IES Holdings Inc (IESC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Integrated Electrical Services second 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 0 on your touchtone phone. As a reminder this conference is being recorded today, Thursday, April 29 2004.

At this time I would like to turn the conference over to Mr. Ken DENARD, managing partner at DRGNE, please go ahead sir.

Thank you, DUSTIN. Good morning, everyone.

We appreciate you joining us for IES's conference call today to review second quarter results. We also like to welcome the internet participants listening to the call as it is being simulcast live over the web.

Before I turn the call over the the management, I have the normal housekeeping details to run through. You could have received an e-mail of the earnings release yesterday afternoon, but occasionally there are technology difficulties during these broadcasts, if you didn't get the release please call 713-529- 6600 and we will get that right out to you.

Also, if you would like to be on the regular e-mail distribution list please relay that information to us there will be a replay of today's call via webcast www.IES-CO.com, or there is a recorded instant replay, which will be available for the next seven days by calling 303-590-3000 using the pass code 577533.

Please note that information reported on this call speaks only as of today, April 29, 2004, 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, this conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be deemed 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, excuse me, the inherent uncertainties related to estimated future results, fluctuations in operating results, because of down turns in the levels 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, the did general level of the economy, changes in the level of competition from other major electrical contractors, increases in the cost of steel and copper products used in the electrical industry, and fluctuations due to seasonality.

The foregoing and other factors are discussed in the company's filings with the Securities and Exchange Commission, including the company's annual report on form 10K for the year ended September 30, 2003. Please note that we do have slides that accompany this presentation today, and you can access them by going to the company's investor relations's site at www.IES-CO.com, and click on the webcast for today's call. These slides will be available following the call as well.

Now, with me this morning is Roddy Allen, the company's President and Chief Executive Officer, Roddy.

Thank you, Ken, good morning to all of you joining us today.

Looking at slide two, our revenues were $343.8 million, about the same as last year's second quarter. Operating income was $12.8 million, up 10% over the last year's second quarter. This improvement is from a continued focus on our overhead costs. Diluted earnings per share for the second quarter were 14 cents.

This includes the release of the remainder of a $4.8 million tax valuation allowance and $5.2 million of costs incurred when IES retired $75 million of senior subordinated notes on March 30, 2004. Excluding both of these items, diluted earnings per share for the quarter were 10 cents. At the low end of our guidance range.

We reduced total debt by $25 million to $223.1 million, and our continued effort on further improving IES's capital structure. IES entered into a new $175 million four-year credit facility, comprised of a $50 million term loan and a $125 million revolving line of credit.

IES utilized the term loan and $29.7 million of our cash to retire $75 million in senior subordinated notes and pay fees associated with retiring the debt.

We remain focused on the measures we have put in place as we implement our three-phase strategy. Our back to basics initiatives remain key to our success, and we continue to perform well in these areas.

Turning to slide 3, our total backlog is $703 million, compared to $714 million last quarter, and $798 million a year ago. IES added $170 million of new larger project work defined as projects greater than $300,000 to backlog during the second quarter. This compares to to $189 million of work added in the first quarter of 2004, and $187 million added in the second quarter, one year ago.

Moving to slide 4, you will see that our general and administrative costs continue to come down. Overall SG&A expenses for the quarter were $35.1 million, versus $37.5 million and last year's second quarter, a 6.4% decrease.

Overall, SG&A expenses as a percentage of revenue, were down to 10.2% in the second quarter compared to 10.9% a year ago. When IES initiated its three-phase plan, our long-term goal was for IES to achieve SG&A expenses of 10% of revenues, and we have come very close to achieving this target with expenses at 10.1% of revenues for the first half of fiscal 2004.

Turning to slide 5. Year-to-date, we have generated cash flow from operations of $7 million, resulting in free cash flow of $3.9 million defined as cash flow from operations less capital expenditures, however prior to the cash cost of $4.9 million prior to retiring the $75 million of debt, IES generated $8.8 million in free cash flow. This cash generation has enabled us to end the quarter with $19 million in cash on the balance sheet, even after using $29.7 million of our cash to retire debt.

Turning to slide 6, I will provide you with a little more detail on our financial performance. Revenues have remained flat in the second quarter versus this period last year, increasing by $700,000 to to $343.8 million. Operating income, increased to $12.8 million from $11.6 million in the second quarter of 2003, due to the SG&A improvements I have already discussed.

Gross profit margin for the second quarter was 13.9%, compared to 14.3% a year ago. Gross margins continued to be under pressure due to the market. However, raw material prices have the greatest impact on gross margin level this quarter.

IES's diluted earnings per share for the quarter were 14 cents, which includes 12 cents per share or $4.8 million related to the remaining deferred tax valuation allowance. This relates to a deferred tax evaluation allowance that was established when we adopted FAS 142 during fiscal 2002. There is no remaining adoption allowance related to FAS 142.

Diluted earnings per share also includes 8 cents per share or $5.2 million of cost associated with the retirement of the $75 million of retired debt. Our second quarter diluted earnings per on an operating basis were 10 cents. This number at the lower end of our guidance range primarily as a result of increasing copper prices. The price of copper has increased between 35 and 40% during our second quarter, to over $1.34 per pound in March 2004.

Although IES prepurchases some of its raw materials, this significant increase in price has affected the profitability of many of our projects because these projects were a fixed price and IES has not been able to pass these price increases on to customers. Copper prices, negatively impacted the quarter by over 4 cents per share. Additionally, steel prices have increased by over 60% during the quarter, and these increases have just recently begun to affect IES's, cost of products that contain steel, such as conduits.

Steel prices had a small impact on the quarter, and we expect these pricing increases will continue to impact IES in the third quarter. These commodity prices may continue to affect performance over the next quarter or two until these price levels can come down and/or IES can begin passing the costs on to its customers as we enter into new contracts.

For the second quarter, revenues in our commercial and industrial segment decreased 5.1% to $270.1 million from $284.7 million a year ago. This decline was caused by weakness in a few select commercial markets and the further reduction of communication revenues.

On residential construction spending data for the first two-months of this year showed continued weakness in most sectors with the lodging area showing some strength in February. Commercial and industrial gross profit decreased $4 million or 10.8% from $36.9 million for the quarter March 31, 2003 to $32.9 million for the quarter ended March 31, 2004.

Commercial and industrial gross profit margin decreased 13% for three months ended March 31, 2003 to 12.2% for three months ended March 31, 2004. This decrease in gross profit margin was primarily the result of the increase in copper.

Our residential revenues increased by 26% in the second quarter to $73.8 million from $58.4 million in the quarter one year ago. This increase is due to the surge in single family housing starts in the past quarter. Single family housing starts in March increased 5.5% above February levels, according to the U.S. Department of Commerce.

We have also seen the increases in our multi family work and multi family family backlog is up $15.6 million last last year to $69.1 million and this work remains strong. Residential gross profits were $14.9 million in the second quarter of 2004 versus $12.2 million in the second quarter of 2003. This translates into a gross profit margin of 20.3% in 2004 versus 20.9% a year ago.

Residential margins came under pressure this quarter, primarily as a result of increases in copper prices. The economic environment, or commercial and industrial construction spending is expected to improve during the rest of this year, and 2003, the residential construction market with 11% growth drove total construction spending to about 3% growth.

According to FW Dodge, total construction spending is expected to grow 1% in 2004 with strong double-digit growth projected in the commercial and industrial markets, which is where the majority of IES's revenues are usually generated. Looking beyond 2004 the Dodge data projects total construction spending growth to be approximately 5% a year for the next three-years.

Turning to slide 7, at the end of the second quarter, we had $19 million in cash on the balance sheet, after the debt retirement and $223 million in debt. Day sales outstanding were 82.6 days in the second quarter, relative to 79.8 days in the first quarter of 2004, and 80.4 days in the quarter one year ago.

Our goal for DSOs is well below current levels, and the company will continue to be focused on bringing that number down in the coming quarter. Backlog is $703 million, and we added $170 million of new larger project work to our backlog in the second quarter. We added a significant amount of new backlog from hotels and condos, apartments, manufacturing projects, health care facilities and institutional projects.

This is consistent with FW Dodge's projections for sector growth, which is indicated at hotel and condo and manufacturing sectors to see strong growth in 2004. Since the end of the quarter, we have signed a number of new projects, including a $4 million distribution center in Texas, a $10 million transportation project in Florida and several large condominium projects.

Turning to slide 8, I want to give you a quick update on you are integration initiatives that are a part of the continued implementation of one company, one plan. Forefront, our enterprise system is approaching completion with only five entities left to enter the conversion process.

We have better access than ever before to the detailed information at our sites, and forefront is becoming an invaluable tool for corporate and data collection and analysis. We 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 hospital or highrise construction.

Our project managers and subsidiary leaders have completed the first phase of our project management training and enhancement program. We began the second phase with 40 project managers and subsidiaries attending this program, and several sessions are scheduled in the coming weeks.

Our safety continues to be strong. Recordable accidents are 3.62 incidents per 100 employees through the second quarter of fiscal 2004. This compares to the already low level of 3.8 incidents for 100 employees reported in fiscal 2003. Our national purchasing program continues to grow. More lines of manufacturers were added during the second quarter, and savings from this program is up 9% relative to this quarter last year.

Moving to slide slide 9, I want to update you on our continued growth strategy, or what I call planning the future. We have implemented our strategic client group, which has focused on Federal and military-related national opportunities.

We recently hired a managing director of business development to lead this group. He has 20 years of engineering sales experience with nationally recognized engineering and construction firm. Additionally, IES has opened four new Greenfield offices and is planning more in the near future.

Moving to slide 10, we have outlined our guidance. We expect earnings per share in the third quarter of fiscal 2004 to range between 10 and 17 cents per share, because we are still concerned by the increases in copper and steel prices, and believe it may impact our performance in the third quarter by as much as 7 to 10 cents.

We are maintaining our full-year guidance, which we provided at the beginning of fiscal 2004. We expect full earnings per share to range between 55 and 75 cents.

With that, I will turn it over to the operator for 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 1 on your push button phone. If you would like to decline from the polling process please press star 2. You will hear a three-tone prompt acknowledging your question. Please ask one question and follow up and re requeue for questions. One moment, please, for the first question.

Our first question comes from Jeff Beach. Please state your company name followed by your question.

Steve Nicholas, good morning, Roddy.

Good morning, Jeff.

A question on the surging prices in steel and copper and your fixed price contracts. First of all, can you give us some better understanding of how much of your business is under fixed price contracts, how many, you know, how long do some of these fixed price contracts run out to where you have vulnerability to reprice, and then in addition, I have noticed here in the last seven days that copper has plunges its --retraced about one-third of its upward move and if it holds here or declines, declines, is this going to, at least on the copper side, if this continues to relieve that pressure in the third quarter?

Well, several questions there, Jeff, in answer -- on a lot of it.

Number one, you are correct. The last couple of days have seen a little bit of easing in the copper price. But just as the base copper goes up, we don't necessarily see see an increase in the base and wire, same thing going down. So it will take a few days, no matter what happens, for it to work through the system.

It's been my experience over the last 38 years that about once every 10 years with copper, we have an anomaly like we have had over the last, oh, 90 days or so, it generally goes up rapidly, it generally comes down very rapidly also once it starts. I hope what we are seeing is the beginning of the start.

April is pretty much in the bank, and we have experienced some pretty significant increases in the wire that we have purchased during the, during the month of April. Just to give you an idea of the magnitude of our copper purchases on average, we purchased about $4.5 million worth of copper wire in any one given month, so that kind of gives you an idea of what the magnitude of our purchases is in the copper market.

Now all of that is not necessarily exposed to a fixed price that we established way back when. To get to your question about the amount of our fixed price contracts, I would say that, as we have said, we have about $700 million in backlog. As you know, we don't backlog single family houses, but we do backlog any projects over $300,000.

You know, about $170 million of those, of those project, have been added in the last quarter. A lot of those, we knew, we saw what was happening in the copper and steel market, and we had the new prices plugged into those contracts. So, so we don't have a, a, a, you know, too much exposure there on that.

Some of the other projects, probably 50% of stuff, we had already purchased the conduit and wire for those project, so we didn't have anything left. The ones we got caught short on were the ones we have probably gotten during the fourth quarter of last year, that we were still in the, in the process of not fourth quarter, first quarter of this year, that we were still in the process of handing over to project management and all, you know, from estimating and preconstruction to do the buyouts and get prepared to do the work. So, as I say, a small percentage of our overall work that was exposed. But when you had the increases like we had. It doesn't take too much to materially affect you.

Steel actually went up more than copper. Conduit actually doubled from the first of March till, till about 15 days ago, actually doubled in price, conduit. Now, again, a lot of that conduit we had prepurchased, a lot of it we recovered under some blankets. So, you know, everything we buy won't be subject to that. But that's why I give you the range on why I think the magnitude could be this quarter.

My hope is that all the stuff is going to go away very quickly, and it would be at the low end of that range or even less than that if that happened. But, the steel people in particular stay they expect this to last for another 90 days or so. So, copper, copper could go away 30 days from now. I just don't know ,Jeff.

All right. But that does help a lot. My follow-up question is just on the tone of business you have seen in the last month or two, if you are seeing broadly an improvement, you know, we are coming out of a seasonal weak quarter, and, if you have any kind of revenue guidance going forward or, if we will see the typical seasonal rebound in the second half of the year in revenues.

We are certainly planning on that. We see a lot of activity out in the marketplace. You know, April has been a very busy month for us. I would, I would expect, if if things continue to move forward, and we don't, the improving construction market doesn't get affected by commodities, then, then we should certainly expect a seasonal improvement in our revenues, a seasonal improvement in our operations, once you take away the short-term effect of the situation we have with copper and steel.

All right. Thank you.

Thank you. Our next question comes from Rich Wazowski. Please go ahead with your company name followed by your question.

Yes. This is Rich Wazowski from SI DOTI. Good morning, everybody.

Roddy, I would like to dig a little deeper into the changes that we have seen on the top line and each of the three segments we have seen in the past three quarters or so. Starting with residential, we were up about 26% over the year ago quarter which reverses a string of about four declines in this segment. And although the single family housing starts were pretty strong in March, I mean, that's really no change from the previous three quarters, and I was wondering what specifically caused the blow out you there.

Yes. We feel we are getting market share. You know, we have some very strong residential companies. They are performing extremely well for us. They are, they are more than holding their own in the marketplace.

They are getting new business business all the time, and we expect, while I do not anticipate the continued growth that we have experienced over the last few months, I think we will at least, barring some drastic reduction in the number of housing starts, that we will continue to improve our, our position in that marketplace and multi family has been extremely strong, as I mentioned, and I would expect continued good performance out of our residential group over the rest of the next couple of quarters.

Okay. So there is no real anomaly here. I mean, the market is strong. We saw a pretty big jump from, say, 60 million to $70 million from the second to third quarter last year, and although, you know, we can't expect something that big, you would expect the final two quarters of the year on the top line in the residential segment to come in online or above the $74 million of the second quarter?

Yes.

Okay. And moving over to commercial industrial, that market, you know, as we know, is still pretty stagnant. The 5.1 isn't really a surprise but only in relation to the growth that we see in the past three quarters in that market. Is there anything different going on there?

Well, several things happened, you know, during the past quarter. Number 1, as you may know, weather was terrible in a lot of parts of the country.

Uh-huh.

You know, that affected our getting certain projects started, it affected our performance on being able to get projects that we were on progressing, so that affected that somewhat. We continued to do less in the communications arena, and that's kind of been an ongoing saga for the last year or so, and so I believe we have now pretty well bottomed out, as low as we will go. We will continue to have a presence there, but it will be a relatively small presence going forward at a few locations. So we anticipate a rebound in the commercial sector over the next two quarters.

Okay. Do you have the margins for those segments?

I think I gave you, it was about, what, a little less than 13%, I believe, in the commercial industrial, and that's primarily based -- most of the copper, we got wacked worse in the commercial than we did in the residential and that affected that margin pretty good it's actually 12.2% in the three months ended March 31, '04 tour.

Thank you. Our next question, MANISH MANAJA please go ahead with your question followed by your company name.

Hi, good morning, JP Morgan. Roddy, would you have the operating income breakout of commercial and industrial and residential.

Yes. We have got that number of the it will take me a second to get it.

Okay.

Do you have any others?

Yes. A lot of the other questions were answered already. You know, I guess one follow up would be what's the update on the placing bill?

I am in the final stages of accomplishing that.

So --

I have got it narrowed it narrowed down to one guy and we are talking, okay?

Mr. Manaja, did you have any additional question?

No, that's it.

Let me give you the figure, commercial and industrial operating income for the first three months was $11,573,000 residential and with $6,455,000.

Thank you.

Our next question comes from Crew Martinson. Please state your your company name followed by your question.

CIBC world markets.

Maybe I missed this but I was wondering if your give your guidance on cash flow for 2004 and if there were any stock reductions or debt reduction?

Our cash flow guidance was 30 to $35 million, I believe, at the beginning of the year, and we see no reason to change that. Typically, our first quarter is the worst. Second, is our second worst, and third is third worst, and fourth is best. So we would anticipate that to continue forward and see no reason to change that guidance at this time. Our stated purpose for the use of cash going forward is to pay down debt and buy back equity. In today's world, and the stock price being where it is, we would probably tend to concentrate primarily on continuing pay down debt going forward.

Thank you very much.

Thank you. Our next question comes from Susan MCGARY. Please state your company name followed by your question.

Hi. Investment management. I have a few questions.

Did acquisitions add any growth to the top line this quarter?

Say again?

Did acquisitions contribute to top line growth this quarter?

Well, you know, we have only made one acquisition in the last, oh, I guess, approaching four-years now, and that was Riviera Electric, and Riviera obviously just completed their full-year performance at the end of February, so, yes, the revenues for Riviera are in that total revenues, and, I don't know if I have got a brokout number or not. Somebody over here is shaking their head, so we will get it for you.

Okay. Another question is, could you give us an update on the Navy contract?

The Navy contract, you all probably read the paper, has been going extremely slow, contributed very little to our quarter. We are about 75% complete with the work orders we have on hand. It was, a very small amount of that was actually done in our second quarter. We, with he -- we expect to complete the remaining portion of that contract, probably now over the next two to three quarters, depending on, oh, how that progresses and how that moves forward, but it is going much slower than anticipated originally.

Okay. And, could you run --

Riviera contributed $6 million during the first quarter.

And --

I mean, second quarter.

And what did it contribute to the quarter last year?

It would have been almost nothing last year because we didn't acquire them until the end of February last year.

Could you give a bit more detail on the cash flow from operations during the quarter, does it really, the three months, the cash flow provided by operating activities really dropped dramatically?

Do you have a specific question?

Well, could you break it down a little bit?

Not really, no.

In terms of some of the components? I am just wondering, what was the big drag?

Well, the big drag was retiring the debt. As I said, we had a $4.9 million that we used in retiring the $75 million of bonds, and we only had, $8.8 million.

Thank you. Our next question is a followup from Mr. Jeff Beach, please go ahead with your followup.

Yes. Can you talk about the competitive environment specifically. Has there been any bankruptcies of any of your larger competitors in the last quarter or two that's helping, and can you talk about the surety bond market, and, is it, are the conditions there helping you, or is the -- is your cost, do you feel a surety bonds lower than competitors? Are you getting kind of an indirect benefit?

Well, I would say there's no benefit from bonding other than the fact that we can get bonding and that's always a huge benefit, and the bonding market, as you may or may not know, has changed drastically over the last couple of years. It's a much tougher market. The requirements are, have increased and I think as a general rule, from what we are hearing, the availability out in the marketplace is completely different from what it was a year or two ago.

So I think, the end of the day, IES will benefit from its strong financial position and where we are in the marketplace. You know, there have been a number of, you know, companies go out of business over the last several months, it is kind of an ongoing process. You know, we see it happening all the time. I would rather not get into names, but suffice it to say, there are 70-odd thousand electrical contractors in this country, and the average life expectancy is five years. So that tells you that in any one given month there's going to be a lot of coming and going.

So, now, the vast majority of those are extremely small shops, and, you know, don't make a blip on our marketplace. I do know that we are seeing less competition on the type of work that we traditionally go after, and, and we are seeing design build starting to come back. We are seeing a lot of what has been our key marketplaces get busy, Atlanta comes to mind. Things have really picked up there. So we feel extremely good about where we are, what the future holds for us over the next few quarters and what the outcome will be for IES.

All right. Two other questions.

First, on the gross margin, if you back out the impact of copper, I am coming up with a gross margin of 14.6 to 14.7 which would be the best margin in a year and a half or more. If I am write on my math, what is happening here? Are we seeing better margins because of the mix of business, or are we seeing real improvement of the profitability that is going to become very clear once copper and steel impact is out?

Well, I think it's some of all of that, you know, we do. We do see, as I said a minute ago, we see less competitiveness in certain pieces of the marketplace. We are increasing our share in the residential marketplace. And as you know, the margins are much better on the residential side of the house, traditionally, than they are on the commercial industrial side of the house. So that helps our mix, and as we go forward and as work continues to improve, we will continue, we hope, and expect, to be able to improve our margins.

Last thing, I didn't see in the recent wins, anything about the electric utility, the T and D work, are you seeing any signs that that business is picking up and presents some opportunities for some growth over the next few quarters in in that sector?

In certain sectors we have a good possibility. We have a couple of companies that are really focused on that, and they have, I didn't mention it just because it's hard to mention all the things we are doing, but one of our companies did pick up the a couple of very, very nice projects in that area in the last 90 days.

Do you see a meaningful pickup coming in the next, through the end of this current calendar year?

I don't know. You know, we hear a lot of speculation you know about they need to do this, they need to do do that, but one write up I read will say that we have excess generating capacity. The next one I read will say we need generating capacity. You know, it's a mixed bag, I believe, from most of the things that we subscribe to and listen to and look at.

All right. Thanks.

Thank you. Ladies and gentlemen. If there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you are using a speakerphone, you will need to lift the hand set before pressing the numbers.

Our next question comes from Alex REGAL. Please state your your company named followed by your question.

Friedman, Billings, Ramsey.

Can you discuss what actions you have taken to reduce your risk towards commodity prices and then can you also what kind of accounting method do you use, do you use LIFO or FIFO in your inventory?

Well, we use FIFO on the inventory. But, you know, as far as mitigating a risk, I have been doing this for 38 years, and I have gone through a number of spikes in copper prices, I have never gone through the type of spike we have had in steel this time, and this is an anomaly from as far back as we can figure out. The most I ever paid for half inch EMT up until today is $15 a 100 in those 38 years. A half inch EMT today is $26 a 100, so that gives you an idea of the magnitude of steel increases over the last 30 days.

We are not going to change a whole lot about the way we have done business there. I have always figured out, smart enough to figure out what copper will cost me, six or nine months down the road. Occasionally we loose a little money when it is going up, but we usually make up for more than that when it is coming down. So, you know, given that this is one of the normal spikes and is not something abnormal, we should be, you know, we should come out of this fine. It's going to short-term affect the bottom line line a little. The good news is we have been able, able to weather that storm and still put some money to the bottom line, and we would anticipate that this starts to mediate itself over the next 90 days, as I said. One way or the other, we will have it covered shortly.

Thank you.

Thank you, Mr. Allen. There are no further questions. Please continue.

Listen. Thank you all very much for joining today. It's always a pleasure to report to you on the performance of IES over the last few months. We look forward to joining you again three months from now to talk about our third quarter. Thank you very much.

Ladies and gentlemen. This concludes the Integrated Electrical Services second quarter conference call.

If you would like to listen to a replay of today's conference call please dial 303-590-3000 followed by the pass code 577533. Once again, if you would like to listen to a replay of today's conference call please dial 303-590-3000 followed by the pass code 577533. You may now disconnect and thank you for using AT&T teleconferencing