IES Holdings Inc (IESC) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Integrated Electrical Services third-quarter conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded Tuesday, August 14, 2007. At this time I would like to turn the presentation over to Ken Dennard with DRG&E. Please go ahead, sir.

Thank you, Andrew, and good morning, everyone. We appreciate you joining us for IES's conference call today to review fiscal 2007 third-quarter results and certainly would like to welcome all our Internet participants as they are listening to the call simulcast over the Internet.

Before I turn the call over to management and run through the normal housekeeping details, we are rebuilding the e-mail distribution list for IES. So if you did not receive an e-mail of the news release yesterday afternoon, please call our offices at DRG&E, and that is 713-529-6000 and provide us your contact information. Or you can e-mail it directly to me, and my e-mail address was in the press release. Either way we want to get you added to that list if you so choose.

There will be a replay of today's call, and it will be available by going to the website for the webcast, and that is www.ies-co.com, and it will be a telephonic instant replay available for the next seven days by calling 303-590-3000 and using the passcode 11094726. And, of course, that information is also in the press release.

Please note that information reported on this call speaks only as of today, August 14, 2007, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. At the end of this call, I will come back and provide greater detail related to forward-looking statements that may be made in today's call. And general information about IES can be found at the website under Investor Relations of 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 amendments, press releases, etc. are all available free of charge through the website as soon as reasonably practical after filed with the SEC.

Now with me this morning are Michael Caliel, Chief Executive Officer, and Randy Guba, Chief Financial Officer. I would like to turn the call over to Mike.

Ken, thanks. Good morning, everyone, and thank you for joining us today as we review our fiscal 2007 third-quarter results. Before I discuss the highlights of the quarter and our operational restructuring initiative, I would like to highlight some of the progress that we have made over the past three quarters.

Now last fall I outlined our plans to strengthen the foundation of the Company and begin the process of transforming IES and establishing a platform from which to grow. In October of 2006 we embarked on a comprehensive transformation program, and that program is ongoing. We continue to focus on enhancing the critical functions and work processes within the business, many of which are showing considerable improvement. We have made improvements to our estimating, project management and supply chain management functions. Our cash management disciplines have been strengthened throughout the Company. We have institutionalized work processes and best practices throughout the Company and have begun to compete as an institution rather than a collection of independent businesses. And despite a very good safety record, one which we are extremely proud of, we are continuing to drive improvements in our safety performance.

With respect to safety, you may recall we recently issued a press release highlighting numerous safety awards received by several of our divisions, including [Bear Electric], New Tech Electric, Primo Electric and Rogers Electric.

Since the beginning of this process, we have worked through some difficult and unprofitable projects and have taken decisive steps to improve the performance of a handful of businesses that were underperforming. In each case, rather than trying to grow our way out of our problems, we made the tough decisions to fix the foundation of the businesses before trying to grow them. We have improved our cash position from $11 million a year ago to nearly $70 million in cash today. And in May of 2007, we made a $15 million prepayment of our term loan. Now this was an important step in reducing our debt level and further improving the financial position of the Company.

The initiatives and actions taken over the past several months have resulted in an improved surety situation, and as evidence of this improvement, we received a return of collateral totaling approximately $10 million from our primary surety provider. With our transformation program well underway, we are now in a position to proceed with the next phase and address the more structural aspects of the business. Therefore, we have embarked on an operational restructuring initiative to reorient the structure of IES from our current geographic alignment into three major lines of business -- Industrial, Commercial and Residential.

Now this restructuring is part of IES's long-term strategic plan to reduce the overall cost structure of the business and move it more in-line with our markets and our industry. Also to realign the business to the markets that we serve in order to better serve our customers and to better strengthen our financial controls and ultimately to position the business better to implement a market-based growth strategy in the future.

IES has been operating 27 distinct companies each with local administrative support infrastructures including human resources, finance and accounting. This restructuring plan will eliminate redundant administrative functions through business line consolidation, allowing IES to operate as an integrated entity rather than a network of distinct companies. As importantly, it will enable us to go to market in a manner that aligns with the customers and the markets that we serve. After the restructuring plan is complete, the primary functions at these 27 companies will be business development, estimating, project execution and customer service and support. The remaining functions, including the critical roles of accounting and finance, will have been consolidated and centralized leading to improved internal controls and lower G&A.

We are implementing this initiative in a way that assures our ability to continue to compete effectively and provide superior service to our customers. Importantly, these changes will enable our field operations personnel to focus even more on our customers' needs. As a result of the consolidation, selective job reductions will occur primarily in redundant administrative and support functions. There will be no impact to our field operations resources. Rather we are intensifying our focus on building and retaining a first-rate skilled workforce, and we are making investments in the training and development of those personnel.

Now with respect to our operating results for the quarter, we are pleased to report a profitable third quarter in spite of some softness in our Residential segment and poor weather in some of our key markets, and we continue to make progress in several important areas. Our gross margin showed continued improvement, increasing to 17.2% from 16.5% in the second quarter and from 14.9% in the third quarter a year ago. We saw improvement in the critical processes of estimating the screening of new work and project management, which contributed to our gross margin improvement in the quarter. Our backlog was approximately $330 million at the end of the third quarter, and the quality of work in our backlog improved, reflecting our ongoing selectivity in the work that we pursue. As I have indicated before, our primary goal is not simply to build backlog and rather therefore our backlog may flatten or dip periodically as we go forward.

And finally, we generated strong operating cash flow in the quarter of $16.4 million with a $19 million improvement in cash flow over the past year.

Now let me turn the call over to Randy to give you the details of the financial results for the quarter.

Thanks, Mike. Revenues for the third fiscal quarter of 2007 were $222 million compared to revenues of $241 million a year ago. This represented a 7.7% revenue decline that was primarily attributed to softness in our Residential business resulting from the housing market pressures. Plus, some increased selectivity in the work that we have been pursuing. We have also been seeing an impact from unusual rainy weather during some of our markets, particularly in the Southwest.

Gross profit in the third quarter was $38 million. This was compared to $36 million in the prior year. The gross margin improved by approximately 230 basis points as a result of key initiatives from our transformation programs beginning to show some benefits. We have been seeing some benefits in areas such as more rigorous screening of new work, improvement of estimating and implementing more comprehensive project management controls.

Now Mike mentioned operating cash flow for the quarter was $16 million. This compared to a usage of almost $3 million from last year, which, of course, is a nice significant improvement.

On May 7, 2007, we completed an amendment with our lenders led by Bank of America on our revolving credit facility that allowed us a prepayment of $15 million to our term loan. Pursuant to that term loan agreement, the principal payment included prepayment penalties and fees, bringing the total amount to $15.8 million. Included in the amendment agreement is a modification of our maximum leverage ratio covenant of 4.4 to 1 from its current level of 4.25 to 1 after the prepayment was made. Also included is the removal of the Commercial and Residential minimum EBIT, the earnings before interest and taxes covenants. And in addition, we elected to go to cash pay of interest on the term loan beginning July 1, 2007.

Our EBITDAR, of course, the earnings before interest, taxes, depreciation, amortization and restructuring expense was $7 million for the third quarter. This compares to $1.3 million for the last year, and we believe that EBITDAR is a useful metric to be able to provide investors comparable numbers to peer companies. We do provide a full reconciliation of EBITDA and EBITDAR to net income in the third-quarter earnings release.

Net income from continuing operations in the third quarter was $1 million or $0.07 per diluted share compared to net income from continuing operations of $47 million or $3.04 per diluted share in the third quarter a year ago. Included in fiscal 2006 third-quarter results are reorganization items totaling a net gain of approximately $40 million or $2.62 per diluted share.

Net income, which includes discontinued operations for the fiscal 2007 third quarter, was $1.2 million or $0.08 per diluted share. This compares to $36.8 million or $2.39 per diluted share for the comparable period a year ago. That, of course, included the net gain from reorganization items.

SG&A for the third fiscal quarter was $34 million or 15.3% of revenues compared to $31.4 million or 13% of revenues a year ago. Included in SG&A expenses in this year's second-quarter are $1.8 million in costs related to our ongoing investment in the transformation program to improve our operational performance.

Also, regarding our operational restructuring that Mike discussed previously, we expect to achieve a 15% to 20% reduction in nonoperational field resource compensation costs through the restructuring, along with improved operational efficiencies. We expect to incur pretax restructuring charges of approximately $10 million over the course of the process, which is expected to last approximately 18 months. These charges will include cost of severance benefits, as well as facility consolidations and closings.

Now for a brief review of our nine-month results. Revenues for the first nine months were $666 million compared to $684 million in the prior year, which is a 2.6% decline. Gross profit was $112 million compared to $104.2 million a year ago, and gross profit margin improved by approximately 160 basis points over the prior year.

SG&A expenses for the first nine months of fiscal 2007 were $104 million or 15.7% of revenues compared to the prior year of $91 million or 13.3%. Included in the fiscal 2007, SG&A expenses or the following incremental expenses over the same period of 2006 -- $6 million related to the ongoing investment in our transformation program to improve the overall operational performance; $2.5 million of amortization costs resulting from the fresh start accounting which was implemented in April 30, 2006; $2 million of incentives to business unit management resulting from improved cash flow performance of about $19 million over prior year; and non-cash compensation expense of approximately $1.2 million related to the restricted stock.

Net income from continuing operations for the first nine months of fiscal 2007 was $0.5 million or $0.04 per share compared to net income from continuing operations of $23.7 million or $1.54 per diluted share for the comparable period last year. Included in the fiscal 2006 are reorganization items totaling a net gain of approximately $28 million or $1.83 per diluted share. Net loss, which includes discontinued operations for the first nine months of fiscal 2007, was $300,000 or $0.02 per share compared to net income of $5.9 million or $0.38 per diluted share for the same period in fiscal 2006.

For the operating segments, third-quarter revenues for Commercial and Industrial work were $136.7 million with a gross margin of 17% compared to $138 million in revenues with a gross margin of 13.9% a year ago. Residential segment generated revenues of $85.9 million in the third quarter with a gross margin of 17.5% compared to $103 million of revenues and a gross margin of 16.3% in the third quarter a year ago.

Segment revenues for Commercial/Industrial work for the first nine months of fiscal 2007 were $406.6 million with a gross margin of 16.3% compared to revenues of $397 million with a gross margin of 13.4% in the comparable period of fiscal 2006. Residential revenues for the first nine months of fiscal 2007 were $259 million with a gross margin of 17.6% compared to $285 million with a gross margin of 17.7% in the prior year.

Backlog related to continuing operations was $329.5 million as of June 30, 2007, representing a 8.7% decline from the $361 million backlog level at December 31, 2006. Year-over-year the backlog was essentially flat, and the quality of the backlog continued to improve, reflecting our ongoing selectivity regarding the business.

We closed the quarter with $69 million in unrestricted cash and cash equivalents compared to $67 million in cash and cash equivalents in the preceding quarter and compared to $11 million a year ago due in large part to the continuing rigor of our cash management program.

I will now turn the call back to Mike for his final comments.

Thanks, Randy. Before we take your questions, I want investors to know that Randy and I plan to be getting out this fall and look forward to meeting many of you, as well as generating new interest in IES.

I also want to reiterate that we are undertaking a major turnaround in both the Company's overall cost structure, as well as in operating disciplines and work processes. And while we are making progress, we still have a lot work ahead of us and a long way to go. Our focus here is on execution, on accountability and getting the fundamentals right in order to strengthen the foundation of IES and position us to improve our performance and create value for our stakeholders.

As always, thanks for your support, and operator, we will now take some questions.

(OPERATOR INSTRUCTIONS). [Francis Ward], [Viathon Capital Management]. (OPERATOR INSTRUCTIONS). [Peter Larson], [EVS].

Actually it is UBS. And I have one question and one follow-up question. The first one is, this is the second time you have mentioned some softness in the Residential segment. We know this is a higher gross margin for your business. So we want to -- is it possible for you to give us some color of how it is performing this quarter so far since this trend is only worsening in the whole country? So this is one concern that we have.

And my follow-up question will be, could you give us some sensibility in terms of how volume decline and price decline could affect your Residential segment?

On the Residential side for the quarter, we experienced revenues of about $86 million, which was representing about a 17% decline year-over-year. So this represents or is reflective of the pressure we have been seeing in the Residential market. I think you have probably been reading similar periodicals.

Our profitability is actually pretty good in that segment. We're showing a 17.5% gross profit, and that is up from last year of 16.3%. So we are pretty happy with that performance. It is an improvement year-over-year, and actually it is a little bit better than the industrial commercial segment right now, which shows a gross profit of about 17%. So it is actually performing reasonably well. The second question?

And actually yes, I'm sorry to interrupt. My question was, if you could give us some color of how it is performing this quarter we are in now? Since where it has like half off the fourth fiscal quarter analysis, so I mean this trend is getting worse and worse in the whole country. So I wanted to know if you could give us some color without, of course, details.

Yes, I think in general, as I think you probably know, we don't give forward-looking statements of the business, and we won't do so at this point. I think certainly everybody has been seeing the pressure in the Residential marketplace historically, and we continue to do our best to be very competitive as we work through a difficult time.

Okay. And the follow-up question please, in terms of sensibility to volume declines and price declines going forward?

Could you repeat the question, please?

Yes, I wanted to understand how eventual volume declines and price declines is in your Residential end market could affect your numbers.

Yes, I think again that is a forward-looking question. We are I think happy with the Industrial, Commercial segment performance that we have had. We're happy with the Residential profit uptick that we have seen in the current quarter. We're going to be working through a difficult next couple of quarters as I think everybody else will in our peer group. As we all work through the Residential side at this point, we're not going to be giving forward-looking statements.

(OPERATOR INSTRUCTIONS). [Nick DeLeonardis], Bond Street Capital.

Just a quick question in regard to restructuring. You may have mentioned this, but do you have an estimate as to how much remaining cost you expect to incur as you kind of work your way through this?

Yes, we are expecting to incur up to $10 million in restructuring costs as we move forward towards the next segment of restructuring as Mike had indicated.

And how much of that 10 is going to be cash? All of it or is it --?

I think most of it will be cash. We have not recognized any of it at the moment since we have not actually incurred a liability. We will be seeing it over the span of the restructuring period. But I would expect most of that to be cash.

Just as a kind of an aside on the Residential segment, can you give us some idea as to the regional breakout of where your work comes from primarily? Is it concentrated, or is it well spread throughout the country?

We have a fairly reasonable wide spread throughout the country, although we do certainly have some concentrations in the Southwest and the Southeast. But we do have representative volumes really nationwide.

Our footprint is primarily in the Sunbelt states with our Residential business.

And then just in regard to the one subsidiary that you talked about being closed, is there -- maybe you can give a little bit more detail around that? Was -- you know, for just reasons in general, and is there any opportunity in the kind of surrounding states for you to pick up some of the business and just incorporate that into the current cost structures there?

Yes, I would say that absolutely. We are always looking at new areas of growth. We continue to look at several areas and target several areas within the business. As we see certain businesses falling off and markets being not as attractive as perhaps they once were, we take the right actions to be able to close down the shops and allow us to be able to reinvest in areas where we see there is more growth. This is certainly one of those circumstances, and I think we're pretty excited about getting out of this particular one and making some of the investments in some of the other locations.

[Richard Lazaro], [Hasland Capital].

Could you talk about the seasonality of your business, like sort of what quarters are the strongest for you, and what quarters are the weakest if that is a big factor in your business along those lines, and then I have one follow-up please?

Well, classically the spring and summer months, which would be our third and fourth quarter, represent the stronger quarters. Historically that has been the case.

So I mean because if you are in the South, then you're not -- there is still more business in the summer down there than the winter and such?

That has been the historical trend.

Okay. It is just tough to look at your historicals right now. The other question is, how much of your business is contractual like more longer-term contracts, reoccurring business versus sort of short-term onetime bids? You know speaks to the length of the contracts, do you have any kind of color on that?

Not precisely, no.

Well, just generally.

I would say that they generally are shorter term and non-recurring type of contracts as compared to other businesses that might have year, year and a half type long-term contracts with various customers. Ours tend to be -- it varies, of course, by business segment. Some of the Commercial and Industrial sides have longer cycles, but they are I would say in general certainly less than a year.

But on the maintenance side, I mean do you have any contracts where you are just providing maintenance all year long for certain customers?

Yes, we have some, and I would say that is an area that we are certainly looking at trying to bolster in the future.

(OPERATOR INSTRUCTIONS). [Nick DeLeonardis].

Just one quick question. In regards to the non-Residential construction, the Industrial and Commercial, can you give any more detail on kind of what you're seeing right now in terms of new activity, bids opportunities and what the market is right now?

Well, we continue to see very robust activity in the Industrial sector. That is a much longer cycle business, and as you know, the activity level there has been quite significant, and we continue to see that activity very robust.

On the Commercial sector again we see that market as an interesting market as well. The market is quite diverse, so there are some sectors within the Commercial segment that are quite active at this point. There are other sectors, for example, the large multi-family condominium markets in parts of the country that have seen some pressure. But overall the Commercial market and the Industrial market are showing continued strength.

And you continue to have the opportunity or you continue to see the opportunity to bid on new contracts in both those segments?

We do.

(OPERATOR INSTRUCTIONS). [Peter Larson], UBS.

Just one more follow-up question. Maybe I was not clear on my last question. I'm not asking for forward-looking statements from you in terms of this potential sensibility of just volume and prices going up or down. I just wanted to understand more of your business how it works in terms of what is important variables.

So how do you see I mean this softness? If it continues or if it stops, the price of real estate in your areas goes up and volumes go up. And how do you see this sensibility to revenues on the Residential side? That is not a forward-looking statement that I'm looking for.

I just wondered is it more how your revenues would behave in that scenario, like prices going up, prices going down, volumes going up, going down, what kind of elasticity you have?

Yes, I mean I think I probably read the same periodical that you probably have in terms of what is happening in the marketplace. We're certainly seeing the pressure in the Residential. We are seeing that in terms of our volume and the volume fall year-over-year, the 17%, which I indicated before. We certainly are also seeing increased price competition. It is a tough market out there. A lot of people are fighting for lesser work. And so we see both the volume and the pricing pressure, and you're seeing that in the revenue line today.

So the revenues that we are experiencing are reflective of that difficult volume and pricing environment. As that environment improves, we will certainly see improvements to the top line. As that environment gets worse, we will certainly see some additional pressure on the top line.

(OPERATOR INSTRUCTIONS). [Wes Sutton], Deutsche Bank.

I was wondering if I could get you to expand a little bit on the Industrial segment of the business. What percentage of it is maintenance and repair, what percentage of it is just new construction, new business, and what kind of margins do you have in that area?

I don't know that we routinely break out the subsegments of that Industrial segment. In the Industrial and Commercial, we're seeing gross profit this quarter of about 17%, and for the year-to-date, it was about 16.3%. Those numbers profitability-wise are up year-over-year. So the current quarter is up from 13.9% and year-to-date up from 13.4%. So we are happy with the performance, and we expect to be able to continue to derive good profitability in those segments.

[Gary Learman], JPMorgan.

I apologize if you already addressed this, but what are the annualized cost savings that we can expect from these restructuring initiatives?

We're looking at a total impact to nondirect compensation and benefits expense of an improvement of about -- or a cost reduction of about 15 to 20%. So we expect -- and again, we segregate the direct, which is the folks that are actually out there doing the work on the sites versus the nondirect folks, which are going to be impacted by the restructuring.

So as you look at the total comp and benefits of those nondirect employees, we think this will be a substantial improvement, a substantial restructuring, that will give us some cost savings of about 15 to 20% of those costs.

And what are those costs? What is the number?

Well, those would kind of fall into some forward-looking statements. We're not prepared to provide specific breakdowns of elements.

What I will say is this, this is a piece, this is a journey and this is a piece of the journey. We are going to be doing a restructuring to be able to get the business aligned that will allow us to move forward in terms of bringing the new cost structure and new operating performance, customer performance to the business. So this will be one step along the way. We are excited about it. We think it is substantial from a headcount savings perspective, but we're going to be doing this as well as other things to be able to help make this Company more competitive.

And as far as giving specific numbers, we're representing -- it is significant from the percentage of savings on salaries and comp and salaries, but at this point we're not going to be giving forward-looking statements on total cost reductions.

Okay. I know that you have devoted significant resources to improving your purchasing. Can you characterize where you are in those efforts? Are we still in the early innings or has -- (multiple speakers)?

Yes, we are very much in the early innings. We're building the organization. But we are building the work processes. We are establishing some of the strategies, but we're very much in the early stages of executing on our supply management strategy.

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

Thanks, everyone, for spending a few minutes with us this morning. We hope to see a lot of you this fall when we begin to reach out to new investors and analysts, and we will certainly look forward to keeping you up-to-date on our progress as we move forward. And now let me turn it over to Ken who has got a few comments regarding the risk factors.

Yes, 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 1993 and Section 21E of the Securities Exchange 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 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 matters and related financial and other covenants; limitations on the availability and the increased cost of surety 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 weakness in inventory and in a control environment at one business unit that had been fluctuations in operating results because of downturns 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 both from third parties and ex-employees; increases in costs and limitations on availability of labor, especially qualified electricians; increase in cost and commodities used in our industry of steel, copper and gasoline; accidents resulting from numerous physical hazards associated with the Company's work; loss of key personnel, particularly presidents of business units; the disruption in cost associated with any SEC investigation or class-action suits; litigation of unexpected liability or lawsuits associated with more warranties; difficulties in integrating new types of work into existing subsidiaries; inability of the Company to incorporate new accounting control and operating procedures; loss of productivity either at the corporate office or operating level resulted from change procedures or management personnel disruptions or inability to effectively manage consolidations.

You should understand that the foregoing, as well as other risk factors discussed in this call, are detailed in IES's annual report on Form 10-K for the year ended September 30, 2006 and in IES's quarterly reports on Form 10-Q for the quarter ended June 30, 2007. These 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 ability 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 provided in this call are pursuant to the Safe Harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of estimates, assumptions, uncertainties and risks described herein.

And with that, that is the end of the call. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will conclude today's teleconference. We do thank you for your participation on the program. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000. You will be asked to enter an access code of 11094726 followed by the #. (Repeats numbers)

At this time we will conclude. We do thank you for your participation on the conference. You may now disconnect, and please have a pleasant day.