IES Holdings Inc (IESC) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Integrated Electrical Services Fourth 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).

This conference is being recorded today, Thursday, December 13, 2007. I would now like to turn the conference over to Karen Roan, DRG&E. Please go ahead, ma'am.

Thank you, Vince, and good morning, everyone. We appreciate your joining us today for IES's conference call to review fiscal 2007 fourth quarter and year end results.

We would also like to welcome our Internet participants listening to the call simulcast over the Internet.

Before I turn the call over to management I have the normal details to cover. If you did not receive an email of the news release yesterday, please call our offices at DRG&E. That number is 713-529-6 (technical difficulties) 3600 and provide us with your contact information.

There will be a replay of today's call and it will be available by going to the Company's web site for the webcast and that is www.IES-CO.com. There will be a telephonic instant replay available for the next seven days. That replay information is in yesterday's press release.

Please note that information reported on this call speaks only as of today, December 13, 2007, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. 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.

General information about IES can be found on the Company's web site under Investor Relations, in 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. All are available free of charge through the web site 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'll now turn the call over to Mike.

Karen, thank you and good morning everyone and thank you for joining us today to review our fiscal 2007 fourth quarter and year end results.

Fiscal 2007 has been a transitional year for the Company. As you may know, during the fall of 2006 we began a comprehensive and systematic program to transform the Company and improve our operational performance. This included strengthening our core processes and consisted of a thorough review of all key elements of the IES enterprise including our personnel, our processes and our business systems.

This systematic review was guided by an assembly of teams from within our business units, supported by our executive management team and operational management. As a reminder we have set out to strengthen the critical functions of our business, such as enhancing our estimating, project management and supply chain management process; improving our overall cash management disciplines; identifying best practices and institutionalizing them throughout the Company, enabling us to compete as an institution rather than as a collection of independent entities; assessing our cost structure to remove costs that do not add value, and while we were very proud of our safety record, continuing to drive improvements to insure that our people return home safely each and every day.

Now this comprehensive transformation program is ongoing and we continue to focus on enhancing our critical functions and work processes, many of which have shown considerable improvement. In fiscal 2007 we accomplished a number of strategic objectives. We hired a new chief financial officer with strong operational finance experience and demonstrated strategic leadership. Our cash management disciplines have been strengthened throughout the Company. We went from having essentially zero cash to generating nearly $70 million in cash in nine months and in May we made a $15 million prepayment of our term loan. That was an important step to reducing our debt level and further improving the financial position of the Company.

We have institutionalized work processes and best practices throughout the Company. We have begun to compete as an integrated entity. We have made improvements in our estimating, project management and supply chain functions and with regard to supply chain management we hired a vice president to lead that effort.

We implemented the first phase of a comprehensive project management system which we believe provides us with unique operating tool versus our competitor's on both the local and national level. We embarked on a strategic reorganization within our operating segments, which align the business along commercial, residential and industrial industry lines, allowing us to grow the business more strategically. We divested or closed noncore divisions and worked to turn around the underperforming ones.

Now during this process we've worked through some difficult and unprofitable projects. We've taken decisive steps to improve the performance of a handful of underperforming businesses. 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 business before trying to grow them.

Our initiatives and actions taken over the past year resulted in an improved surety situation as well. As evidence of this, earlier this year we received a return of collateral of $10 million from our primary provider of surety bonds. And, recently, we amended our agreement with the surety provider, almost double that capacity.

We continued our focus on safety, again exceeding the prior year safety performance, and we are absolutely resolute that a culture focused on safety is central to excellence and project execution and significantly reduces risk to our employees and the consequent costs to the business. As I have said many times this year we remain focused on strengthening the foundation of the Company and have made and continue to make necessary improvements to institutionalize these changes and ensure that the foundation we are putting in place is solid.

As you might expect, the transformation of a business such as ours is a complex undertaking and not a quick fix. Rather it is 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 looking at the fourth quarter. I will let Randy cover most of the color, but I want to emphasize that we continue to see improvement in the critical processes of estimating, a screening of new work and project execution, which helped our gross margin in the fourth quarter. However this improvement was offset by cost overruns related to legacy projects at one underperforming division.

Our backlog was approximately $334 million at the end of the fourth quarter. This compares to approximately $330 million in the previous quarter and [to] $370 million a year ago. The year-to-year decline is mainly due to lower demand from multi-family housing.

Importantly the quality of our work and backlog continues to improve as we continue to be selective in the work that we pursue. As I've indicated before, our primary goal is not simply to build backlog, but to do so selectively and, therefore, our backlog may flatten or dip periodically as we move ahead.

Now a major highlight for the year was cash management. Our cash management program yielded excellent results in fiscal 2007. In fact, we just retired our debt and entered into a new $25 million loan by means of a senior subordinated note from an investor. We also announced that our Board has authorized a share repurchase plan that authorizes is to repurchase one million shares, an affirmation of their confidence in the prospects of the Company. This strengthening of our balance sheet provides us substantial financial flexibility to pursue operational and strategic initiatives.

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

Thanks, Mike.

Revenues for the fiscal fourth quarter of 2007 were $227 million compared to $250 million reported in last year's fourth quarter. Revenue decline was primarily attributed to softness in our residential business, resulting from the housing market pressures plus some increase selectively in the work that we have been pursuing. Partially offsetting the housing market weakness was an improvement in our commercial and industrial business.

Reported gross margin for the fourth quarter was 14.5%. Gross profit for the fourth quarter included approximately $4.8 million in charges related to cost overruns associated with legacy projects in one of our underperforming divisions. This compares to a gross margin of 14.6% in last year's fourth quarter. Without the impact of these cost overruns, our gross margin for the quarter would have been 16.6%.

During the past several quarters, we have experienced benefits from the screening of new work, improved estimation and the implementation of a more comprehensive project management program. However we will not fully recognize the benefits of these systems and controls until we complete those legacy projects. We expect to be substantially complete later in fiscal 2008.

Sales, general and administrative expenses or SG&A were $33 million compared to $32 million in the last year. Fourth quarter SG&A also includes a $1.3 million negative impact related to those legacy projects in that one division as well as $1.1 million in costs related to our ongoing investment in IES's transformation program to improve overall operational performance.

There were also $800,000 in restructuring charges included in the fourth quarter. Net loss from continuing operations, including all charges in the fourth quarter of 2007, is $1.6 million or a loss of $0.10 per share compared to a net income from continuing operations of $2.2 million or $0.14 per diluted share in the fourth quarter of last year.

Excluding the 2007 fourth quarter charges, net income from our continuing operations was $2.8 million or $0.19 per diluted share.

Our EBITDA was $1.7 million for the fourth quarter compared to $5.8 million for the fourth quarter in the prior year; and we believe that EBITDA is a useful metric to be able to provide investors comparable numbers to peer companies. And of course we do provide full reconciliation in our fourth quarter earnings release.

Also regarding our operational restructuring we expect to achieve a 15 to 20% reduction in nonoperational field resource [and] compensation costs due to 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 with respect to our 12-month results, revenues for fiscal 2007 were $893 million compared to $934 million in the prior year. Our gross profit was $145 million or 16.2% margin. This compares to last year's $141 million or a 15.1% margin.

SG&A expenses for fiscal 2007 were $138 million or 15.4% of revenues compared to $123 million or 13.2% of revenues in fiscal 2006. Included in 2007 expenses at the following incremental expenses over prior year -- $7.1 million related to our ongoing investment in our transformational program to improve our overall operational performance; $2.7 million of depreciation and amortization resulting from the fresh start accounting was implemented in April of 2006; $1.3 million of incentives to business unit management resulting from improved cash position performance of about $42 million over last year and non-cash compensation expense of approximately $4.2 million related to restricted stock.

Net loss from continuing operations for the fiscal of 2007 was $1 million compared to a net income from continuing operations of $26 million in the prior year. That figure included a net reorganization gain of $27 million.

For the operating segments, fourth quarter revenues for commercial and industrial were work $150 million with a gross margin of 13.5% compared to $140 million and a gross margin of 12.3% the prior year. The residential segment generated revenues of $77 million in the fourth quarter with a gross margin of 16.4% compared to $110 million of revenues last year and a gross margin of 17.7%.

Segment revenues for the Commercial/Industrial work in fiscal 2007 were $557 million with a gross margin of 15.6% compared to $538 million and 13.1% last year. Residential revenues for 2007 were $336 million with a gross margin of 17.4% compared to $396 million, with a gross margin of 17.8% the prior year. Backlog was $334 million as of September 2007. This compares to $330 million in the previous quarter and $370 million last year. The $36 million decline year over year is primarily attributable to our residential segment due to the reduction in multifamily housing demand. And as Mike said earlier we continue to be selective with the quality of our backlog.

We close the year with $70 million in unrestricted cash and cash equivalents compared to $69 million in the prior quarter and $28 million in the prior year. This is primarily driven from the continuing rigor in our cash management program.

As Mike noted, subsequent to the quarter we have paid off our senior debt and have entered into a new $25 million loan through a senior subordinated note from an investor in the Company. Also we have recently amended our agreement with our primary surety provider which almost doubles that capacity. Significant improvements in our balance sheet provide us increased financial flexibility for executing our strategy going forward.

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

Randy, thank you. Now with respect to our market the forecasting services that we used a lot indicate that residential construction is expected to return to a very modest growth with a projected five-year compound annual growth rate of 0.7%. Contrast to this decreased growth rate in residential construction, growth in nonresidential construction we still expect to outpace the economy as a whole with a projected five-year growth rate for that segment of approximately 7.3%.

Our work to transform IES is aimed at putting into place a solid foundation so that, in the future, we will be in a position to capitalize on the activity in these markets. We are undertaking a major turnaround in the Company's overall cost structure as well as in the operating disciplines and work processes. As I said last quarter and the quarter before that, we are making progress and yet still have a lot of work ahead of us and a long way to go.

Our focus here is the execution, it is on accountability, and it is on getting the fundamentals right in order to strengthen the foundation of IES, and to position the Company and improve our overall performance and to create value for our shareholders.

As always, we appreciate your support. Thank you for joining us. And, Operator, we will now take any questions.

(OPERATOR INSTRUCTIONS) [Matt Wetrick] with Bond Street Capital.

Got a question on the terms for your senior sub notes. What is the pricing on that?

We are actually getting about an 11% interest rate on that for a term that is going to be the same term, a maturity of about 2013. We have essentially got very favorable covenants. That is to say, we don't have any significant substantial covenants associated with it and we do have flexibility for taking the interest and no fees for early paydown.

So it's a nice instrument for us. It provides a lot more flexibility and we are (inaudible) to have it.

And I'm assuming [Tauntin] provided that?

Yes they did.

[Ronny Kaplan] with [Wolfpoint] Capital.

You mentioned before your -- this field restructuring that you were doing that was going to cost about $10 million over 18 months. Can you just tell us when that 18 months time period runs from and to?

We spoke about that in our last quarter and we embarked on a restructuring late in the fiscal year. So we will move forward from there.

So you are thinking over basically through 2008?

Through the 2008 (multiple speakers).

Through the 2008. And can you give us a little bit more color on what you are seeing for the next year for 2008, as far as volume and pricing? Are you expecting volume to be down or revenue to be down for the year or -- and whether you think you can maintain the margins that you generated in this past fiscal year?

Well we spoke a bit about the markets. We continued to see pressure in our residential markets. It's very difficult to call the turns so to speak in the residential market and that is a significant portion of our business. We are experiencing continued growth in our commercial and industrial segments and the outlook, as we said, for those segments remains encouraging.

So we are approaching the markets as such. We are working within our residential business to flex our cost structure, according to the volumes that we see and that market, as you might expect, is not a uniform market across the country. We see strength in some parts of our residential market; we see softening in other parts of the market.

But, overall, the residential market we expect to continue to be difficult. I am really through the fiscal 2008 year but we are continuing to experience growth and we are continuing to focus our efforts on both commercial and industrial.

Do you think you can maintain your margins from this year into next?

We have seen a bit of softening in some of the commodity prices where we are working more effectively to manage our supply base. As you know, our supply base, our material costs are a large portion of our overall cost. So we are working very hard to manage the supply based more effectively. We have spoken in the past about some of the programs that we've instituted around the screening of new work. We've also spoken in the past about the programs that we've instituted in the area of project execution and project management, which is fundamental to our aspirations to improve our margins.

So we have our hands on the right levers. But as I said earlier it is a complex undertaking and we have the organization focused on that.

And can you explain a little bit more about this $25 million note. I mean it seems like you really don't have any debt on your balance sheet and yet it's an 11% coupon when your EBITDA is running mid 20s right now. It seems like you would have been able to get some better terms out there. LIBOR is below 5%. 11% just seems a little excessive at the moment. Can you just enlighten us as to what the rationale was for that?

I think you need to look at the whole terms of the loan to get a better feeling for the interest rate and, certainly, we are a business that has been coming out of some financial distress which is certainly reflected in the interest rates. We have also got very favorable terms within this particular instrument that were we to -- that essentially equate to I would say, overall interest rate, given the terms and the covenants that we have.

So I'd say that if we wanted to go with a lower interest rate we would have done so at the expense, let's say, of some of the fees and some of the more restrictive covenants that we otherwise don't have.

(OPERATOR INSTRUCTIONS). Matt Wetrick with Bond Street Capital.

Going back to the cost overruns issue on your legacy contracts. Are we done with the noise in your financials because of contracts that were prior to your tenure there?

We are in a project business and we've spent a significant amount of time in the last year, a significant amount of effort in the past year working on the screening of new work, ,making sure that we have a very rigorous process to assess the quality of work coming in, the risk profile from a financial from an execution standpoint, from a commercial standpoint. So we've instituted many of the screens that we need to have in place.

We are also working to improve the effectiveness of our project management ranks and the productivity of our craft labor force. But as I said earlier this is a project business, there's obviously inherent risks in the kind of work that we do. But we are focused very intently on mitigating the risks to the extent possible through some of the programs that I talked about.

Right but these contracts actually predated the procedures that you've set up.

That's correct and we are focused on those projects, those legacy projects as well as the new work that's coming in. We expect it's -- as you're further down the road it's more difficult to make adjustments and drive improvements on some of these projects.

Right and what was the rough amount of revenue that was associated with this $6.1 million worth of cost overruns? Are we talking about just a small number of contracts?

Yes. We are talking about -- really there was a handful of projects that produced this particular cost overrun and we are substantially -- we are -- we've made substantial progress through the term of the projects if you will, say that we were over halfway through the and so we are working through the process of getting them completed.

As Mike said it is something you do need to keep an eye on going forward. There are going to be issues that you see in the current periods as we are executing and completing the execution of these projects, I think as we indicated earlier as well. Until we get through some of these legacy projects we are going to have some risks of some issues of cost overruns. So that's just a bit of the nature of the business.

(OPERATOR INSTRUCTIONS). Ronny Kaplan with Wolfpoint Capital.

Can you just give us an idea as to what you are seeing on the commodity side of things as far as your supplies go? Are you seeing a lot of upward pressure on prices still or is that sort of abated?

Well, on the commodity side as you might expect copper is one of the most significant commodities that we deal with as well as still and to a certain degree plastic. Copper prices have stabilized somewhat, relative to where they were last year. So that's encouraging, but we are always looking for ways to mitigate the essential thread of price increases in our material supply.

That's precisely why we have worked so hard with our supply chain strategy. That's why we've worked so hard to begin to coordinate the purchase of some of our commodities and some of our components of supply - major equipment such as wire - and we are working with our vendors in order to be able to take advantage of our collective purchasing power. We are a very large purchaser as you might expect being a national provider. So we are working to take advantage of that.

Do you have the ability in your contracts to pass through those costs? Obviously some of these contracts are longer term. You are not in there on for a week or two weeks, they are much longer term contracts. Do you have the ability as prices move? Is that written into the contracts? Or are you really subject to whatever the market is at the time you are purchasing?

Some of the contracts we are able to pass on material price escalation. On other contracts we are not.

Although with a policy and the practice we don't enter into long-term contracts and basically maintain the risk of commodity pricing. So that if it's going to be a long-term contract that we expect there will be some time before we have to utilize material, we will opt to reduce the risk by locking the material pricing thoroughly to be able to make sure we don't incur that risk of future commodity volatility.

And just switching to the revenue side of things, on the Commercial/Industrial side. Are you seeing more work these days in commercial or industrial? Can you break those two out, I guess, and give me some idea as to the strength of those two markets at the moment?

Our industrial segment is quite strong right now. That is inherently a longer cycle business and of course the residential market or the commercial market and we continue to see that segment remaining strong for a period of time. On the commercial side we did see continued good opportunities. Our commercial revenues in 2007 actually decreased slightly. However we were very focused in 2007 as we will be in 2008 and being more selective in what we pursue.

So working on opportunities and securing projects that have the kind of margin profile, the kind of risk profile that we are after. Not just going out there and trying to build volume for volume's sake. The backlog as I said earlier is a bit lower year on year. But the margins in the backlog are continuing to show encouraging (inaudible).

What's the breakdowns revenue wise between commercial and industrial?

We don't break that out in our reporting. We do, you do two segment reporting in this business and so you'll see the Commercial/Industrial lumped together and we don't provide that detail.

Is there any ballpark you can give us percentage wise or --? (technical difficulties) closer to 50-50 or are we talking closer to 20/80 our something residential?

Residential was about -- as I recall about 38% of our revenue and (multiple speakers) balance Commercial/Industrial.

No I mean between commercial and industrial.

We don't provide that.

James [Baer] with Perimeter Capital Management.

You just touched on this a little, but can you speculate if there's any major electoral transmission work out there for you that might materially change your backlog going forward in the next year or so?

I won't be speculating, but I can say that it's been well written about the situation with the U.S. grid and we believe that that marketplace - as part of the Industrial segment - provides some interesting opportunities going forward.

Is there any area ready to actually lay out a contract or a request for proposal to bid?

We have a division that has some excellent capability in high-voltage and transmission work and they've done a significant amount of work. They continued to do work and secure new work. So we are intent on building on that capability.

When would you speculate what year that these kind of things will be just a -- everything happening at once or is it going to be a gradual process where we are going to see this type of work finally happen?

This, in my own opinion, is that the re-electrification of the grid will continue to expand as other renewable energy sources come on line and become more prominent. We will see increased opportunities in that area, but I believe it will be a ramp up that we will see over this year and next your.

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

Very good, thank you. I will turn it over to Karen for the appropriate closing.

Thank you, Mike. Certain statements in this call including statements regarding the restructuring plan and total estimated charges and cost reductions associated with this plan are 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 be reasonable up 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 the financial covenants, 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 or operating income; potential difficulty in addressing material weaknesses in the inventory and controlled environment at one business unit that has been identified by the Company and its independent auditors; fluctuations in operating results because of downturns in levels of construction particularly residential construction; inaccurate estimates used in entering into an 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 or limitations on availability of labor, especially qualified electricians; increasing cost of commodities used in our industry of steel, copper, aluminum and gasoline; weather-related delays; accidents resulting from the numerous physical hazards associated with the Company's work; loss of key personnel, particularly presidents of business units; litigation risks and uncertainties including in connection with the ongoing SEC investigation; unexpected liabilities or losses associated with warranties; difficulties and integrated new types of work into existing subsidiaries; inability of the Company to incorporate new accounting control and operating procedures and decentralization of back office functions; loss of productivity either at the corporate office or operating levels, resulting from change procedures or management personnel; disruptions or inability to effectively manage consolidation.

You should understand that the foregoing as well as other risk factors discussed in this call in IES annual report on Form 10-K for the year ended September 30, 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 for its cash position or any forward-looking statement 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.

With that this is the end of this call. Thank you very much.

Ladies and gentlemen, this concludes the Integrated Electrical Services fourth quarter earnings call. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 using the access code of 11104150, followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.