IES Holdings Inc (IESC) 2007 Q2 法說會逐字稿

Welcome to the Integrated Electrical Services Q2 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] This conference is being record, May 9, 2007.

I would now like to turn the conference over to Mr. Ken Dennard with DRG&E. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us for Integrated Electrical Services conference call today to review fiscal 2007 second quarter results. We'd also like to welcome our Internet participant listening to the call simulcast live over the Web.

Before I turn the call over to management, I have the normal housekeeping details to run through. We are rebuilding the e-mail distribution list for IES, so if you didn't receive an e-mail of the news release, please call us at our offices at DRG&E, and that number is 713-529-6600, and provide us the contact information. Or you can e-mail me at ksdennard@drg-e.com. Either way, we want to get you added to that e-mail list, if you so choose. Also, there is going to be a replay of today's call. It will be available via Webcast by going to www.ies-co.com, or there is a telephonic instant replay feature for the next 7 days by calling 303-590-3000, using the pass code 11088674. And that information is in the press release.

Please note that information reported on this call speaks only as of today, May 9, 2007, and therefore you are advised the time-sensitive information may no longer be accurate as of the time of any replay listening. Also, as you know, 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 and Exchange Act of 1934. All of which are based upon various estimates and assumptions that the Company believes to have been 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 at such statements. Such risks and uncertainties include, but are not limited to, increased costs; assurety bonds required for certain projects; the inherent uncertainties related to estimating future operating results; and the Company's ability to generate sales, operating income, or cash flow; potential difficulty in addressing material weaknesses 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 into and executing contracts; inaccuracies in estimating revenue and percentage of completion on contracts; difficulty in managing the operation's existing entity; 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; increasing costs and 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 or costs -- and costs associated with the SEC investigation or class actions; litigation risks and uncertainties; expected liabilities or losses associated with warranties; difficulties in integrating new types of work in the existing subsidiaries; the inability of the Company to incorporate new accounting control or operating procedure, but also productivity, either at the corporate office or operating level, resulting from change of procedures or manage of personnel; disruptions or inability to effectively manage considerations.

You should understand that all of the foregoing, as well as other risk factors discussed in this call and IES's Annual Report on Form 10-K for the year-ended September 30, 2006 and IES's Quarterly Report on Form 10-Q for the quarter-ended March 31, 2007 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 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.

General information about IES can be found on the Web site, which I mentioned is www.ies-co.com under the "Investor Relations" section. The Annual Report, Quarterly Report, and current reports are all, as well as any amended to those reports, are available free of charge through the Web site as soon as reasonable practical after filed with the -- or furnished with the SEC.

Now, with me this morning, we have Michael Caliel, the CEO, and Randy Guba, CFO. I'd like to now turn the call over to Mike.

Ken, thank you. Good morning, everyone, and thank you for joining us today as we review the fiscal 2007 Q2 results. Before I begin, it's a pleasure to welcome our new CFO, Randy Guba, who joined us on April 11th. Randy's extensive financial experience and proven leadership skills will be a great asset to our organization and we're delighted to have him here.

As I've said before, we're in the midst of a comprehensive transformation at IES. It's a program to strengthen the overall foundation of our Company and position it for growth. We're focused on strengthening the critical functions of our business, which include enhancing our estimating project management/supply chain management processes. We're continuing to focus on our cash management disciplines. And while we've seen considerable progress since we launched this program last August, we believe that more improvement is required.

We're institutionalizing some work processes and best practices throughout the Company to compete as an institution, rather than a collection of separate entities, and we're continuing to assess our overall cost structure and remove costs that don't add value. Meanwhile, we're very proud of our safety record. We're focused on continuing to drive improvements in our overall safety performance.

In addition, we're in the midst of addressing the performance of a very small number of businesses in our commercial and industrial segment. In each case, we've taken decisive action to fix the foundation of the business before we grow it. So we're not trying to grow our way to health, we're taking the tough medicine to get these companies well established before we attempt to grow them. Therefore, we saw some impact from this approach, both in lower volumes and the associated effect on SG&A in the quarter. It's important to note that the remaining companies in this segment are solid and performing well.

During the quarter, we also saw the external pressures of the housing market impact our results, negatively affecting both volumes and margins in our residential business. The convergence of the housing market dynamics and our internal improvement initiatives had a clear impact on our results.

Now, that being said, we continue to make progress on some key areas of our business. Gross margin continued to improve, increasing to 16.5% from 15.1% in the second quarter a year ago. Our selectivity in the work we're pursuing resulted in higher quality backlog. Our primary goal, though, is not to simply build backlog and therefore our backlog may dip periodically as we go forward. Backlog was a $354 million at the end of the second quarter and the quality of work in our backlog improved, reflecting our selectivity in the work that we pursue.

We generated a strong operating cash flow in the quarter of $22 million. And due to our efforts to improve cash management, we've seen a solid improvement in our cash position over the last several quarters. As a result, we reached an agreement to prepay $15 million in principal and our term loan this month and this is a very important step in continuing to assure our financial future.

Now, at this point, I'll turn the call over to Randy to review the financial results for the second quarter.

Thanks, Mike. Firstly, I would like to say it's a pleasure to be here today. I'm really excited to join the IES team because I really believe that there is tremendous value in this business, and I was particularly impressed with Mike Caliel and the Board of Directors as well, as I interviewed for this role. And I do think my experience is going to fit well with the challenge. So that being said, let's get into the financials.

The revenues for the second fiscal quarter of 2007 were $217 million, compared to the prior year of $228 million. This is a 4.8% revenue decline, and, as Mike indicated, that's primarily attributable to the decline in our residential business, due to pressure on the housing market as well as our selectivity in the work that we're pursuing.

Gross profit for the second quarter was $36 million, compared to $35 million last year. Gross margin improved by approximately 140 basis points as a result of the key initiatives of our transformation program as they begin to show benefits. We're also seeing benefits from more rigorous screening of the new work and the implementation of more comprehensive project management controls.

As Mike mentioned, the operating cash flow for the quarter was $22 million. This is compared to $2 million a year ago, a dramatic improvement. And that improvement allowed us to embark in the beginning of May on the amendment with our lenders, led by the Bank of America, to adjust our revolving credit facility and allowing a prepayment of $15 million of principal in our term loan.

Pursuant to the term loan agreement, the principal payment will include a prepayment penalty of 4.5%, which will be a total of about $15.7 million. But also, we've been able to amend the agreement to modify our maximum leverage ratio covenant to 4.4 to 1 from its current level of 4.25 to 1 after the prepayment is made. We're also -- we'll be able to include a removal of the commercial and the residential minimum EBIT covenants, which will help us as well. In addition, we have made the decision to go to a cash pay on the interest on the term loan beginning July 1, 2007.

EBITDAR, which of course is our interest before -- earnings before the interest, taxes, depreciation, amortization, as well as our restructuring expenses, was $2.7 million in the second quarter. That compares to a negative $6.3 million a year ago. So that's a nice $9 million improvement. We believe that EBITDA and EBITDAR provide useful information to investors as a measure of comparability to peer companies. We do include a full reconciliation of EBITDA and EBITDAR to that income in the second quarter earnings release.

Net loss from continuing operations in the second quarter was $.7 million, or $0.05 per share. This compared to a new loss in continuing operations of $21.1 million, or $1.41 per share a year ago. Total net loss, which includes the discontinued operations was $700,000, or $0.05 per share, in the second quarter. This compared to a total net loss of $28.5 million, or $1.91 per share, a year ago.

Turning to SG&A for the second quarter, we delivered $35.4 million of SG&A, or 16.3% of revenues, compared to $30.5 million, or 13.3% of revenues last year. Included in our SG&A expense in this year's second quarter is $2.5 million of costs related to our ongoing investment in our transformational program that will help us with our overall operational performance. There is $700,000 of incentives to the business unit management resulting from the improved cash flow of $20 million over our prior year. We also have non-cash compensation expenses of approximately $700,000 related to restricted stock. And our fresh start amortization impacted us $1.1 million as a result of the fresh start accounting and reporting, which was implemented on April 30, 2006.

Now, let me turn briefly to our 6 months results. Revenues for the first 6 months were $446 million, compared to $455 million last year. That was a 2% decline. However, despite lower revenues, our gross profit rose to $73 million from $69 million in the prior year. And our gross profit margin improved by approximately 110 basis points.

SG&A expenses for the first 6 months of 2007 were $71 million, or 15.9% of revenues. This compared to $60.3 million last year, or 13.3%.

Net loss from continuing operations for the first 6 months of 2007 was $4.1 million, or $0.07 per share, as compared to a loss from continuing operations of $22.9 million, or $1.53 per share, for the comparable period last year.

Net loss, which includes net loss from discontinued operations, for the first half of 2007 was $1.5 million, or $0.10 per share. This compares to $30.9 million, or $2.07 per share, in the prior year.

In the operating segment, second quarter revenues for the commercial and industrial work were $137 million, the gross margin percent of 16.2. This compared to $136 million in revenues in the prior year, with a gross margin percent of 12.5. The residential segment generated revenues of $79.3 million in the second quarter, with a gross margin of 17%, compared to $92.6 million in the prior year, with a gross margin percent of 19.

Segment revenues for commercial and industrial work for the first 6 months of fiscal 2007 were $272 million, with a gross margin of 15.5%. This compares with the prior year of $272 million at a gross margin percent of 12.9. Residential revenues for the first half of fiscal 2007 were $173 million, with a gross margin of 17.6%, compared to the first half of fiscal year 2006 residential revenues of $183 million and a gross margin of 18.5%. Backlog related to continued operations was $354 million as of March 31, 2007, a slight decline from the $361 million level of December 31, 2006. Year over year, backlog increased approximately 4% from March 31, 2006 levels, and the quality of the backlog continued to improve, as we were more selective on new business. We closed the quarter with $67 million of unrestricted cash and cash equivalents, compared to $46 million in the preceding quarter and compared to $18 million to a year ago and due to a large part to the continued rigor of our cash management program. I'd now like to turn it back to Mike for his final comments.

Randy, thank you. With respect to our markets, as we've been discussing for some time and people have been reading about for some time, the residential markets have softened in 2007. The forecasting services that we utilize indicate that in 2008 the residential markets projected to return to growth again. As for our transformation program, our business is undergoing a major turnaround effort, both in its overall cost structure, as well as the operating disciplines within the Company. This is a massive and complex restructuring effort that we've undertaken. And while we're making progress, we still have a lot of work ahead of us and a long way to go. Our selectivity is paying off and we'll continue to be selective regarding work that we take on. And, as such, our backlog level may dip periodically as we go forward. Our safety performance is a source of pride for IES and it will continue to be a top priority for the Company. Again, I want to emphasize that we're encouraged by what we've seen in the majority of our operations, however, we're in the midst of a complex and comprehensive transformation of this business. We have a significant amount of work ahead of us. There are no shortcuts, there are no quick fixes. Our focus is on execution, on accountability and getting the fundamentals right in order to strengthen the foundation of IES and put us in a position to improve our performance and create value for our stakeholders. So at this point, Operator, we'll now take questions.

[Operator Instructions] Matt [Widerack], Bond Street Capital

Great quarter. Got a quick question on the SG&A on a go-forward basis. Can you give us a little guidance where you think you guys can get the SG&A down to?

Well, I don't think we're in a position to routinely give forward guidance in terms of numbers in the future. I will say that certainly one of the strategic opportunities that we see in this business is to take a fairly significant amount of SG&A out of the business. I would say that we're certainly looking towards doing that in the future and being a bit more competitive with some of our peers.

Okay. On the transformational initiatives, where you say you spent $2.5 million in SG&A during the quarter, is that a one-time expense and are there going to be any other one-time expenses related to that that we should see in the next couple of quarters? Or does that go away after this quarter?

No, the transformation investments that we're making are projected to continue through the year.

What's the total you expect to spend during the year?

We're not in a position to share that at this point.

[Operator Instructions] Management, at this time we have no further questions. Please continue.

Very good. Well, with no further questions, I want to thank you all again for spending a few minutes with us this morning and we look forward to continuing -- rather, to update you on our progress as we move forward. Thank you again, everyone.

Ladies and gentlemen, this concludes the Integrated Electrical Services Q2 Conference Call. If you would like to listen to a replay of today's conference, please dial 303-590-3000, entering pass code 11088674. You may now disconnect. Thanks for using AT&T Teleconferencing and have a pleasant day.