IES Holdings Inc (IESC) 2006 Q4 法說會逐字稿

Welcome to the Integrated Electrical Services 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today Thursday, December 21, 2006. I would now like to turn the conference over to Karen Roan with DRG&E. Please go ahead, ma'am.

Thank you and good morning everyone. We appreciate you're joining us for Integrated Electrical Services conference call today to review fiscal 2006 fourth quarter results. We 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. We are currently rebuilding the e-mail distribution list for IES. So if you did not receive an e-mail of the news release please call us at our offices at DRG&E at 713-529-6600 to provide us your contact information, or you can e-mail me at kcroan@DRG-E.com. Either way we want to get you added to the e-mail list if you so choose. There will be a replay of today's call and it will be available via webcast by going to www.IES-CO.com where a recorded instant replay will be available for the next seven days by calling 303-590-3000 using pass code 11078490.

Please note that information reported on this call speaks only as of today, December 21, 2006 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. As you know this conference call contains certain statements that may be deemed forward-looking statements within the meaning of the section 27A of the Securities Act of 1933 and section 21-E of the Securities Act of 1934. All of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof. These statements involve 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 meet debt service obligations and related financial and other covenants, particularly as relates to the shutdown company projects and the possible resulting material default under the company's credit agreements, which is not waived or amended.

Limitations on the availability and the increased costs of surety bonds required for certain projects, risk associated with surety to provide surety bonds on jobs where the company has commenced work or are otherwise contractually obligated to provide surety bonds; the inherent uncertainties relating to estimating future operating results and the company's ability to generate sales operating income or cash flow; potential difficulty in addressing material weaknesses in the inventory and control environment at one business unit that has been identified by the company and its independent auditors; fluctuations in operating results because of downturns and levels of construction; inaccurate estimates used in entering unto and executing contracts; inaccuracies in estimating revenue and percentage of completion on contracts; difficulty in managing the operations of existing entities; the high level of competition in the construction industry both from third parties and ex-employees; increases in costs or limitations on availability of labor, especially qualified electricians; increases in costs of commodities used in our industry of steel, copper and gasoline; accidents related from the numerous physical hazards associated with the company's work; loss of key personnel, particularly presidents of business units; business disruption and costs associated with the Securities and Exchange Commission investigation or class-action now pending; litigation risks and uncertainties including in connection with the ongoing SEC investigation; unexpected liabilities or losses associated with warranties or other liabilities attributable to the retention of legal structure or retained liabilities of business units where the company has sold substantially all of the assets; difficulties in integrating new types of work into existing subsidiaries; inability of the company to incorporate new accounting control in operating procedures, the loss of productivity either at the corporate office or operating level resulting from change procedures or management personnel; disruptions or inability to effectively manage consolidations; 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 different new projects awarded to the company during the bankruptcy and its effect on future financial results; the lowered efficiency and higher cost 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 and the distraction of management time in winding down and closing subsidiaries.

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 December 30, 2006 could cause future outcomes to differ materially from those expressed in such forward-looking statements. IES undertakes 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 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. General information about IES can be found at www.IES-CO.com under Investor Relations. The company's annual report on form 10-K, quarterly reports on form 10-Q and current reports on form 8-K as well as any amendments to those reports are available free of charge through IES's website as soon as reasonably practical after they are filed with or furnished to the SEC.

Now with me this morning are Michael Caliel, Chief Executive Officer and David Miller, Chief Financial Officer. I will now turn the call over to Mike.

Thank you, Karen. Good morning, everyone, and thank you for joining us today. We are pleased to have this conference call and discuss our fiscal 2006 fourth quarter results, as well as our plans for improving the business and positioning the company for its future. In our discussion today we are going to focus on and refer to our continuing operations, which are comprised of our go-forward units. You can see the results of our wind-down units in the press release and in the form 10-K which was filed today.

First in the way of background on IES's restructuring, the company grew by acquisition from its inception in 1997 through the year 2000, and during that time incurred significant leverage. Following the events of September 11, 2001 and the during the recession that followed profit margins in the commercial and industrial segment were compressed. Then in August '04 the company announced it was delaying its June 30, 2004, 10-Q filing which led to internal and SEC investigations, further complicating the relationship with the company's lenders. The amount of leverage on the company's balance sheet restricted bonding availability and the company's long-term growth prospects.

In late 2004 the company announced the divestiture program which was completed in late 2005. Earlier this year the company structured a consensual arrangement with its subordinated noteholders and filed for prearranged Chapter 11 on February 14, 2006. During the restructuring process all creditors were paid in the ordinary course of business including those with pre-petition claims. Restructuring was successful and IES emerged from Chapter 11 within its expected timeframe on May 12, 2006. I joined the company two months later on July 12th of this year.

Before I discuss the new IES subsequent to the restructuring let me first acknowledge the support of the IES employees, customers, suppliers and creditors during the reorganization process. Also I must recognize our new senior lenders led by Banc of America and including Wells Fargo, Foothill and CIT, with whom we have an $80 million credit facility to be utilized for letters of credit and other working capital needs. As well as our term lenders, and we have a $53 million term loan.

Now regarding IES going forward we've embarked on a journey to transform IES. During the last few months we've examined and assessed our operations, our processes and our controls as well as our capabilities. Based on the results of those analyses, we have begun a series of decisive initiatives to strengthen the foundation of the business and move the company toward realizing its full potential.

Our first priority is enhance the company's core competencies, such as estimating, project management and supply chain management, along with improving our overall cash management. We believe that focusing on these critical functions will allow us to consistently deploy these critical word processes thereby improving our performance predictability and our overall level of profitability. As well as help us improve our cash conversion and improve our overall cost competitiveness.

Turning now to cash management; we've been working diligently to improve our entire order-to-cash cycle. That is from the time we are awarded a job to the time that we've collected all the receivables on it. We launched an aggressive program in August of this year aimed at improving our cash flow by reducing the amount of invested working capital. Since its inception we've seen a dramatic improvement in our cash position which is currently at approximately $54 million. We have also with the assistance of an external consultant performed working groups within the company, led by our people to identify best practices and institutionalize them throughout the company. Additionally we are installing key metrics and management operating systems and providing training to our people on these improved processes and systems. Our focus is on the entire IES value chain, essentially where we make money; from the assessment of the quality of work we are pursuing through the bidding, execution and completion of a project, as well as the management of our supply chain. As a result of the work that these groups have done, we have begun to implement uniform best practices throughout our business. This is a critical step in IES beginning to compete as an institution versus simply a collection of local electrical contractors.

Beyond that we're in the process of evaluating our overall cost structure and we have begun eliminating costs that don't add value. We're at the front end of this work, and we have more to do in order to move our cost structure in line with that of our peer group. On the operational side in order to improve the predictability of our performance, we have established a rhythm of in-depth monthly operating reviews of our businesses. This is a first step in establishing a new level of visibility into the performance and potential of each of the businesses, and creating the proper accountability for the performance of our business among our leadership group. In addition to the work we have underway to transform IES, we continue to focus on our safety performance. Our company is built on our people, and we will do whatever we can to ensure that they are safe and that they are excited about their future with IES. We are extremely proud of our safety record; our OSHA recordable rate is roughly one-half the industry average. For every 100 of our employees an average of 2.5 was involved in a work-related accident in fiscal 2006. The industry average is at 6.3 accidents per 100 workers. However, we are not content with any accidents and we are continuously working to improve on that record.

Now before I turn the call over to David Miller to review the financial results let me note that in the fourth quarter, our first full quarter following the restructuring, our backlog which held relatively steady throughout the restructuring process remained strong, increasing 12% sequentially and 13% over last year to $371 million. Our gross margin in backlog is improving increasing both sequentially and year-over-year. Now let me turn the call over to David to discuss the financials.

Thank you, Mike. As Mike said we are focused on our go-forward units which are now all that comprise continuing operations. Revenues for continuing operations for the fourth fiscal quarter of 2006 were $250.6 million with a gross profit of $34.8 million at 13.9%. In our operating segments fourth quarter continuing operation revenues for commercial industrial work were $140.7 million with a gross margin of 11.1%. And the residential segment generated revenues of $109.9 million with gross margins of 17.5%.

SG&A in the fourth quarter was $32.3 million or 12.9% resulting in income from operations of $2.5 million. There was a net loss in the quarter of $0.1 million from continuing operations.

EBITDA for the fourth fiscal quarter in continuing operations was $3.8 million and total EBITDA including discontinued operations net of reorganization items was a negative $1.9 million. Management believes EBITDA provides useful information to investors as a measurement of comparability to peer companies. A full reconciliation of EBITDA to net income can be found in our year end earnings release. For the full fiscal year 2006 revenues from continuing operations were $950.2 million with a gross profit of $139.5 million at 14.7%. And in our operating segments full-year continuing operation revenues for commercial industrial work were $554.4 million with a gross margin of 12.5%, and the residential segment generated revenues of $395.8 million with a gross margin of 17.8%.

SG&A for the full-year was $124.1 million or 13.1% resulting in income from operations of $15.4 million. Net income from continuing operations for the year was $23.6 million due in part to a $26.2 million gain from reorganization items during the year, and this yielded $1.53 earnings per share.

EBITDA for the full year and continuing operations was $23.9 million excluding reorganization items and total EBITDA net of reorganization items was -$0.2 million including our discontinued operations.

As mentioned in our form 10-K filed today, we determined that an error occurred related to accounting for inventory and recognition of accounts receivable at one of our business units for the interim period of 2006, which warranted revisions to previously reported interim results for fiscal 2006. The total impact of these adjustments was to decrease previously reported operating income by less than $400,000. We are strengthening our controls at this business unit.

Turning to some indicators of our business, as Mike said, our backlog continues to be robust, which reflects the strength in the markets that we serve and of the ongoing support of our customers. Backlog in continuing operations as of September 30, 2006 was $371 million, up 12% from the previous quarters level of $332 million and just as important the margin of this backlog is improving.

Total debt as of September 30, 2006 was $55.8 million, and today it is approximately $57 million. This compares to over $220 million of debt before the restructuring. We have no borrowings under our credit facility and availability as of today is $33.7 million. In fact we have not borrowed on this facility since August 2 of this year. We closed the fiscal year with $28 million in cash and cash equivalent as compared to $11 million in cash and cash equivalent in the previous quarter. As of yesterday cash and cash equivalents had grown to approximately $54 million thanks in large part to the continued success of our new cash management program that we put in place in early August.

One of the areas of focus of the program is to reduce the average time between when we pay our vendors and when we collect from our customers. The difference, measured as the gap between days sales outstanding and days payable outstanding was reduced by more than ten days from the end of July to the end of October. I will now turn the call back to Mike for his final comments.

David, thank you. When we look at the industry forecast, the markets we serve are projected to remain strong over the next several years including residential. Commercial industrial which comprises approximately 60% of our business has been projected to remain strong. Residential which makes up approximately 40% of our business overall continues to perform well despite published reports of the cooling in the residential market. However in the markets where we are experiencing a softening in residential spending we are acting quickly by adjusting our cost base and planning for the shifting market.

We have had a change in leadership in our residential business in Houston and I'm pleased to report that [Richard Nix] has been appointed President of Houston-Stafford Electric, or HSE. Rick served as President of HSE from 1999 through 2002, rejoined the company in 2004 and has been instrumental in building many of HSE's divisional operations. [Dennis Howe], who has worked at HSE for over 20 years has been appointed Vice President of Operations and in addition, [Teddy Wilkes] continues as Vice President of Finance and Administration for HSE and will work alongside Rick and Dennis as a key member of their leadership team.

Today after approximately five months at IES and having assessed the operations in the field, we have made progress in some key areas. We substantially completed the wind-down process, customer confidence is solid, and supplier relationships remain strong. We are strengthening and institutionalizing some of our core work processes and we've improved our overall cash management disciplines.

Before I turn the call over for questions though I will say that I am optimistic and excited about the prospects for improving our performance and creating value for our stakeholders. But let's be clear, we have significant work to do. I believe there is a strong potential in this business. However, there are no quick fixes or shortcuts here. It's about doing a lot of things right everyday. It's about execution and it's about accountability, and that is our focus at IES.

Let me extend my personal thanks to our customers and our suppliers who have supported IES as well as our employees have shown dedication and have continued to focus on our customers. I look forward to reporting on our progress as we move forward, and operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS) [Ronnie Kaplan] with Wolf Point Capital.

Thank you, and thanks for the information you are providing on the call. Two questions for you. First given that your cash balances seen to be increasing, is there any thought to paying down some debt given that your term loan is kind of expensive money?

Ronnie, I agree, good morning. The term loan is at 12.3% margins, and I will say that as the cash balance grows and as we focus on collecting cash, obviously looking at the best ways to use that cash are things that we're going to be doing going forward. However at this point I am not ready to say that we are in a position to pay down that debt. We are going to be looking at the best ways to use that capital going forward.

I know in the past management has talked about some jobs that you had, some larger jobs that had some very poor margins that you are working to complete. And that were sort of bringing down the financial performance of the company. Have you finished those jobs as of the end of this last quarter, the fourth quarter? So is it something that we could be looking for better margins going forward, or are we still working through those jobs?

Ronnie, as Mike said, we are very much focused on the order-to-cash cycle and improving the business that comes into our backlog. As you know having completed 4300 contracts in 2006, we are working on that many contracts rather, we are always going to have some book of business that performs at lower than expectation. However, with that said we are very focused on managing the book of business that we do have and bringing in at or above the margins that we expect to bring it in at. And where we have those contracts that are causing us difficulties we are deploying the appropriate resources to work through those as quickly as possible.

Ronnie, we are focused on really three areas. One, ensuring that we have good rigor around assessing the quality of our incoming work, assessing the accuracy of our estimates. And then finally as David alluded to, ensuring that the rigor and the oversight is in place while we are actually executing the projects to make sure that we execute to the plan that we established.

And it looks like your backlog has grown a fair amount, which is great news. How much of that is firm contracts and how much of it could be subject to -- and I realize it probably can't quantify this in any firm numbers -- but is a lot of it work that could be canceled if there continues to be a decline in the housing market?

Our backlog -- as you know or maybe don't know, Ronnie, the majority of our backlog is commercial and industrial. A very, very small portion of this is actually residential; we don't really backlog our residential work because it is such quick turn in nature. But with respect to the rest of the backlog all of that is supported in general by firm contracts or written notices to proceed. However in the construction industry customers do have the ability to terminate contracts in many cases for convenience. However our history has not been that those contracts are typically canceled.

And last question here, as far as your footprint, are you happy with the footprint you have right now? Or would you be looking to maybe expand that further, although obviously you've just gone through a period of selling off units. I didn't know if there was any thought to maybe expanding your footprint at all.

I think given where we are with our operational initiatives we are happy with our footprint today.

Thank you. Nice work.

(OPERATOR INSTRUCTIONS) Bill Goldman, [Simco]

I just wanted to clarify the cash as of December 20th was $54 million. That is just the unrestricted cash?

Yes, that's correct.

And how much restricted cash was there as of that day?

There was $20 million of restricted cash on deposit with our senior credit facility lenders led by Banc of America.

Okay, great. Thank you.

Management, there are no further questions at this time; I will turn it back to you for closing comments.

Very good. Thank you. Again I want to thank all of you for your interest in IES, and we look forward to talking with you on our next call. Happy holidays to everyone. Goodbye.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and at this time you may disconnect.