IES Holdings Inc (IESC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Integrated Electrical Services first quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded Wednesday, February 14th of 2007.

And at this time, I'd like to turn the presentation over to Karen Roan with DRG&E.

Thank you, Andrew, and good morning, everyone. We appreciate your joining us for Integrated Electrical Services conference call today to review fiscal 2007 first quarter results. We would also 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 continuing to rebuild the e-mail distribution list for IES. So if you did not receive an e-mail of the news release, please call our offices at DRG&E at 713-529-6600 and provide us with your contact information. Or you can e-mail me at kcroan@DRG-E.com. Either way, we will get you added to the 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, or a recorded instant replay will be available for the next seven days by calling 303-590-3000, and using pass code 11083573. Please note that information reported on this call speaks only as of today, February 14, 2007; 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 deem to be forward-looking statements within the meaning of Section 27-A 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 here of. 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 it relates to the shutdown of company projects, and the possible resulting material default under the Company's credit agreement which is not waived or amended; limitations on the availability and the increased cost of surety bonds required for certain projects; 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 shutdowns in levels of construction, inaccurate estimates used in entering into and executing contracts, inaccuracies in estimating revenue and percentage of completion on contracts, difficulty in managing the operation of existing entities, the high level of competition in the construction industry from both third parties and ex-employees, increases in cost or limitations on availability of labor, especially qualified electricians, increase in cost of commodities used in our industry of steel, copper and gasoline, accidents resulting 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 the 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 and operating procedures, the loss of productivity either at the corporate office or operating level resulting from changed 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 lowered efficiency and higher cost associated with projects at subsidiaries of the Company has determined to wind down or close, and the loss of employees during the bankruptcy process and the winding down of subsidiaries. You should understand that the foregoing as well as other risk factors discussed during this call, in IES's annual report on Form 10-K for the year ended September 30, 2006, and in IES's quarterly report on Form 10-Q for the quarter ended December 31, 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 and certainties and risks described herein.

General information about IES can be found at the Company's Website 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 which are available free of charge through IES's Website as soon as reasonably practicable after they are filed with or furnished to the SEC.

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.

Karen, thank you. Good morning, everyone, and thank you for joining us today to review our fiscal 2007 first quarter results.

Before I begin, it's a pleasure to welcome Dennis Baldwin who joined us as Chief Accounting Officer effective Friday, February 9th. The background and experience Dennis brings to IES will be a great asset to the Company, and we look forward to his contributions and leadership. As I indicated in our last call just two months ago, we have embarked on a journey to transform IES and strengthen the overall foundation of the Company. During the last quarter, we launched a comprehensive structured program to transform the Company and improve our overall operational performance. We've engaged an outside consultancy to assist in reengineering our work processes, developing tools, installing systems and metrics, and to support the training of our people. It's important to note that our people are leading this effort, and today over 150 people from across IES are taking an active role in transforming our company. We're focussed on strengthening the critical functions of our business such as enhancing our estimating, project management, and supply chain management processes. We're improving our overall cash management disciplines. We're identifying best practices and institutionalizing them throughout the Company so that we can compete as an institution rather than as a collection of independent entities. We're assessing our cost structure to remove costs that don't add value, and while we're very proud of our safety record, we continue to drive improvements to ensure that our people return home safe each and every day.

It's important to recognize that our transformation work is still in the very early stages. However, we've made progress in some key areas. One of our primary goals is to compete as an institution, leveraging our size and national presence, especially in the area of supply chain management. As a result, we've established company-wide supply management programs for our vehicle fleet and fuel purchases. Additionally, as a result of the work of our supply management team, we've established company-wide demand planning and procurement practices for one of our largest commodities. While I'm encouraged by the progress we've made in some areas, there is still much more to do across the entire company. We have made an will continue to make the necessary investments to institutionalize these changes and ensure that the foundation we're putting in place is solid. As you might expect, the transformation of a business such as ours is not a quick fix but an ongoing process aimed at strengthening the core business processes, thereby allowing us to improve our performance predictability and our overall level of profitability.

Now, turning to our performance in the first quarter, there were some encouraging results to report. While the first quarter is seasonally slow from a revenue standpoint, our gross margin increased by 230 basis points over the previous quarter. We generated a strong operating cash flow in the quarter, 18.3 million, driven by our diligent focus on our overall cash management disciplines. Our backlog held relatively stable, ending the quarter at 361 million, while the quality of work in backlog improved. Now, going forward, we'll continue to be selective in the work that we pursue in order to improve the quality of our backlog. Our safety record is excellent, and continues to improve due to the efforts of each and every employee to keep everyone at IES safe. In December, we had the lowest number of reported incidents in our company's history.

Now, I'll turn the call over to David to review the financial results for the quarter.

Thank you, Mike.

Revenues for the first fiscal quarter of 2007 were 229.0 million, with a gross margin of 16.2% compared to revenues of 250.6 million with gross margin of 13.9% in the fourth quarter of fiscal 2006. While a portion of the revenue decrease can be attributed to a seasonal decline, it's also a function of our being more selective on the work that we're pursuing. Gross margin improved by 230 basis points thanks in part to the implementation of more rigorous project management controls. SG&A for the 2007 first fiscal quarter was 35.6 million or 15.5% of revenues, compared to 32.3 million or 12.9% of revenues in the prior quarter. Some of the factors that affected SG&A in the first quarter are an incremental $1.5 million cost related to the external consultant engaged to assist the Company in its transformation program, and we incurred 0.9 million of additional noncash compensation expense related primarily to the restricted stock granted company-wide to management upon emergence from the restructuring last year. The Company also modified the 2007 incentive plan for its operating company management to align it with the Company's goals of improving safety, income from operations, and cash flow.

First quarter income from operations was 1.5 million, compared to 2.5 million in the prior quarter, and net loss from continuing operations in the first quarter was 353,000 or $0.02 a share. This compares to a net loss of 55,000 or essentially breakeven per share in the preceding fourth quarter. Total net loss for the first quarter was 799,000 or $0.05 a share versus total net loss of 6.3 million or $0.42 per share in the prior quarter. And EBITDA before restructuring expenses for continuing operations in the first fiscal quarter was 3.9 million, as compared to 4.8 million in the preceding fourth quarter. And total EBITDA including discontinued operations and net of reorganization items was 2.9 million in the first quarter compared to a negative 1.9 million in the fourth quarter of 2006. Management believes that EBITDA provides useful information to investors as a measure of comparability to peer companies, and a full reconciliation of EBITDA to net income can be found in our first quarter earnings release.

For the operating segments, first quarter revenues for commercial industrial work were 134.8 million, with a gross margin of 14.8%. This compares to fourth quarter revenue for commercial industrial work of 140.7 million with gross margins of 11.1%. Residential segment generated revenues of 94.2 million in the first quarter with gross margin of 18.2%, and this compares to 109.9 million in the fourth quarter with gross margins of 17.5%. Our progress in winding down certain business units as originally mentioned in March 2006 continues, and backlog in discontinued operations was down to 1.6 million as of December 31st, 2006, with just a few jobs left to complete. Interest expense for the quarter was 1.6 million, a reduction of 73% over the same quarter last year, and total long-term debt at the end of the first quarter was approximately 58 million. As of December 31st, 2006, we're in compliance with all covenants under our credit facility. We currently have no borrowings under our credit facility and have not borrowed on this facility since August 2nd. Availability as of today is 31.6 million. We closed the quarter with 46 million in cash and cash equivalents, compared to 28 million in cash and cash equivalents in the preceding quarter. And as of yesterday, cash and cash equivalents totaled approximately 65 million due in large part to the rigor of our cash management program that we established in early August. A key area of focus in the program is to reduce the average time between when we pay our vendors and when we collect from our customers. That difference, measured as the gap between days sales outstanding and days payable outstanding, was reduced by 12 days from the end of July to the end of December 2006.

I'll now turn the call back over to Mike for his final comments.

David, thank you.

Now, with respect to our markets, the market forecasting services that we utilize indicate that over the next five years the market segments in which we operate are projected to grow. Residential markets are projected to soften in 2007; however, the residential segment is projected to grow each year beginning in 2008. Our work to transform IES is aimed at putting in place a solid foundation so that we may one day be in a position to capitalize on the expected strength in these markets. So to summarize the first quarter, we've launched a comprehensive, structured, and disciplined program to transform IES. This process, which we expect to span 2007, has required us to make significant up-front investments ahead of the benefits expected later in the program. We've engaged external support to assist our people and the program timelines, milestones and metrics have been established and are tracked continuously. We have made and will continue to make the necessary investments in our business to improve our operational performance, strengthen our financial position, enhance our overall capabilities, and improve our overall cost competitiveness. To that end, we've launched a school-to-work program aimed at identifying, training, and developing future electricians while they're still in school. The cash management program that we established in August has continued to show positive results. However, we believe more improvement is required. Our safety performance is a source of pride for IES and will continue to be a top priority for our company. Finally, while some of our early efforts have shown encouraging results, we still have significant work to do. There's a strong potential in this business; however, there are no shortcuts or quick fixes. Our focus is on execution, accountability, and getting the fundamentals right in order to strengthen the foundation of IES and to position us to improve our performance and create value for our stakeholders.

Operator, we'll now take questions.

[OPERATOR INSTRUCTIONS]. Management, at this time we have no questions in the queue, and we'd like to turn the presentation back to you for any closing remarks.

Well, thank you. Thank you very much. Thanks very much, everyone, for spending a few minutes with us this morning. We look forward to continuing to update you on our progress in the future, and again, thank you and have a great day.

Pardon me, management. We do have a question that popped up into the queue. Would you like to take that at this time?

Absolutely.

[Rakish Patel], Credit Suisse.

Hi. I was wondering if you could just give a -- a quick overview of what your outlook was for the commercial market?

The outlook in the --

In the commercial part of your business.

Well, the -- we look at the commercial market as certainly providing some interesting growth opportunities. The commercial market traditionally tracks the residential market in terms of growth. In fact, lags by a bit. But the external data that we have been tracking would show that over the course of the next several years the commercial market is forecasted to grow in the mid single-digit range. That's a compound annual growth rate over the course of the next five years. So we look at the commercial market as remaining healthy.

Right. Okay. Thanks. And just in terms of the backlog, do you see that growing during the year or -- ?

Well, as we said, our focus is on the quality of the backlog. We're going to continue to be very selective in the work that we are pursuing such that -- so that we can continue to improve the quality of our backlog and ensure that we execute properly.

Okay. Do you have a target margin that you aim -- that you have as a target for when you take on this business?

We certainly do, but we're not in a position to share that.

Okay. That's great. Thanks.

[OPERATOR INSTRUCTIONS]. [Gary Leeman], JP Morgan.

Hi. Good morning, guys. Just a point of clarification on the cash balance you mentioned as of yesterday. Is that including or excluding the restricted cash?

That is excluding the restricted cash, Gary, and good morning.

Good morning. And could you elaborate a little bit more on the quality of the backlog in terms of what that means?

Yes, Gary, we -- we're not in a position to tell you what the margins in backlog are, but we continue to see improving margins in backlog. And as Mike said, we're being much more selective on the type of work that we allow into our backlog at all, and the type of work that we pursue going forward.

Okay. With the improvement in the balance sheet, have you given any thought to refinancing the term loan? It looks like -- it looks like that's pretty expensive paper right now, considering that we're in a positive net cash position.

Yes, Gary, I agree that -- with the cash that we've got on hand and what that paper costs us, it is relatively expensive. And we're focusing on the best way to utilize our cash balances. I'm not in a point today to say that we're in a position to pay down that debt. However, we are looking at the best ways to use that capital going forward.

Okay. And what is the call premium on the term loan right now?

It's 5.5%, goes down to 4.5% in mid-May.

Okay. And the 20 million in restricted cash, how do we -- how do we free that up? Is that just a function of -- I mean, can you speak to the agent bank and discuss potentially freeing up that restricted cash so that we could put it to better use?

It's certainly a possibility going forward, but I'll say that it's actually a -- it's structured into our credit facility right now. It's a covenant under the credit facility as well as it's a covenant under the term loan that that $20 million remains there, so there's a couple of hurdles that have to be -- that have to be crossed to release that $20 million.

Okay. And a final question. Could you discuss some of the efforts you're making to improve the purchasing of the business? I understand that that's an area that you're pretty focussed on. What's the potential upside there?

Well, I'm not in a position to talk about the potential upside, Gary, but I can tell you that we look at supply management as a critical program for the Company. We -- we've taken some steps to begin to purchase and manage our supply base more effectively across the enterprise. I talked about the programs that we've implemented in the past several weeks around fleet management, around fuel purchases, around doing some demand planning, and forecasting with some of our major commodities and equipment purchases, and consolidating our spend across the business. So we look at that as a -- as a very critical strategic initiative for the business, and we'll continue to work diligently at improving our supply management disciplines.

Okay. And the improvement in the cash balance since the end of the December quarter, was that primarily related to the runoff of the discontinued operations or was that from the core business?

Certainly a piece of it, Gary, relates to the discontinued operations, but the lion's share of it, just as it did from the December quarter, is coming from the rigor that continuing operations are placing every day on cash management.

Okay. All right. Great. Thanks, guys. Keep up the good work.

Thanks, Gary.

Thanks, Gary.

[OPERATOR INSTRUCTIONS]. Alan Mitrani, Sylvan Lake Asset Management.

Hi. Thank you. Which end markets within non-res construction are going fastest for you and do you see the most potential for in the next 12 to 14 months?

End markets in non-res constructions, Alan?

Yes. Non-res commercial construction, yes.

In the commercial side, the institutional market, the retail markets are continuing to grow. Outside of the commercial sector, obviously, the industrial market for us continues to be very encouraging, and we don't see any signs of that market slowing down either.

And when you go up against other competitors for bids, are you competing against some of the other publicly traded companies like Comfort Systems or a Emcor Group typically or is it small local contractors?

It's really both. It depends on the market that we're in, it depends on the sector that we're competing in. So it really varies by opportunity.

And then I'm somewhat new to the Company, at least in this form, but I want to understand, is there anything that you've seen in your time there that structurally should explain why your margins should be any different than Emcor's or Comfort Systems or any of the other contractors over time as you clean up the backlog and book more business?

Anything structurally, the business, I think, is structurally in a position to make good progress. We have some work to do around our cost base. We have some work to do around our supply base, as I said earlier. We also have work to do to ensure that we execute work effectively, and we maintain the margins as the project work moves through our backlog and through our execution process. So much of the work that we have to do is around -- is really around strengthening some of our core work processes and deploying those across the business so that we can ensure that we have consistent execution and consistent delivery in the business.

Okay. Thank you.

Thank you. Management, at this time I'd like to turn the conference back to you for any closing remarks.

Great. Again, folks, thank you very much for spending a few minutes with us this morning. We'll look forward to continuing to update you on our progress as we go forward. Thank you very much.

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