IES Holdings Inc (IESC) 2008 Q2 法說會逐字稿

Welcome to the Integrated Electrical Services second-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. This conference is being recorded May 13th, 2008.

I would like to turn the all over to Mr Ken Dennard. Please go ahead, Sir.

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

Additionally, as we mentioned in the news release, there is a short slide deck that corresponds with today's presentation on the company's web site at ies-co.com. That's on the investor relation's page. Download the pdf and follow along, if you would like.

Before I turn the call over to management, I have the normal housekeeping detail to run through. If you didn't receive a email of the news release, yesterday afternoon, please call our offices at DRGE. That number is 713-529-6600 and provide us your contact information.

Also there will be a replay of the today's call, which will be available on the company's web cast -- web site, for the archived web cast area. Also, there will be a telephonic instant replay available for the next 7 days and the replay information is in the press release, yesterday.

Please note that information reported on this call speaks as of today, May 13th, 2008. Therefore, you are advised that time-sensitive information may no longer be accurate as of the time of replay listening.

General information about IES can be found on the company's web site under investor relations in the companys end report on form 10-K, quarterly reports on form 10-Q and current reports on form AK, as well as, amendments, press releases, et cetera. All are available free of charge at the web site as soon as reasonably practical after filing 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.

Good morning. Thank you for joining us today to review our second quarter, 2008 results.

Beginning with slide 3, as I have been saying for the past several quarters, we continue to make progress on the comprehensive transformation program outlined in 2006.

We remain intently focused on the critical initiatives of strengthening the overall foundation of the company, improving operation performance, restructuring and consolidating the business, reducing the overall cost structure of the company and strengthening our leadership ranks. All of these are serving to ultimately reposition IES for growth.

Turning to slide 4, as part of this strategic plan, we divested or closed noncore divisions and worked to turn around some underperforming ones.

We worked through some very difficult and unprofitable projects. We have taken decisive steps to improve the performance of a handful of under performing businesses and in each case, rather than trying to grow our way out of problems, we made the tough decisions to fix the underlying foundations of these businesses before attempting to grow them.

Last year, we began the realignment in the business in the three major operating groups, commercial group, industrial group and a residential group and continue consolidating and integrating those businesses.

Before I turn the call over the Randy, on slide 5, let me point out some of the highlights in the second quarter.

Adjusted income from continuing operations, excludes restructuring cost and one-time gain was $0.06 per diluted share. SG&A lower by approximately $7.6 million, versus the second quarter a year ago. That's a decrease of almost 22%. Gross margin 15.7% compared top 16.5% a year ago. Backlog was approximately 382 million at the end of the second quarter, compared to 348 million in the previous quarter.

Total restructuring cost year to date, total 3.4 million and our overall restructuring program remains on track to achieve a 15% to 20% reduction in nonoperational field resource compensation cost. Finally, we extended our revolving credit facility under favorable terms. Let me turn the call over the Randy to review the financial performance in detail and then, I will return to discuss more about our markets, the cost reduction programs we have underway, as well as, some of our strategic investments in productivity enhancement and project management tools and training.

Thank you, Mike.

As you can see on slide number 6, revenue for the second quarter of fiscal 2008 were $196 million compared to 215 million reported in last year's second quarter.

Revenue decline was primarily attributed to softness in the residential business due to pressures of the housing market and as well as, weakness in certain segments of the commercial group.

Parts of the commercial business have been negatively affected by housing market pressures, certain other areas impacted by delayed timing of job starts and reduced orders due to softness in parts of the economy.

Overall, reported revenues declined 8.6% from a year ago. Year to date revenues $394 million compared to $443 million in the first half of 2007. Gross profit for a second quarter was $31 million or 15.7% of revenues, compared to $36 million or 16.5% of revenues a year ago.

This decline was primarily due to lower consolidated revenues in decreased gross margin rates in the industrial and commercial groups, partially offset by a improvement in grows margin in the residential group.

Looking at a year to date comparison, our gross margin for the first half of 2008 was 16.2% compared to 16.6% last year.

Turning to page 7, sales, general and administrative expenses, excluding restructuring charges, sailed to $28 million or 14.1% of revenue, decrease of $7.6 million from the same period in the prior year, where SG&A was 16.4% of revenues.

Decrease in both overall spending and percentage of revenues was in part due to our strategic efforts to restructure our field offices and eliminate redundant positions at facilities. The greatest impact of the cost cutting measures was in the commercial group, where approximately 100 positions have been eliminated.

Declining revenues also reduced selling cost, including target incentives. Decline in the SG&A expenses include a $2.1 million reduction, in general administrative charges, resulting from our restructuring efforts, $1.7 million decrease in management incentives and 3.8 million decrease in corporate expenses.

Year to date SG&A expenses dropped $12.4 million or 18% to $58.2 million in the first half of 2008. As a percentage of revenue, SG&A expenses were 14.8% in the first half of 2008 compared to 15.9% in the first half of 2007.

Slide 8, operating income for the quarter, prior to restructuring charges was $3.1 million compared to $0.2 million in the prior year, which didn't have restructuring expenses. Year to date operating income prior to restructuring charges was $5.6 million, compared to $3.1 million, which has no restructuring charges in the same period in 2007.

Slide 9, net income from continuing operations was $93,000 or $0.01 per diluted share. Excluding the unusual items adjusted net income from continuing operations was under $1 million or $0.06 per diluted share. This compares to a net loss from continuing operations of $880,000 or $0.06 loss per share in the second quarter of last year. For the first half of 2008, net loss from continuing operations was $935,000, or$0.06 loss per share. Excluding the unusual items adjusted net income from continuing operations was $2 million or $0.14 per diluted share. This compares to net loss from continuing operations of $501,000 or $0.03 loss per share in the first 6 months of last year, which had no restructuring cost or unusual items. Slide 10, our adjusted EBITDA from continuing operations excluding nonrecurring restructuring charges and one time settlements was $6.4 million the second quarter, compared to $2.8 million the second quarter a year ago.

We believe that EBITDA is a useful metric to provide investors comparable numbers to peer companies. We have provided a full reconciliation of adjusted EBITDA to net income in the second quarter earnings release.

Year to date adjusted EBITDA from continuing operations excluding nonrecurring restructuring charges and one-time settlements was $11.5 million compared to $8 million in the same period of 2007. Regarding our operational restructuring, we are on track to deliver a 15 to 20% reduction in non-operational field resource compensation costs. Restructuring along with improved efficiencies. We expect to incur pretax restructuring charges of approximately 5 to $10 million over the course of profits expected to be substantially complete by September 2008. Charges will include compensation severance benefits, consulting charges and facility consolidation and closings. First half of fiscal 2008, our restructuring cost totalled $3.4 million.

Now turning to slide number 11, I will provide a review of operating groups, since we restructured operations in three business groups, this is our second quarter reporting of our group data based on this new alignment.

Second quarter revenues for commercial work declined by 2% to $111 million at a gross margin of 14.3%. This group was affected by reduced demand for light construction projects, such as restaurants, movie theaters and local shopping centers, which is correlated in slowdown in the housing sector.

Also experienced increase competition to low -nd retail work from residential contractors who have been impacted by the housing slowdown. Hoping to offset decline in this group are several significant projects, including university buildings, high-rise office towers, and large regional retail shopping centers. Year to date revenues for the commercial group were $221 million compared to $226 million in the same period of 2007, 2% decline. Commercial groups gross margin percentage declined by 10 basis points in the second quarter driven primarily by two of our divisions. In one we are completing under performing legacy projects. And at the other we are completing several low margin projects.

Year to date gross margin in the commercial group was 14.6%. Compared to 15.4% in the same period of last year.

Slide 12, our second quarter revenues for industrial work were up $7 million from last year to approximately $35 million. Gross margin declined to 13.7% versus 16.9% last year, as a result of increased transportation expenses and a completion of several large high-margin projects that we have not been able to replace, as of yet.

Industrial market is generally not as cyclical as the rest of the construction industry due to the nature of the projects, often large scale multi-year contracts financed by large corporations or government agencies.

2008 period, our industrial division has seen growth in utility line service projects and increased construction at electrical substations, ethenol plants and pulp and paper mills. Year to date industrial groups revenues $68 million compared to $58 million in the same period of 2007, 17% increase. Gross margin in the segment was 15.6% first half of 2008, compared to 15.5% in the first half of 2007.

Slide number 13, our residential group generated revenues of $50 million in the second quarter with a gross margin of 20% compared to $74 million in 19.7% last year. Reduction in revenue was due to the well-known drop in demand in residential sector, in particular for single family housing. Residential gross margin improved approximately 30 basis points in the current year versus last despite of the competitive pressures in the industry.

Attribute this improvement to stabilization and material cost, including copper, wire and aluminum, improved project execution, and labor productivity. We added several new multifamily housing jobs with higher profit margins. Year to date revenues in the residential segment were $106 million compared to $159 million in the same period of 2007, 33% decline. Gross margin in the residential segment year to date was 19.9% compared to 18.8% in the first half of 2007.

Now, turning to the backlog on slide 14, our backlog was $382 million compared to $348 million at the end of the first quarter and $348 million at the end of the second quarter a year ago.

Sequentially increase in backlog occurred in each of the company's groups. The largest improvement in the commercial and industrial groups, largely due to growth and construction projects, which university buildings, large entertainment facilities and shopping centers, electrical substations and manufacturing plants.

Improved backlog for residential groups attributable to the market shift away from single family which does not create backlog to multi-family housing which does. As we have said before, we can you be the to be selective with the quality of the backlog.

Turning to slide 15, we ended the second quarter with $31.9 million in unrestricted cash and cash equivalence, compared to $35.6 million in the preceding quarter, and $67.3 million a year ago.

We also had $35.7 million available under our revolving credit facility, therefore, had liquidity totaling $67.6 million, which we believe is adequate to meet operating needs.

Quarter end cash balances are lower than last year as a result of paying down debt, repurchasing stock, reinvesting in infrastructure and investing in working capital. In May, we entered in to an amendment to our revolving credit facility extending the maturity date to May 12th, 2010.

Elected to reduce the size of the facility by $20 million to better match our needs. This facility has improved terms including the elimination of a restricted cash requirement allowing us to recover $20 million.

Update on a share repurchase program, to date the company has purchased 156,000 shares, totaling $2.8 million. Presently establishing a rural 10B-51 plan, which allows us to purchase during black-out periods. I will now turn the call back to Mike.

Thanks, Randy. Improving execution across the business is one of the key cornerstones to enhancing our performance. As I stated in the past, we are in a midst of a major turn around at IES, and our overall cost structure, operating disciplines and our work processes.

As you can see on slide 16, during the first six months of fiscal 2008, we expanded our restructuring efforts in response to the softening market conditions, and position ourself for the future.

To that end in the first six months of the fiscal year, we have organized the commercial group into 6 operating divisions, consolidating the leadership and back office functions, thereby, significantly reducing our SG&A costs. We accelerated and expanded our restructuring programs in response to the heightened market pressure, particularly within the commercial group.

We closed 3 offices in the residential group and 2 office locations in the commercial group, consolidating them in to other IES locations. We hired a new group Vice President to lead our industrial group. And we reassigned a residential Vice President to focus solely on growing the multifamily housing business.

We are intent in reducing the cost base during our restructuring , we have also been strategically investing in productivity enhancing tools, such as, project management processes and systems, upgrading our financial and operating reporting system to better manage the business and strengthening the leadership team. All to create a sustainable and scalable platform for growth.

For the progress we made in stabilizing restructured operations, we are focusing on organic growth. Accordingly, we developed and installed an order management system to drive visibility and accountability in meeting our growth targets.

With respect to markets, we expect to see continued softness in the residential market and while there has been softening in some commercial sectors, we are seeing strength in other areas of our commercial markets, especially institutional and health care. Industrial market is solid.

We continue to focus on opportunities in that sector. So in summar, despite the headwinds in the economy, our first-half results showed improvement over last year, orders picked up, size and quality of backlog continues to strengthen and our capital structure has been significantly enhanced. We are also reinvesting in the business by re-tooling our system and processes to make us more efficient and effective. We are investing in our leadership to develop a world class team.

As I said before, our focus is on execution, on accountability, and getting the fundamentals right, in order to strengthen the entire foundation of IES and position the company for improved performance, growth and a great value for our stakeholders. As always, thank you for your support. We will talk to you during the next quarter.

Certain statements in this conference call including statements regarding the restructuring plan and total estimated charges and cost reductions associated with the plan are forward-looking statements within the meaning of Section 27A of the Securities Act of the 1933, in Section 21-E 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 here of. 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 not limited to the inherent uncertainties related to estimated future operating results in the company's ability to generate sales or operating income.

Potential difficulty in addressing material weakness have been identified by the company. Fluctuations and operating results become downturns in the level of commercial residential construction. Delayed payments resulting from financial difficulties affecting customers, inaccurate estimates used in entering into contracts, inaccuracies in estimated revenue and percentage of completion on projects. The high level of competition in the construction industry both from third parties and ex-employees, increase in the cost of commodities used in our industry, including steel, copper, plastic, aluminum and gasoline, weather-related delays, accidents resulting from the physical hazards associated with the company's work, difficulty in reducing SG&A, loss of key personnel, particularly, in presence of business units, litigation risks and uncertainties, difficulties incorporating new accounting control operating procedures and centralization of back office functions.

Disruptions and/or the inability to effectively manage consolidations. You should understand that the foregoing, as well as, other risks discussed in this call are in the company's annual report on form 10-K for the year ended September 30th, 2007.

Could cause future outcomes to differ materially from those expected in such forward-looking statements. The company under takes no obligation to publically update or revise information concerning the restructuring efforts, foreign availability of cash position or any forward-looking statements are provided in this call pursuant to Safe Harbor established by the Securities Reform Act of 1995 and should be evaluated in the context of the estimate assumptions, uncertainties and risks described therein.

The general information about IES can be found at the company's website, the company's annual report on form 10K, quarterly reports, 10Q's and others are on the web site and free of charge. That will be concluding the call. Operator.

Ladies and gentlemen, this concludes the Integrated Electrical Services second-quarter earnings conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236. Pass code is 11113499-pound. We would like to thank you for your participation. Have a pleasant day. You may now disconnect.