IES Holdings Inc (IESC) 2008 Q1 法說會逐字稿

Welcome to the Integrated Electrical Services first quarter earnings coverage call. During today's presentation all parties are in listen-only mode. Following the presentation a conference will be open for questions.

(OPERATOR INSTRUCTIONS)

This coverage is being recorded today, Tuesday, February 12th, 2008.

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

Thank you and good morning everyone. We appreciate you joining us for IES's conference call today to review fiscal 2008 first quarter results. We would also like to welcome our internet participants listening to the call as it is being simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping details to run through. If you didn't receive an e-mail of the news release yesterday afternoon, please call our offices at DRG&E, that number is 713-529-6600, and provide us your contact information. Also there will be a replay of today's call, which will be available by going to the company's website for the archived webcast. That web site is www.ies-co.com. Also there will be a telephonic instant replay available for the next seven days, and that replay information is in the press release.

Please note that information reported on this call speaks only as of today, February 12, 2008. 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 call I will come back and provide greater related to forward-looking statements that may be made in today's call. General information about IES can be found on the company's website 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, et cetera. All are available free of charge on the website as soon as reasonably practicable after filing with the SEC. With me this morning are Michael Caliel, Chief Executive Officer, and Randy Guba, Chief Financial Officer. I would like to now turn the call over to Mike.

Thank you and good morning everyone, and welcome. Thank you for joining us today to review our first quarter 2008 results.

Just two months ago we hosted our 2007 conference call and reviewed the year, as well as the steps taken and the progress made as we began our strategic plan to transform the company in October of 2006. While we have made progress, this comprehensive transformation program is ongoing, and continues to focus on the critical initiatives of strengthening the overall foundation of the company, improving operational performance, restructuring and consolidating the business, reducing the overall cost structure of the company, and ultimately repositioning IES for growth. As part of this strategic plan, we have divested or closed non-core divisions, and worked to turn around under-performing ones. We have worked through difficult and unprofitable projects. We have taken decisive steps to improve the performance of a handful of under-performing businesses. In each case, rather than trying to grow our way out of problems, we have made the tough decisions to fix the underlying foundation of these businesses before attempting to grow them. We have also realigned our business into three major operating segments, commercial, industrial and residential group, and we are in the process of consolidating and integrating those businesses.

As announced on January 23rd, Jim Robertson joined IES as the Vice President and General Manager of our industrial group. Jim joins us from GE energy, and has extensive experience in leading large industrial organizations and managing field operations, and will bring important leadership skills to this key business segment.

As I've said before, the transformation of a business such as ours is a complex undertaking and not a quick fix. We have made meaningful progress in restructuring and repositioning the business, and in particular reducing our cost base. However, we still have much more work to do.

With respect to our first quarter, on an adjusted basis our operating results showed improvement, with restructuring well underway and moving forward. We will now discuss some of the highlights of the quarter. Excluding the restructuring charges and refinancing costs, our adjusted income from continuing operations for the first quarter was $0.08 per fully diluted share. Our SG&A was lower by approximately $5 million versus a year ago, and our gross margin was constant year-over-year at 16.7% despite revenues being down. Our backlog was approximately $348 million at the end of the first quarter, an improvement over the previous quarter. The decline in backlog from prior years is primarily attributable to our residential segment, largely due to reductions in multi-family housing demand. Quarter-over-quarter increase in backlog is principally due to increase in the commercial segment, mainly related to improved demand in the East Coast and Southwest regions of the country, and in the industrial segment, where we continue to see strong demand. Importantly, the quality of work in our backlog continues to improve as we continue to be selective in the work that we pursue.

However, there were issues that negatively affected the quarter. The market, with a challenging economy, impacted revenues in parts of our business. Obviously our residential segment was negatively impacted. We have been hearing about housing market weakness for some time and it remains under pressure, especially in specific regions such as California and Arizona. In our commercial segment, the runoff of older low margin work as well as execution issues on certain legacy projects impacted our overall margin. We're still winding down this older work, a process which is almost complete, and the backlog going forward has higher margins. Importantly, we stand behind our commitments to our customers to complete the work and provide ongoing service. Despite these issues and volume being down in residential and parts of our commercial business, our cost reduction initiatives are showing progress as we managed our costs more effectively during the quarter.

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

Thank you, Mike.

Revenues for the first quarter of fiscal 2008 were $198 million compared to $228 million reported in last year's first quarter. The revenue decline was primarily attributable to softness in our residential business due to pressures in the housing market, as well as weakness in parts of our commercial segment. Parts of the commercial business were negatively affected by housing market pressures. Certain other areas impacted by delayed timing of job starts reduced orders due to softness in parts of the economy. Overall, reported revenues declined 13% from a year ago. Sales, general and administrative expenses were approximately $30.6 million compared to $35.4 million last year. First quarter '08 SG&A includes restructuring costs of $1.3 million related to our transformation program to improve the overall operating performance. We also incurred $2.3 million in penalties and fees related to our debt refinancing.

As we an announced on December 12th, 2007 we paid off our $45.6 million term loan and entered into a new $25 million loan through a senior subordinated note. Net loss from continuing operations including the above mentioned unusual items was $1 million, or a loss of $0.07 per share. Excluding the unusual items, net income from continuing operations was $1.2 million or $0.08 per fully diluted share. This compares to net income from continuing operations of $400,000 or $0.03 per diluted share in the first quarter of last year.

Our adjusted EBITDA from continuing operations earnings before interest, taxes, depression, amortization and restructuring expense was $5.1 million for the first quarter compared to $5 million for the first quarter a year ago. We believe that adjusted EBITDA is a useful metric that provides investors comparable numbers to peer companies. We have provided a full reconciliation of adjusted EBITDA to net income in the first quarter earnings release.

Regarding our operational restructuring, we expect to achieve a 15 to 20% reduction in non-operational resource compensation cost through the restructuring, along with improved operational efficiencies. We expect to incur pretax restructuring charges of approximately 5 to $10 million over the course of the process. This is expected to last approximately 18 months. These charges will include cost of severance benefits, consulting charges, as well as facility consolidations and closings.

Now for brief review of our operating segments. Since we restructured our operation into three primary lines of business, as of this quarter we will be reporting our segment data based on this new alignment. First quarter revenues for commercial work were $110 million with a gross margin of 14.8% compared to $113 million and a gross margin of 16.3% last year. The slight decline in revenues was due in part to increased competition for low-end retail work from residential contractors who've been affected by the housing slow down. A 150 basis point decline in commercial gross margin percentages was principally driven by two of our 17 divisions, in which we had underperforming legacy products in one division and completion of low margin contracts at the other, as previously explained by Mike. These legacy projects are 90% or more complete and are expected to be concluded during 2008.

First quarter revenues for industrial work were $33 million with a gross margin of 17.7%, compared to $30 million in revenues with a gross margin of 14.2% last year. There is improved profitability in our industrial sector as a result of labor efficiencies and reduced operating costs. Also the long-term lead time for many projects served by this segment allows us to avoid the revenue disruptions generally seen in other areas of the construction industry. Our residential segment generated revenues of $55 million in the first quarter with a gross margin of 19.7%, compared to $86 million and a gross margin of 18.1% last year. The reduction in revenue was due to a drop in demand in the residential sector, in particular for single-family housing. However, despite the decline in the number of housing starts, gross margin in our residential segment improved approximately 160 basis points. We believe the improvement in gross margin is due to the stabilization of the pricing environment, improved project execution and the ability to increase and decrease our work force as necessary.

Backlog was $348 million as of September 30th, 2007, compared to $334 million at the end of the previous quarter and $359 million as of December 31st, 2006. This slight $11 million decline from the prior year is primarily attributable to the pressure in multi-family housing, as well as in certain parts of our industrial business. As Mike mentioned earlier, we continue to be selective with the quality of our backlog.

We ended the first quarter with approximately $36 million in unrestricted cash and cash equivalents, compared to $70 million in the preceding quarter, and compared to $46 million a year ago. We also have approximately $26 million available under our revolving credit facility, and therefore we have liquidity totaling $62 million, which is adequate to meet our operating needs. Also as previously an announced on December 12th, 2007 and underscoring confidence in the IES prospects going forward, our Board authorized a 1 million share repurchase plan. Purchases under this program will depend on market conditions, and are not subject to a specific timeline. To date we have purchased over 156,000 shares totaling $2.8 million.

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

Thanks, Randy.

Now with respect to our markets, we expect to see continued pressure in our residential segment as buyers wait to find the floor. Our commercial backlog is actually increasing now, as job starts have been pushed out somewhat due to uncertainty surrounding the economy. More importantly though, as I mentioned earlier, although there's weakness in some commercial sectors we are seeing strength in our areas of commercial segment especially, institutional and health care. The industrial market is still robust and we continue to focus on opportunities in that segment. It is important to remember that we are in the midst of a major turnaround of IES. That's in our overall cost structure, in our operating disciplines and our work processes. And as I have stated before, we have made meaningful progress, but still have a lot of work ahead of us and a long way to go. Our focus is on execution, on accountability and get than the fundamentals right in order to strengthen the entire foundation of IES, and then position the company for improved predictability and improved performance, and for growth and to create value for stakeholders.

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

Thank you sir. We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Matt [Widerich] with Bond Street Capital. Please go ahead.

Nice quarter guys. My question has to go - is with respect to the SG&A expenses and your restructuring. What percent of your SG&A is non-operational compensation expenses, prior to the initiation of restructuring initiative?

You're saying non-operational compensation expenses?

Yes. I'm just trying to figure out on a run rate basis, once you finish the restructuring process, what that 15 to 20% decline in non-operational compensation expenses works to - on a dollar basis?

We have basically outlined the impact as we have. It's actually not purely an SG&A impact. We do have impacts in the indirect costs as well. The direction we have been giving in the 15 to 20% range is significant to the overall labor base. However, you know, we have not basically broken out the dollar impact on the P&L.

Okay. Thank you.

Yeah.

Our next question comes from the line of John Rogers with D.A. Davidson & Co. Please go ahead.

Hi, I was wondering if you could just take a second more and talk about especially the market segments in terms of what you were saying about your outlook. I mean obviously the residential market's difficult, but the commercial and industrial markets seem pretty optimistic about the industrial markets. The commercial market was down, do you see it picking up, that's a little bit different than what we're seeing in the headlines? So if you could just talk about that for a second.

Well, I think there's been plenty written obviously about the residential mark.

Yeah.

If you look at the industrial market, I mean clearly there's continued momentum in the industrial market and we're optimistic about the outlook in that market. ,That is inherently a longer-cycle market than we see in commercial and certainly residential. On the commercial side, we would expect to see some impact from the residential slowdown in those sectors that are adjacent, if you will, to the residential market, those sectors of the commercial market that are dependent on growth and demand on the residential side. However, as I stated earlier, we continue to see strengths in parts of the commercial market, the institutional area, the health care area, the marketplace, and the data sources that we use would indicate that that will continue.

And how much of that, specifically in the commercial market, is retrofit work versus most of it as opposed to new construction or is it both?

There's a small percentage of retrofit work in our commercial market and industrial market, but the lion's share of that is new construction work.

Okay, great, thank you.

You're welcome.

Thank you, there are no further questions in the cue. I will turn it back over to management for any closing remarks.

Very good. Thank you everyone for your questions.

Going forward, we will be changing the format of our regularly scheduled quarterly calls. In considering how to best balance management desire to focus on critical operating issues of business, and in consideration of the needs much our stakeholders, we will provide a more comprehensive and robust review of our results in our prepared remarks, along with a slide presentation but in a non-interactive format. We will continue to address the needs of our stakeholders on an ongoing basis, and we thank you for your interest in IES and look forward to updating you on our progress in the near future.

Thank you. Ladies and gentlemen, this concludes Integrated Electrical Services first quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 with the passcode 11108547. Once again that is 303-590-3000 or 800-405-2236 and enter the passcode 11108546. Thank you for your participation, you may now disconnect.