IES Holdings Inc (IESC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Integrated Electrical Services second-quarter conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Monday, May 15, 2006. At this time, I would like to turn the presentation over to Karen Roan with DRG&E. Please go ahead, ma'am.

Thank you, Andrew, and good morning, everyone. We appreciate you joining us for the Integrated Electrical Services conference call today. We also would like to welcome our Internet participants listening to the call simulcast live over the Internet. Before I turn the call over to management, I have the normal details to cover.

You could have received an e-mail of the press release last week. Sometimes there are technical difficulties with these broadcasts; so if you did not receive yours, please call our offices at DRG&E, and that is 713-529-6600; and we will get one to you. Also, if you want to be on the permanent e-mail distribution list for the Company, please relay that information to us.

There will be a replay of today's call, and it will be available via webcast by going to the Company's website at www.IES-co.com, for a recorded instant replay (technical difficulty) will be available for the next seven days. You can call 303-590-3000 and use pass code 1106-0391 for that replay.

Please note that information reported on this call speaks only as of today, May 15, 2006. Therefore, you're advised that any and all time-sensitive information may no longer be accurate at the time of any replay.

This conference call includes certain statements that may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, all of which are based upon the various estimates and assumptions that the Company believes to be reasonable as of the date hereof. These statements involved risks and uncertainties that could cause the Company's actual future outcomes to differ materially from those set forth in such statements.

Such risks and uncertainties include, but are not limited to, the Company's ability to continue as a going concern; the inherent uncertainties relating to estimating future operating results or our ability to generate sales, operating income, or cash flows; potential difficulty in addressing a material weakness in the Company's accounting systems that has been identified by the Company and its independent auditors; potential limitations on our ability to access the credit line under our credit facility; litigation risks and uncertainties; fluctuations in operating results because of downturns in levels of construction; inaccurate estimates used in entering into and executing contracts; difficulty in managing the operation of existing entities; the high level of competition in the construction industry both from third parties and ex-employees; changes in interest rates that could affect the level of construction; the general level of the economy; increases in costs or limitations on availability of labor, steel, copper, and gasoline; limitations on the availability and the increased costs of surety bonds required for certain projects; inability to provide sufficient bonding needed for available work; risk associated with failure to provide surety bonds on jobs where we have commenced work or are otherwise contractually obligated to provide surety bonds; loss of key personnel; business disruption and costs associated with the Securities and Exchange Commission investigation now pending, and other litigation that may arise from time to time; unexpected liabilities associated with warranties or other liabilities attributable to the retention of the legal structure or retained liabilities of business units where we have sold substantially all of the assets; inability to fulfill the terms of any debtor-in-possession credit facility or exit facility; inability of subsidiaries to incorporate new accounting, control, and operating procedures; inaccuracies in estimating revenues and percentage of completion on contracts; inability to add sufficient amount of work at sufficient margins to replace work that was not awarded to IES during the bankruptcy; difficulty in curing vendor and customer concerns that were created by the bankruptcy filing; managing disruptions caused by the transition to a new CEO and new Board of Directors in the emergent IES; the Company's ability to meet debt service obligations and related financial and other covenants; and the possibility resulting material default under the Company's credit agreements which is not waived or rectified; limitations on the availability of sufficient credit to fund working capital; disruptions or inability to effectively manage internal growth or consolidations; distraction of management and costs associated with the Company's restructuring efforts; the residual effect with customers and vendors from the bankruptcy process leading to less work or less favorable delivery or credit terms; the delayed effect of fewer or smaller new projects awarded to the Company during the bankruptcy and its effect on future financial results; the lowered efficiency and higher costs associated with projects at subsidiaries that the Company has determined to wind down or close; the loss of employees during the bankruptcy process and the winding down of subsidiaries; the distraction of management time in winding down and closing subsidiaries; inability to successfully restructure our operations to reduce operating losses; and unexpected weather interference.

You should understand that the foregoing as well as other risk factors discussed in our filings with the SEC, including those listed under the heading Risk Factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2005, and 10-Q filed for the quarter ended March 2006 could cause results to differ materially from those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise information concerning the Company's restructuring efforts, borrowing availability, its cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

You should understand that the foregoing as well as other risk factors discussed during this call and in IES's annual report on Form 10-K for the year ended September 30, 2005, could cause future outcomes to differ materially from those expressed in such forward-looking statements. IES undertake no obligation to publicly update or revise information concerning the Company's restructuring efforts, borrowing availability, or its cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Forward-looking statements are provided in this call pursuant to the Safe Harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties, and risks described herein.

Now I would like to turn the call over to Byron Snyder, Chairman and Chief Executive Officer. Byron?

Thank you, Karen. Good morning, ladies and gentlemen. Thank you for joining us today. As you may have seen, last Wednesday evening we filed our 10-Q and published our fiscal 2006 second-quarter results. We hope you have had a chance to review these results, which are posted and available for public viewing on our website. We can certainly take questions in the question-and-answer portion of the call.

But in my prepared remarks today, I thought I would spend a few moments to sincerely thank all of our employees, all of our customers, all of our vendors, all of our finance partners, all of our surety providers, and all of our stakeholders for their support throughout these difficulties we have worked through in the past several quarters; and thank all of these parties for their efforts in our successful navigation through and out of a complicated bankruptcy process within a time frame we had established and communicated to all constituencies.

I am pleased to report that effective May 12, 2006, IES emerged from Chapter 11 bankruptcy. As you recall on February 14, 2006, IES and all of its domestic business units entered into a prearranged Chapter 11 plan. The case was filed pursuant to an agreement with the institutions that held approximately 61% of IES's 173 million 9 3/8 outstanding Senior Subordinated Notes due 2009, to support a consensual financing restructuring of the Company.

The common stock has been trading on the OTC Pink Sheets since December 2005 under the ticker symbol IESRQ.PK. IES's new common stock has been approved [for] quotation on the NASDAQ. The NASDAQ has assigned the stock symbol IESC as the trading symbol for the Company's new common stock. The stock is expected to start trading today, May 15, 2006.

Our customers have been very supportive during these challenging times, and our vendors have worked as our partners as we transitioned our balance sheet over the past three months. We appreciate all of their efforts on our behalf because we have worked very hard to protect, maintain, and grow these relationships. Now I will turn the call over to our CFO, David Miller.

Thanks, Byron. I would like to start by discussing our financial results. For consolidated operations, total revenue for the second fiscal quarter of 2006 was $245.2 million compared to $268.9 million for the second fiscal quarter of 2005. Gross profit as a percentage of revenue increased to 11.8% for the 2006-7 second quarter, from 11.3% for the same quarter of 2005.

The loss from operations increased from an operating loss of $4.7 million for the second fiscal quarter of 2005 to an operating loss of $7.0 million for the second fiscal quarter of 2006; and the net loss for the second quarter of fiscal 2006 was $27.4 million compared to a net loss of $13.2 million in the same quarter last year.

Included in the 2006 second-quarter net loss are $12.1 million of charges related to the Company's reorganization, including $8.1 million in professional fees related to the bankruptcy and a non-cash charge of $4.0 million to write off certain unamortized debt issuance costs, debt discounts of premiums, and embedded derivative liabilities related to the Company's Senior Convertible Notes and Senior Subordinated Notes.

For the six months ended March 31, 2006, total revenue from consolidated operations was $504.3 million, decreasing from $534.3 million for the six months ending March 31, 2005. Gross profit as a percentage of revenue increased to 13.1% in the first six months of fiscal 2006, from 12.1% for the same period one year ago.

The loss from operations for the first half of fiscal 2006 was $3.1 million compared to an operating loss of $5.5 million for the first half of fiscal 2005. The net loss for the first half of fiscal 2006 was $29.2 million, an improvement of $1.6 million from the net loss of $30.8 million in the same period a year ago.

Again, included in the fiscal 2006 year-to-date net loss are the same $12.1 million in charges related to the Company's reorganization.

In our operating segments, revenue for Commercial/Industrial work in the second quarter of 2006 was $152.7 million with a gross margin of 7.2%, a decline from revenues of $200.8 million with a 7.5% gross margin for the prior year. The decline in revenue in the Commercial and Industrial segment is primarily the result of the decline in revenue of the wind-down units, and they also had a significant impact on the margins during the period ending 2006.

The Residential segment delivered revenue of $92.5 million with a gross margin of 19.3% in fiscal 2006, an increase of 35.8% from revenues of $68.1 billion with 22.6% gross margin in the same quarter of the previous year. The decline in margin is due to the increasing cost of materials, particularly copper wire, which has not been fully passed on to our customers. Residential work as a percent of total revenue increased to 38% in the second quarter of fiscal 2006, from 25% in the same quarter of fiscal 2005.

Now I would like to provide some detail on our go-forward operations. In Wednesday's earnings release, we separated our units into wind-down units, those that we're in the process of shutting down, and go-forward operations. We feel that the performance of the go-forward operations is important, because they are the operations that will make up IES going forward.

Revenue at the go-forward operations increased 5.8% to $227.6 million in the second fiscal quarter of 2006, from $215.0 million in the same period of 2005. The gross profit earned by the go-forward operations increased $4.8 million to $35.6 million for the second fiscal quarter of 2006, from $30.8 million in the second fiscal quarter of 2005.

Gross profit as a percentage of revenue increased to 15.7% for the second fiscal quarter of 2006, from 14.3% for the fiscal 2005 second quarter. The increase in gross margin was primarily due to improved profitability in the Commercial/Industrial segment and a shift in revenue mix to incorporate more Residential work, which typically has a higher gross margin.

Go-forward operations' SG&A expenses decreased 0.4 million to $30.5 million for the second fiscal quarter of 2006, from $30.9 million for the second fiscal quarter of 2005. SG&A expenses for these units as a percentage of corresponding revenues decreased to 13.4% for the second fiscal quarter of 2006, from 14.4% for the second fiscal quarter of 2005.

Income from operations of the go-forward units increased $5.2 million from an operating loss of $0.1 million for the second fiscal quarter of 2005 to operating income of $5.1 million for the second fiscal quarter of 2006.

Fiscal 2006 year-to-date go-forward operations' revenue increased 8% to $454.1 million from $420.5 million in the first six months of fiscal 2005.

Gross profit at these operations increased $8.4 million to $70.8 million in the six months ended March 31, 2006 from $62.3 million in the six months ended March 31, 2005. Gross profit as a percentage of revenue increased to 15.6% for the six months ended March 31, 2006, from 14.8% for the six months ended March 31, 2005.

The increase in gross profit dollars was primarily due to increased volume in IES's Residential segment. The increase in gross profit margin is attributable to a shift in the revenue mix to include more Residential revenue, which has a higher gross margin, and improve profitability in the Company's Commercial/Industrial segment.

Go-forward operations' SG&A expenses decreased $1 million to $60.3 million for the first six months of fiscal 2006, from $61.3 million for the first six months of fiscal 2005. SG&A expenses at these units as a percentage of corresponding revenue decreased to 13.3% for the six months ended March 31, 2006, from 14.6% for the first six months ended March 31, 2005.

Income from operations of go-forward operations increased $9.5 million from an operating income of $1 million for the first two fiscal quarters of 2005, to operating income of $10.5 million for the first two fiscal quarters of 2006.

For additional historical results and a complete explanation and reconciliation of the go-forward operations, wind-down units, and continuing operations, please refer to our earnings release published last Wednesday, May 10, 2006.

Our total backlog decreased to $362 million from $378 million, while margin in backlog continued to increase compared to the previous quarter. Backlog in the go-forward operations decreased to $341 million from $348 million, though margins continued to improve.

During the same period, backlog at the wind-down units decreased to $22 million from $30 million with lower margins. The backlog at the wind-down units will continue to decline in the coming months.

We continue to focus on short-term, higher-margin projects as well as non-bonded jobs which have helped to improve the margin and backlog for the go-forward operations over the last 12 months. In addition, I would like to remind everyone that most single-family residential and service and maintenance work is not backlog. All of our Residential companies are part of the go-forward operations.

Finally, I would like to highlight on this call that IES closed with a lending syndicate led by Banc of America on a two-year, $80 million Senior secured, post-confirmation, exit credit facility with a sublimit of $72 million for letters of credit. The new facility will be used to refinance the DIP Facility and provide letters of credit and financing subsequent to emerging from Chapter 11.

We have also closed with Eton Park Fund LP and an affiliate, and Flagg Street Partners LP and affiliates, on a seven-year, $53 million Senior secured term loan. The purpose of the term loan is to refinance the Senior Convertible Notes. The loan permits the Company at its option to direct that interest be paid by capitalizing such interest as additional loans under the facility for the first three years; and we have currently elected to capitalize such interest.

As we exit from Chapter 11, we also have three surety companies that have continued to support this Company and will continue providing surety support to IES. They are Federal Insurance, who you sometimes have heard us refer to as the Chubb, SureTec, and International Bonding and Construction Services. I would now like to hand the call back to Byron. Byron?

Thank you, David. Again I would like to sincerely thank each and every person in our organization that was part of the effort to turn this Company around. IES could not have completed this successful journey without their help. At this time, we will take a few questions.

(OPERATOR INSTRUCTIONS) [Ronald Rich].

Miller Tabak Roberts. I was wondering if you could give me a sense for geographic regions that will be the source for Commercial and Industrial revenue going forward.

Ronald, the geographic regions that will be part of the Company going forward is -- the Company has historically been focused on the Sunbelt states and concentrated in the Sunbelt states. Notwithstanding the wind-down of certain units, we continue to be focused on the Sunbelt states. We've got a high concentration in Texas, a large concentration in Florida, and then all the way through the rest of the Sunbelt, and then up the East Coast into Massachusetts.

Okay. On the Residential side, you have been basically growing nationally?

We are, but again most of our Residential companies are also focused in the Sunbelt states and in the southern U.S.

Okay. Last question, with regard to -- you mentioned copper affecting margin in the Residential segment. Has there been any effect -- it doesn't seem like there has been any effect to the backlog on Commercial/Industrial due to copper.

Copper certainly does impact Commercial/Industrial, although we have not seen it impacted quite as much as the Residential segment. One of the things that we tried to incorporate into our contracts is escalation clauses, as much as we possibly can.

Okay, all right. Great. Thank you very much.

Robert Ryan.

Banc of America Securities. Thank you for having the call this morning. I have missed part of the call, so a lot of this may be repetitive, but have you given an update on your current cash and liquidity position?

Yes, we certainly can. Cash, cash today, is approximately $17.5 million; and liquidity is -- that's unrestricted cash.

Yes.

And liquidity or availability on the line is approximately 12 to $13 million after a restructuring reserve.

What are the prospects for some of the restricted cash? It was $20 million as of March 31, being freed up as the --?

The $20 million will still be required to be as restricted cash under the terms of the new DIP facility. The new exit facility.

Okay.

Banc of America.

Are there any triggers in there that would allow for the release of some of that cash?

There are not.

Then in terms of you talked about the three surety providers, how do you think about your total surety availability? Do you address it on sort of a project by project basis? Or there is a dollar amount that you think of as being unused, so to speak?

Our facilities with Federal Insurance, also known as The Chubb, has a monthly limitation on the amount of bonds that they will write. That limitation is $10 million per month. As well as we have got additional bonding capacity with International Bonding and Construction Services, which does not have a (inaudible) limitation on the [bonds] that they would issue in any month.

What was that bonding deal that you signed up during the Chapter 11 process with -- there was a source in Washington D.C.; it was backstopped by a bank?

That is International Bonding and Construction Services.

Okay. You have not provided any new guidance on the call?

No, we have not.

But in terms of the business outlook, the business environment, generally, there is talk of cooling in the housing market; how would you say the end markets compare to how they have been over the course of the last four or five years?

Well, I think we continue to see a robust housing market, and we certainly see a robust commercial and industrial market. One of the things that is probably unique to IES is what impact, if any, the coming out of bankruptcy will have on our ability to realize all of those robust marketplaces.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Management, at this time we have no additional questions in the queue. I will turn the conference over to you for any further remarks.

Thank you. We appreciate all of you being on the call today, and we would like to thank you for your support. Karen?

Thank you all for participating on today's call.

Thank you, management team. Ladies and gentlemen, at this time we will conclude today's teleconference. We thank you for participating on the program. You may now disconnect and please have a pleasant day.