IES Holdings Inc (IESC) 2009 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. (Operator Instructions). This is conference is being recorded today, Monday, May 18, 2009. I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead, ma'am.

Thank you, Brittney. Good morning, everyone. We appreciate you joining us for IES's conference call today to review fiscal 2009 second quarter results. We would like to welcome our Internet participants listening to the call as it is being simulcast live over the web. 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 this morning, please call our offices at DRG&E. That number is (713) 529-6600. Please provide us with your contact information, and we'll make sure you're on that list. Also, there will be a replay of today's call which will be available at the Company's web site for the archived webcast.

There is also a telephonic replay available for the next seven days, and information on how to access that replay is in today's earnings release. You are also encourage to download the slide deck which is in PDF format so you can read what corresponds with today's presentation, and that is on the Company's web site at www.ies-co. com on the Investor Relations page. We encourage feedback regarding the quality of this content,and if there's any information that you think might be of value in future calls, please let us know.

Also, please note that information reported on this call speaks only as of today, May 18, 2009, 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.

General information about IES can be found on the Company's web site under Investor Relations in the Company's reports on 10-K, quarterly reports on form 10-Q and current report on form 8-K, as well as amendments, press releases, et cetera. All are available free of charge through the website 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 now like to turn the call over to Mike.

Thank you, Karen, and good morning, everyone, and welcome. We appreciate you joining us today to review our fiscal 2009 second quarter results. Referencing slide 3, let me begin by saying that we are disappointed with our performance in the second quarter, particularly with our volume and backlog levels. However, although our volume declined in the quarter, there were some encouraging signs. We saw an improvement in our gross margin. We saw increased volume in our commercial segment and a substantial increase in backlog at our industrial segment.

Importantly, we continue to right size the business. And to that end, we are making measurable progress in our cost reduction programs and are beginning to realize benefits from these initiatives. As we outlined during our last call, our focus now is on building backlog and growing the business. Accordingly, we made investments in our sales organization to better manage and build our pipeline of opportunities. We've evolved our go-to-market strategy from a localized opportunistic approach to a more structured method focused on key targeted markets and national strategic client relationships. We also continue to invest in our sales team and are realizing benefits there as well.

In light of the market pressures and resulting volume shortfall, we have expanded our efforts to right size the business. We completed the initial restructuring of our operations during fiscal 2008, and as part of that restructuring, we integrated 27 companies that were structured geographically into three major business segments, commercial segment, industrial segment and a residential segment, that are all now oriented to the markets that we serve. That operational restructuring was part of our long term strategic plan to reduce our cost structure, to reposition the business to better serve our customers, and to strengthen our financial controls, and as a result, position us to execute a growth strategy in our targeted markets.

We removed approximately $20 million in costs during fiscal 2008 as a result of this restructuring and other cost reduction measures. In addition, we made strategic investments in systems and organizational capabilities to better support our operations. These investments were necessary to strengthen our project management and execution processes to bring a level of performance visibility to the business and to improve controls.

We also made a commitment to enhance the capabilities of our leaders across the business, including upgrade the talent and a formal comprehensive leadership development program, all aimed at developing a world-class management team.

In the first quarter of fiscal 2009 as a result of market conditions, we began a new restructuring program which is the next level of our business optimization strategy, and is designed to further reduce costs and consolidate operations within our three business segments. Even with our focus on cost reduction and restructuring our operations, we felt it was essential to make strategic investments in certain key areas of our business, including refining our go-to-market strategy, growing the business, and continuing to invest in our sales team.

Under this current restructuring plan, we expect to incur pre-tax restructuring charges including severance benefits and facility consolidations of approximately $3 million to $5 million as it's implemented over approximately 12 months. Before I turn the call over to Randy, let me say that in spite of our overall disappointment with our second quarter financial performance, we made progress on several key fronts.

If you would move to slide four. Our adjusted net income from continuing operations excluding restructuring and other one-time charges, was $0.2 million or $0.01 per diluted share. This compares to adjusted net income from continuing operations excluding restructuring charges of $1.1 million or $0.07 per diluted share in the second quarter of fiscal 2008. Our overall gross profit margin rose to 17.8% from 15.8% in the second quarter of last year. Gross profit margin rose in all three of our business segments, despite volume declines in our industrial and residential groups.

The increase in gross profit margin is due to combination of improved project execution, our ability to adjust our labor to meet project demands, as well as stabilization of material costs. The volume increase in our commercial group which ran contrary to the nationwide trend in construction activity, reflects the progress we are seeing from our refined go-to-market strategy and our investments in our sales team.

In the second quarter we reduce SG&A, excluding one-time charges by approximately 13% from a year ago to $26.7 million. We've made measurable progress in reducing our SG&A expenses as a result of our efforts to restructure our operations, eliminate redundant positions and consolidate facilities. We've improved our operating and financial controls, leading to the reduction of professional fees and other general expenses.

We achieved these cost reductions while we were simultaneously making investments to support the new systems we implemented during 2008. Our investments in these new systems and processes have resulted in improved controls and compliance, and have yielded margin improvements and productivity gains throughout the business. However, these cost savings have been mitigated by several one-time charges. And in light of the difficult market and disappointing second quarter volume, we will continue to drive cost reduction through additional consolidation and optimization.

Our backlog was $297 million at the end of the second quarter. Backlog in our industrial segment rose substantially, underscoring the progress of our revised go-to-market strategy and the investment in our sales team. Backlog in both the commercial and residential segments declined due to competitive market pressures and project deferrals, as well as our ongoing selectivity in the work we pursue.

Let me turn the call over to Randy to review our financial performance in more detail.

Thanks, Mike. Before I review our second quarter results, let me begin by providing you with some insight into our decision last week to delay the filing of our Q. As we have outlined over the past several quarters, we have been in the mist of an ongoing program to improve our systems and processes, strengthen our internal controls, and enhance the overall capabilities of our finance team. Over the course of the past 24 months, we have made measurable progress in the upgrade of our team, improved internal controls through standardization of processes, use of best practices and formalized accounting policies.

Our account reconciliation process is one of those key controls. At the beginning of this fiscal year, we made key personnel changes within our headquarters finance organization to upgrade the talent level and strengthen the overall team. This team took a fresh look at our account reconciliations and determined that several were not at an appropriate level of quality. We were able to address those quality issues in all but one account in time to file our 10-Q, and therefore we delayed our filing. We have since reconciled all accounts and improved our controls in the process.

As a result, we have recorded non-cash after tax prior period adjustments of $1.1 million. We determine that the adjustments were not material, so a restatement was not required. Now I'll move on to discuss our second quarter results.

As you can see on slide five, revenues for the fiscal 2009 second quarter were $167 million compared to $196 million last year second quarter, a 15% decline. The decline in revenues was attributable to lower construction activity at our industrial and residential business segments, consistent with the nationwide decline in construction, partially offset by an increase in revenues at our commercial segment. Contrary to national trends, revenues in our commercial group increased as a result of our go-to-market strategy in our sales team.

Revenues in our industrial segment declined as market conditions for this business group continue to be difficult in light of the current credit environment, which has caused many projects to be deferred as they await financing, or cancelled altogether. In our residential segment, the revenue decline was attributable to the ongoing slowdown in both single and multi-family housing construction, a nationwide trend that has affected our residential group's building activity throughout the markets we serve.

For the first six months of fiscal 2009, total revenues were $341 million compared to $393 million in the first six months of fiscal 2008. Despite the double digit decline in consolidated revenues for the second quarter, gross profit declined by only 3% to $30 million from $31 million in the second quarter of last year. Our overall gross profit margin rose to 17.8% of revenues compared to 15.8% of revenues a year ago. This reflects improved project execution due in large part to our investments in the training of our personnel and our proprietary project management system. Gross profit for the first six months of fiscal 2009 was $59 million compared to $64 million the same period of fiscal 2008. Gross profit margin for the above-mentioned periods was 17.5% and 16.3%, respectively.

Turning to slide six, sales, general and administrative expenses for the second quarter were approximately $29 million compared to $27 million in the second quarter of fiscal 2008, and include one-time charges. As Mike said, we have made notable progress in reducing our SG&A expenses, excluding one-time charges, which were approximately $27 million this quarter, down from $31 million in the second quarter of last year. The reduction in SG&A, excluding one-time charges in the second quarter, is due to our strategic efforts to restructure our operations, eliminate redundant positions, consolidate facilities, reduce professional and other general expenses.

These expense reductions have been partially offset by increased investments related to support of the new systems we implemented during 2008. As Mike stated, our investments in these new systems and processes have resulted in margin improvements and productivity gains throughout the Company. SG&A expenses as a percentage of revenue, excluding one-time charges, were 16% in fiscal 2009 first quarter compared to 15.6% in the second quarter of fiscal 2008. SG&A expenses were approximately $58 million for both the first six months of fiscal 2009 and the same period of fiscal 2008. SG&A expenses, excluding one-time charges, were approximately $56 million the first six months of 2009 compared to $59 million for the same period last year. As a percentage of revenues, SG&A expenses, excluding one-time charges, were 16.4% for the first six months of fiscal 2009 compared to 15.1% the first six months of fiscal 2008.

On slide seven, adjusted operating income, excluding restructuring and one-time charges for the second quarter, was $1 million compared to $3.4 million, excluding restructuring and one-time charges, in the fiscal 2008 second quarter. For the first six months of fiscal 2009, adjusted operating income was $2.4 million, excluding restructuring and one-time charges, compared to adjusted operating income of $6 million, excluding restructuring and one-time charges, in the same period of fiscal 2008. Net loss from continuing operations, including restructuring and one-time charges, was $1.2 million, or a loss of $0.08 per share in the second quarter of fiscal 2009. This compares to net income from continuing operations, including restructuring and one-time charges, of $226,000 or $0.02 per diluted share for the second quarter a year ago.

Excluding restructuring and one-time charges, adjusted net income from continuing operations for the second quarter of fiscal 2009 was $176,000 or $0.01 per diluted share. This compares to adjusted net income from continuing operations, excluding restructuring and one-time charges, of $1.1 million or $0.07 per diluted share for the second quarter of fiscal 2008. Net loss from continuing operations in the first six months of fiscal 2009 was $1.3 million or $0.09 loss per share, which includes restructuring and one-time charges. Net loss from continuing operations for the first six months of fiscal 2008 was $694,000 or $0.05 loss per share, including restructuring and one-time charges.

Excluding restructuring and one-time charges, adjusted net income from continuing operations for the first six months of fiscal 2009 was $592,000 or $0.04 per diluted share, compared to adjusted net income from continuing operations in the first first six months of fiscal 2008 of $2.2 million or $0.15 per diluted share.

Adjusted EBITDA for continuing operations, excluding restructuring and one-time charges, for the fiscal 2009 second quarter was $3.4 million compared to $6.7 million in second quarter a year ago. Adjusted EBITDA for continuing operations, excluding restructuring and one-time charges, for the first six months of fiscal 2009 was $6.7 million compared to $11.9 million for the same period a year ago.

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

Now I'll give you a bit of insight into our segment data. If you turn to slide eight, second quarter revenues for commercial work increased approximately 3% to $115 million, from $112 million a year ago, as that business is benefiting from progress on our go-to-market strategy and our sales team, as Mike indicated earlier. The commercial group's gross margin rose to 16.6% from 14.3% a year ago, as a result of improved project execution resulting from the investments we've made in our project management operating system and the training of our personnel, along with some material cost stabilization.

Year-to-date revenues for the commercial group were $217 million compared to $221 million for the same period last year. Gross profit margin for the segment was 16.1% compared to 14.6% for the first half of fiscal 2008.

On slide nine, our second quarter revenues for the industrial group declined 46% from a year ago to approximately $18 million, as the segment experienced decreased demand in light of the current credit environment, which has resulted in many projects being deferred or canceled. Industrial group gross profit margin increased to 16.6% versus 14.3% a year ago as a result of improved project execution as well the effective reduced input prices.

Revenues for the industrial segment for the first six months of fiscal 2009 were $44 million compared to revenues of $66 million in the first six months of fiscal 2008. Industrial group gross profit margin was 14.4% in the first half of 2009 compared to 15.2% in the fiscal 2008.

On slide ten, revenues in our residential group declined 33% to approximately $34 million in the second quarter from $50 million a year ago, due to the ongoing slowdown in single and multi-family housing construction which has reduced demand throughout the markets we serve. However, in spite of the revenue decline, residential gross margin continued to improve this quarter rising to 22.8% from 20% a year ago. This gross margin increase is primarily attributable to improved execution, our ability to adjust our labor to meet project demands, as well as the stabilization of material costs.

Revenues for the residential segment for the first six months of fiscal 2009 were $79 million with a gross margin of 22.7%, compared to revenues of $106 million with a gross margin of 19.9% in the second period a year ago.

Now turning to slide 11, our backlog at the end of the second quarter was $297 million compared to $337 million at the end of fiscal 2008, and $382 million at the end of the second quarter a year ago. In light of the increased competition in the marketplace, we continue to focus on the quality of our backlog.

Now turning to slide 12, we ended the second quarter with approximately $52 million of unrestricted cash and cash equivalents, compared to approximately $49 million in the proceeding quarter and $32 million a year ago. We also had approximately $3 million available under our revolving credit facility for liquidity, totaling approximately $55 million. Following the close of the quarter, we recovered $10 million in letters of credit, resulting in the availability on our revolving credit facility of $13 million currently.

Total debt was approximately $29 million as of the end of the second quarter. We believe we have adequate liquidity to meet the Company's operating needs.

For an update on our share prepurchase program, as of March 31, 2009, we have repurchased a total of 886,360 shares of our common stock for $14.4 million at an average price of $16.24. As you know, we have a 10B 51 plan in place which allows us to purchase during blackout periods. Now I will turn the call back to Mike.

Going to slide 13, let me again point out that we've made significant changes to the business over the last 18 months. The restructuring program announced in 2007 was designed to align our business with the markets we serve in order to position us for growth. And that, for the most part, is complete. Now we are working to continually improve our execution across the entire business, which is one of the key elements to enhancing our performance and profitability. We continue to drive reductions in our cost structure, and are well into another restructuring phase to further consolidate operations within our three business segments.

We remain intent on further reducing our cost base. We have been strategically investing in sales resources, productivity enhancement tools as well as systems to manage the business in order to create a sustainable and scalable platform for future growth. We believe the substantial changes we've made to the business, combined with our strong financial condition, expanded surety capacity, national presence, excellent safety record and new sales capabilities, will enable us to withstand the current economic environment and positions us well for the future.

We are also seeing encouraging progress from our investments in sales resources and believe that these will begin to be reflected in improved overall backlog. We firmly believe that we have the right strategy in place and this, coupled with the cost reduction program that addresses the realities of the current market environment, new sales capabilities, a refined go-to-market strategy, and improved execution, enables us to withstand the current economic environment and position us to benefit from the anticipated increases in infrastructure spending over the coming years. As always, we appreciate your interest, and we look forward to speaking to you again on our fiscal third quarter conference call.

Certain statements in this conference 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 on 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 actual future outcomes to differ materially from those set forth in such statements.

Such risks and uncertainties include but are not limited to the inherent uncertainties relating to estimating future operating results and the Company's ability to generate sales and operating income, potential default under credit facilities and term loans, cross defaults under surety agreements, potential depression of stock price triggered by the potential sale of controlling interest or the entire Company as a result of controlling stockholders decision to pursue a disposition of its interest in the Company, fluctuations in operating results because of downturn in levels of construction, delayed project start dates and project cancellations resulting from adverse credit and capital market conditions that affect the cost and availability of construction financing, delayed payments resulting from financial and credit difficulties affecting customers and owners, inability to collect monies owed because of the depressed value of the project and the ineffectiveness of liens, inaccurate estimates used in entering into contracts, inaccuracies in estimating revenue and percentage of completion on projects, the high level of competition in the construction industry, both from third parties and former employees, weather related delays, accidents resulting from the physical hazards associated with the Company's work, difficulty in reducing SG&A to match lower revenues, loss of key personnel, litigation risks and uncertainties, difficulties incorporating new accounting control and operating procedures and centralization of back office functions, and failure to recognize revenue from work that is yet to be performed on uncompleted contracts and/or from work that has been contracted but not started due to changes in contractual commitment.

You should understand that the foregoing as well as other risk factors discussed in this call and in the companies annual report on Form 10-K for the year ended September 30, 2008, could cause future outcomes to differ materially from those expressed in such forward-looking statements. The Company undertakes no obligation to publicly update or revise information concerning its restructuring efforts, borrowing availability or cash position or any forward-looking statements to reflect events or circumstances that may arise after the date of this release and call.

Forward-looking statements are provided in this conference 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 here in.

General information about Integrated Electrical Services can be found at www.ies-co. com under Investor Relations. The Company's annual report on Form 10-K, quarterly report on form 10-Q ,and current report on Form 8-K as well as any amendments to those reports. These are available free of charge on the Company's website as soon as reasonably practical after they are filed with or furnished to the SEC. With that, our call is concluded.

Thank you. Ladies and gentlemen, this concludes the Integrated Electrical Services second quarter earnings conference call. This conference will be available for replay after 11:30 a.m. Eastern Standard Time today through May 25 of 2009 at midnight Eastern Standard Time. You may access the replay system at any time by dialing 1-303-590-3030 and entering access code of 407-7397 followed by the pound sign. Thank you for your participation. You may now disconnect.