quarter.

And then as a follow-up, if you could talk a little bit more about what the conditions you're seeing in the residential market where you're saying that you're seeing new competitors. Are these independents are they companies similar to yourselves, that are -larger companies dealing with the large home building companies? What are the conditions that are driving that?

We're seeing that the residential market, I guess about the only word that you can use to describe it, from our standpoint, is one that is still very hot. It's very good for us, it's improving. A couple of our companies had the best months ever in the past quarter.

They are getting some pressure on prices, not only from competition but from the builders to hold down prices and continue to perform at the same level, so they can still continue to sell houses at the same price and continue to get more and more people moving into them. So there's pressures, as there always is, from every direction on pricing.

The copper situation didn't help us this past quarter. That cost us a few bucks in a lot of places. In residential work, you have to -- we're buying wire weekly, because it's short-term projects. They do out and rough in a house in a day, they go back and trim it out in a day. It's not like you can put all the purchasing of a commodity that you need to do that.

You've got to have it today. So we expect the residential market to be relatively flat this entire calendar year. We don't look for a great decrease. I think we said 1%. But we're increasing our market share in most of these places that we're in. We expect our residential business to continue to expand.

And even though our margins are getting squeezed a little bit, our margins are still extremely good, and we're happy with it. We intend to continue to pursue it, as hard as we can. We're opening up additional offices in additional market places to participate in the -- what we look to be a long-term good residential market.

Okay. Thank you.

Our next question comes from Craig Irwin. Please go ahead with your question.

Hi. I was wondering if you could give us a little more color on the pressures you're seeing in the residential markets. There are any specific geographic areas that are seeing a little more pressure than others, or you know, areas where trends differ from other areas of the market?

Not really. It's pretty much all. We work for all of the probably top ten builders in the country. IES is the largest residential contractor by several times in the country. Our largest company is bigger than the next three competitors we've got by two or three times.

So the residential marketplace for the most part has been every since I've been in this business, primarily made up of a lot of small players. It's easy to get into, it's easy to get out of, if you don't know what you're doing. It will always be a lot of people hopping in and out of it. Over the last couple of years, with the expansion of the -- or tremendous expansion in the residential marketplace and the single family homes, there's been a lot of people got into it.

Obviously it does create pressures. But, you know, we deal with that well. Our margins dropped about 5% last year, with all the things that were going on, we considered that to be pretty good. So I don't want to overemphasize what we see happening. The biggest driver in our margins and in the first quarter was the price of copper.

Agreed. Agreed. I guess margins really represents a good opportunity longer term. If we could just circle back on the economics of opening up new greenfield startup offices. Could you talk a little bit about the investment needed with respect to Cap Ex, and working capital, and how this plays out over time, more or less, like how long it takes for these offices to start contributing to the bottom line?

Sure. Well, it depends on whether it's a residential office or a commercial office. Obviously it's easier and less expensive to open a residential office than it is a commercial office. I would say to open a residential office we're looking at an investment of 1to $200,000. It starts paying back very quickly, assuming we have some work when we go into an area, which is what we always try to do. Commercial office would probably entail an investment of 3 to $400,000. It would probably take close to a year for that to be a profitable office.

Great. Thank you very much.

There are no further questions at this time. Please continue with your concluding comments.

Well, thank you all very much for joining us today. We're very happy with the results of our first quarter. We're looking forward to the improving economy that we see happening in lots of places and hopefully that's going to continue to expand and things are going to get better for IES as the year goes on. And we look forward to coming back and reporting the results to you each quarter of this year. Thank you very much and look forward to talking to you again soon.

Thank you, sir. Ladies and gentlemen, this concludes today's Integrated Electrical fiscal first quarter earnings conference. If you would like to listen to a replay of today's coverage, please dial 303-590-3000 followed by 567989. Once again if you would like to listen to a replay of today's currency, please dial 303-590-3000 followed by access number 567989. We thank you for participating. You may now disconnect.