PowerSecure International's CEO Discusses Q4 2012 Results - Earnings Call Transcript

PowerSecure International, Inc. Group (NASDAQ:POWR)

Q4 2012 Earnings Conference Call

March 7, 2013 5:30 p.m. ET


John Bluth – Senior Vice President Investor Relations

Sidney Hinton – Chief Executive Officer

Chris Hutter – Chief Financial Officer


William Bremer – Maxim Group

Eric Stine – Craig-Hallum Capital Group

Rob Brown – Lake Street Capital Markets


Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 PowerSecure Earnings conference call. My name is Aisha and I will be your coordinator for today’s call. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. John Bluth, Senior Vice President Investor Relations. You may proceed, sir.

John Bluth

Thank you very much Aisha and thank you all for joining us today for our fourth quarter an full year 2012 earnings call. Joining me on the call from the PowerSecure management team are Sidney Hinton, our Chief Executive Officer and Chris Hutter, our Chief Financial Officer

Before we begin, I want to remind you that during the course of the discussion today we expect to make forward-looking statements under the Safe Harbor provisions of the Federal Securities laws. These are all statements other than historical facts, including statements concerning the future business, financial results, and outlook of the company. Forward-looking statements are based on the current expectations and beliefs of management, but are not guarantees of future performance or events and they are subject to risks, uncertainties and other factors, including those discussed in the company's SEC filings as well as on the call today and in the earnings release which could cause actual results to differ materially from those projected or implied. The company assumes no duty to update or revise any forward-looking statements. In addition, the company will be referring to certain non-GAAP pro forma financial measures on the call today. Please note that the company’s earnings release contains an explanation and reconciliation of these non-GAAP measures to the nearest GAAP measures.

Now I’d like to turn the call over to Sidney who will provide a business overview, then Chris will walk you through our financial results and then we’ll open the call to Q&A.

Sidney Hinton

Thank you, John and thanks to everyone for joining us today. We appreciate your interest in PowerSecure. The preponderance of our audience today is from the investment community, but we do have some utility partners joining the call as well as some of our national account customers. Before I proceed in addressing our investors, let me take a moment and express our appreciation for the opportunity to serve each of you who are our utility partners and our customers. We really do appreciate the opportunity to serve you and we know we’re blessed to do that. We count it blessing every day and we really do seek every single day we strive to earn your deepest respect. Thanks again for the opportunity to serve you.

With that, let me move on and address the balance of my comments are directed to our investors. We’re very excited today to discuss our fourth quarter and full 2012 results with you, both of which demonstrate our continuing strong momentum. Several key things have emerged for us. We hope you’ve noticed. First we saw a significant ramp in the bottom line throughout the year based on the leverage we generated from cost control, revenue growth and investments from prior years and we’re pleased to report a record fourth quarter with revenues of just under $47 million and EPS of $0.13, excluding the cost reduction charge.

Second, we are capturing the benefits of a diverse business with increasing scale across each of our platforms, strong order flow and a record backlog of $183 million and that backlog will be further enhanced in the near future as a result of the revenue that we’ve gained through the ESCO acquisition that we announced last week. Let me just pause for a second. The energy services company that we acquired last week, we’re just simply referring to it as ESCO. Hopefully that’s clear enough for you.

Third, our performance record in 2012 and the momentum we’ve created into 2013, we’re checking right on exactly where we thought we would and hope to on our 2015 strategic plan to deliver $300 million in revenue with double digit operating margins. And fourth, our balance sheet remains pristine, giving us significant financial strength to support our growth objectives.

Heading into 2012, we told you that we expected the investments we made in our business over 2009, 2010, 2011 that it would diversify and enhance our revenue growth and would translate into steady growing operating leverage on the bottom line. You can see this is exactly what’s happened as you look at the fourth quarter and at the full year results for 2012. In fact, we’ve really seen this momentum building in our earnings per share right throughout the year with sequential year over year gains in earnings per share every quarter leading up and including to the fourth quarter which posted an APS of $0.08 on a GAAP basis and $0.13 on a non-GAAP, and make sure that’s excluding the cost reduction charge that we took.

We’ve seen our operating margins expand by almost 2 percentage points on a GAAP basis and 3.6 percentage points, excluding the charge in 2012 compared to 2011. And this expansion accelerated as we move through the year. We expect to see this bottom line leverage continue to expand in 2013. We also expect that the cost reduction program that we successfully executed in the third and fourth quarters will further enhance our operating leverage.

In the fourth quarter our gross margin expanded 1.7 percentage points to 33% and our operating margin increased 1.6 percentage points from the fourth quarter in 2011 and expanded a full 4 percentage points, excluding the charge.

We’re very focused on continuing to drive bottom line leverage. We believe that we’re just at the beginning of a very exciting period of growth at PowerSecure, with a diverse base of business in large growing markets where we have superior solutions and competitive advantages and to support that belief, we offer the following points. You can see our current financial results. You can see our record backlog. You can see the new business that we’ve already announced in 2013 and you can see the opportunities that we’ve added with the recent acquisition of the ESCO business as well as the acquisition we made midyear in 2012 of the solar business.

As we enter 2013, our stated goals of achieving $300 million in revenues and mid double digit operating margins in 2015 are well within sight and we’re tracking almost exactly where we want to be at this stage of the five year plan. With the visibility into 2013 we already have from our backlog, PowerSecure has not entered a year in this strong a position since 2006 and we are a much stronger company given the breadth and depth of our product and customer base today than we were back in 2006.

We will continue to focus on growing revenues and attractive margins while maintaining our discipline on costs and building on our successful track record of making smart investments where we see opportunities. Before I ask Chris to expand on our financial results and backlog development, I want to share some perspective on how we’re seeing each of the three key business areas and the environments that they’re operating in, starting with our Distributed Generation business. The fourth quarter was another outstanding quarter and we really had a phenomenal year with 27% growth year over year to $76 million in our DG revenues for 2012.

We’re especially excited about the progress we’re making in the hospital market with our modular PowerBlock generators which are interim Tier-4 compliant and they have bi-fuel capabilities that will burn up to 70% natural gas, combined with our complete custom switch gear, our turnkey monitoring and our peak shaving, we’re able to offer hospitals a compelling return on their investment that enables them to provide more total backup power at their facility while leveraging the benefits we can deliver on peak saving.

In 2011, we deployed a targeted sales force to focus on the hospital opportunity and we’re seeing real results from this effort. In fact in 2012 we saw the hospital portion of our Distributed Generation grow by 93%, representing 13% of our DG revenues. Throughout 2012 and now in 2013, we see the hospital market as a powerful growth driver for our DG business. As we talked about before, we’ve also initiated a focused sales effort at the emerging data center market. The data center sales development cycle is on the longer side. We do have some data center business in our pipeline and we hope to replicate our success with hospitals in the data center market with new customer wins in 2013 and 2014. This is a market we’re very excited about.

The majority of our DG customers buy the systems that we provide them. We book the revenue from these customers when they make the purchase and the customer captures the peak saving economics. But some of our customers prefer PowerSecure to own the system. In these circumstances, PowerSecure owns the system. We deploy our capital. The customer receives either free backup power or subsidized backup power. Some of them pay for it and we keep the peak saving economics to our self. These revenues from the recurring revenue business which by the way do carry the highest margins in our Distributed Generation portfolio, we saw these revenues increase to $14 million, an increase of over 23% as compared to 2011.

As I mentioned on our call last week when we had the call to discuss our acquisition of the ESCO business, we’re also very excited about the opportunity to add Distributed Generation peak saving to our ESCO customers. It’s a market that as we said on the call we’ve targeted and had exploratory conversations with many of the major ESCO companies. We’ve just failed to break the formula on how to do business with them and we’re very excited that this acquisition brings us a proven platform to do business. They already have their trust and respect. We just now have to get them educated on the economies and economics associated with peak saving in those territories.

Before I leave DG, I also want to note that our solar business which we acquired for approximately $4 million in June of 2012 continues to be a winner. We recognized $8.2 million in revenues from our solar business in the second half of 2012 and we’re targeting $20 million in solar revenues for 2013. We have integrated some outstanding people into the PowerSecure organization by combining our solar capabilities with our fully integrated Distributed Generation solution.

One thing I would point out that by integrating that solar with our Distributed Generation and our switch gear and our MicroGrid capabilities, that we’re able to start offering solutions we’re known as firm solar. I’m sure all of you read the Wall Street Journal every day. I believe it was earlier this week. If not it was late last week. There was an article about California and issues they were facing where they were talking about a potential for brownouts because of the high percentage of renewables which are subject to instantaneous interruptions. That’s a concept that we are well equipped to serve and in fact we are working with utilities to serve right now that we believe holds a lot of promise for PowerSecure in a place we have tons of proprietary edge against anybody else in the market.

All right. That’s all on Distributed Generation. Now turning to Utility Infrastructure. The continued growth and the success of our Utility Infrastructure business which we started from scratch in 2007, is another example of how our investment strategy over the past several years has worked to now deliver meaningful leverage. In 2012 we delivered over $60 million in revenues from our Utility Infrastructure business. That was up 29% from 2011 and it was 150% increase as compared to $24 million back in 2010.

Our fourth quarter revenues in 2012 are slightly over $20 million, actually $20.7 million. It’s an all-time record and is 40% higher than the revenues in our next highest quarter for this business which was the fourth quarter of 2011. We did see additional contribution of about 10% above where we were expecting in the fourth quarter from the storm work we were blessed to receive in support of the utilities as they worked to restore service after hurricane or Superstorm Sandy. And the key areas though in our gross – so 10% of our fourth quarter revenues that’s where they came from. But the key areas of our growth are our transmission.

We’re growing in our distribution work as well, but we’re seeing more and more of a mix towards transmission and because of the various entries, the equipment is much more expensive, you’re earning better gross margins in that business, particularly if you can execute. And we’ve invested in quality equipment so that when a customer contracts us, we can just outperform faster than the other companies, deliver more value to them. And at the same time, they spend a dollar with us, they get more than the same dollar they could get from a competitor and we actually get to keep more of the dollar than the competitor does too. So it’s a win-win for both of us.

Throughout 2012 we gained new customers and new projects across the country, especially in the Midwest and mid-south, helping energy companies to quickly build out a transmission and distribution system for delivering electricity to their oil and natural gas operations. With an abundance of shale gas activity, we see continued opportunity in this area of the market and our current backlog gives us confidence that we will see additional growth in our Utility Infrastructure business in 2013. While the underlying market dynamics in the Utility Infrastructures pace provide a real tailwind, it’s absolutely a rising tide market in that space. We did see market dynamics in the LED energy efficiency space that slowed down the second half o of our 2012 as we had communicated to you and as we anticipated. The year got -- and I’ve now moved the conversation from Utility Infrastructure to energy efficiency.

The year got off to a very strong start with energy efficiency revenues in the first half of 2012. In fact we were 52% higher in the first six months of this year versus the first six months of 2011. But as many of our retail and grocery customers begin to get concerned about the tightening economic conditions in their businesses as they had rising food prices, raw input price increases, they signaled to us midyear that they anticipated slowing their capital spends on lighting projects and they really did slow down. Our energy efficiency revenue in the second half was down 29% versus the second half of 2011.

That said, for the overall year, we still grew 9% in that business unit. Looking forward, we see strong interest in order flow in products like our area light and Parking Lot Light and we see signs from some of our customers, particularly the customers in the grocery store, we see signs that that business will pick back up. I do want to be very, very clear that we really target two customers. The majority of our revenues has come from the grocery store market. I’m going to roughly say 85% to 90% of our revenues come from there. The other part comes from our utility market. The utility market has done nothing but grow and continues to grow. Our first two months of this year we’re well ahead of the pace that we were a year ago in that segment. We’re very bullish on the products we’ve introduced there and the success we’ll have with the utility markets. So let me be really clear that we’re looking for recovery and speeding up in the grocery store markets and that’s’ still speculative to somewhat, but we are reporting strong growth and strong acceptance in the utility market. And you can add anything in your comments, Chris to help clarify that, particularly for the analysts while they try to look for the balance of the year.

With the breadth of our product offerings, the quality and value we engineer into our solutions and the strong relationships we have with the utilities, the groceries and retailers, we feel very good about our position in the marketplace and our ability to capitalize on the LED phenomena as the economy recovers and as the LED adoption rate accelerates which by all means every indicator is that – I can’t tell you when the tipping point is, but we’re much closer to a tipping point and it definitely appears in the next 24 months you’re going to start seeing significant adoption as evidenced by Cree’s announcements, Philips announcements and so forth.

As I mentioned in my opening comments, we will continue to look for ways to accelerate our progress in this market. We will not hesitate to make an acquisition around the LED space if we’re blessed to find the right opportunity. Additionally, we’ve substantially broadened and strengthened our energy efficiency area with the ESCO business acquisition that we announced last week. In addition to our best in class LED lighting solutions, this acquisition gives us new energy efficiency offerings, including HVAC upgrades, building envelope upgrades, transformer efficiency upgrades and water conservation systems.

It’s very exciting for us to be heading into 2013 on the back of a record 2012 which unfolded much as we had expected it to. We’re delivering the bottom line leverage our investments were intended to generate. We have a firm grip on cost and we are very well positioned with differentiated best in class solutions in large and growing markets with substantial upside potential. This is the best position the company has ever been in heading into a year and as one of the company’s largest shareholders myself, I believe we are in an outstanding position to execute and deliver continued growth and success to PowerSecure’s customers, PowerSecure’s utility partners, PowerSecure’s employees and to you PowerSecure’s investors.

Now I’ll turn the call over to Chris who will walk through our record financial performance in more detail.

Chris Hutter

Great. Thank you, Sidney. I’m going to focus my comments today in several areas. I’m going to discuss the highlights of the P&L, including trends in our revenue, gross margins and operating expenses. I’ll break down our backlog as I usually do so you can get a feel for how our revenues are likely to be realized in the upcoming quarters. I’ll review our balance sheet metrics, our key metrics there. Our cash, our debt, our stock repurchase plan and our CapEx and I’ll discuss the financial implications of our recent acquisition of the ESCO business and try to walk everybody through that as you re jigger your numbers for 2013.

Let me start with an overview of our results for the quarter. The fourth quarter was outstanding and capped off a terrific year that played our exactly as we anticipated. And I would reiterate that this is not the first year that we’ve done this as we are right on our strategic plan. Our total revenue for the fourth quarter was $46.7 million, as Sidney mentioned, an all-time record and compared to $39.7 million last year which represents an 18% increase. And just to clarify, Sidney mentioned the Sandy storm work was worth about 10% of our utility services revenues, but I want to clarify something there, that of course we’ve talked about this those of you that have followed us. That is not all incremental revenue and in fact you’ll remember on last quarter’s call we talked about the fact that we had people deployed at that time. So I don’t want anybody to hear that there was a magic $2 million that fell in our lap this quarter. It wasn’t that way at all because of course when we’re working on that storm, we’re leaving work behind that we would have otherwise had. So I just want to clarify that point so nobody thought that that was sort of a gift on the quarter. It wasn’t.

In terms of our revenue performance by product and service area, please see the revenue chart in our earnings release which breaks out revenue and growth in each of our product and service areas, the highlights being that DG growth is 27% and utility service growth of 40% drove our strong results and way more than offset the anticipated softness in our energy efficiency area which of course we’ve talked about for quite some time. And our revenue trend throughout 2012 again progressed almost exactly as we anticipated at the start of the year. It modeled a similar pattern to 2011 with year over year and sequential growth in each successive quarter. For the full year in 2012 we saw a 25% increase in revenue to $162 million and as we look forward into 2013, we expect to see a year where we deliver year over year revenue growth in each quarter for the third consecutive year, something we’re obviously very proud of.

Our gross margin in the fourth quarter expanded to 33% and our fourth quarter operating margin increased to 4.3% as reported and 6.7% excluding the charge, from 2.7% in the fourth quarter of the year before which essentially is a full 4 percentage points of expansion demonstrating the operating leverage that we’ve been talking about over the last couple of years. We are very happy to see yet another quarter of expanding operating margins and growing EPS. We remain focused on continuing to deliver this bottom line leverage as we grow our revenues and focus on strong cost management.

I’ll tip our hand a little here and just add that we expect our EBITDA to double in 2013 and be in excess of $20 million. And as we’ve increased our investment in our company-owned Distributed Generation projects, you’ve noted that our deprecation of course has increased over the years. and so one metric we’re going to start to introduce as we move through 2013 is that EBITDA metric, but of course we’ll make sure that when we report our earnings we’ll disclose that in conjunction with our non-GAAP measures.

Which takes me to how we see the business flowing in 2013, which I’ll first discuss just to be clear, excluding our new ESCO business so you can get grounded on an apples to apples basis first and then I’ll discuss the ESCO bucket. Again everything I’m going to talk about right now is excluding ESCO, then we’ll hit the ESCO. For 2013, we expect to continue to generate healthy gross margins in the low 30s, excluding ESCO, which is also very much in lie with our previous expectations/communications on this element of our P&L. as those of who have followed us for a while know, there’s a degree of quarter to quarter variability in the mix of business and projects having the greatest impact on where our gross margins land each quarter. DG of course is our highest margin business, with Utility Infrastructure and energy efficiency somewhat lower.

Within DG, our recurrent revenues from company owned projects deliver the highest margin and we also see higher margin from sales of our proprietary power blocks compared to the generator solutions we sell with third party equipment. The increased share of our power block DG sales is a tailwind for our gross margin as we look out into the future. Our Utility Infrastructure business was our fastest growing business both in the fourth quarter and for all 2012. These revenues work in the other direction for us since it is at a slightly lower margin, but within the Utility Infrastructure both storm work and transmission work tends to be higher margin than distribution work and we’re doing an increasing proportion of our work on the transmission side. So hopefully that all didn’t just confuse everybody, but the headline there is there’s the mix match, but overall we think we’re going to be in that low 30% type range, low 30s on gross margins as we look into 2013 on a quarterly basis.

With these core gross margins in the low 30s, our anticipated strong revenue growth and steady cost structure provides the formula for increasing operating leverage and driving meaningful operating margin and EPS growth. One of the keys increasing our operating leverage is our ongoing focus on cost control, the catalyst of which were the actions we took in our third and fourth quarters of 2012 to streamline our cost structure.

Our operating expenses in the fourth quarter were $13.4 million as reported and $12.3 million, excluding the $1.1 million charge related to our restructuring and cost reduction actions. Excluding the charge, our $900,000 year over year increase is very simple. It consists of $400,000 of additional depreciation and amortization, primarily related to our recurrent revenue projects and $500,000 of additional operating expenses related to our solar acquisition. That’s it. Excluding the solar, costs were flat. That’s the headline.

I would point out that restructuring charges we took in the third and fourth quarters, our operating expenses as a percent of revenue decreased 3.4 percentage points from 2011 to 2012 for the full year. With the benefit of the cost reduction plan taking effect and our continued focus on cost, we expect that operating expenses as a percent of revenue will continue to decline on an annual basis. For example, looking ahead into 2013, we currently expect our operating expenses, again excluding ESCO, to step down from our fourth quarter levels as we go into 1Q and be in the $11.5 million to $12 million range per quarter throughout the year plus or minus, again without the ESCO business. And up just slightly on an absolute basis for the full year and this too is very consistent with what we communicated on our last earnings call.

Turning to EPS for the quarter, our non-GAAP EPS, which excludes the restructuring charge, was $0.13. You can find a reconciliation of this non-GAAP number to our GAAP EPS of $0.08 in our earnings press release and of course the difference is the charge. We continue to expect our effective tax rate to be in the 37% to 38% range moving forward.

All right, good. That’s the P&L. now I’m going to move into our backlog, again everything excluding ESCO. As of today, our backlog stands at an all-time record $183 million. Again excluding the ESCO business, so we’re talking apples to apples. This compares to $175 million at the time of our last earnings release in November and compares to $158 million a year ago. This visibility into our future revenue provides us with a strong foundation for 2013. As Sidney mentioned, we have not been in this strong of a backlog position entering year since 2006 and have a substantially more robust and diverse pipeline. The really neat thing is that even as we’ve consumed backlog in the fourth quarter by executing a record number of projects at a record pace, we grew our backlog despite that with $45 million of new business wins in December, January and February.

As you can see in our earnings release, we break our backlog down into three categories. Our near term, which is project based work for DG, Utility Infrastructure and energy efficiency projects that we expect to recognize over the course of the next three quarters, longer term project work that we anticipate will be recognized fairly evenly from the fourth quarter of 2013 through 2014 and long term recurring revenues that we expect to recognize over the next seven to 10 years.

If you look at our backlog number of $183 million, $100 million of that is near term backlog, which is an all-time record and tells you that we are expecting very good near term quarterly results. Specifically, we estimate that 32.5% of this near term backlog will be recognized in the first quarter, 35% will be recognized in the second quarter and 32.5% will be recognized in the third quarter of 2013. Again, I’ll give the caveat, projects can and do move in both directions, but we’ve tended to be pretty good with those estimates.

The next component, longer term backlog which includes these long term projects that we have again stands at $15 million and we expect that to be recognized fairly evenly from the fourth quarter of 2013 through 2014. And the last component is $68 million of long term recurring revenues which adds $68 million plus the $15 million plus the $100 million, gives you the $183 million. A simple formula to use that backlog as a basis to model our revenues over the next three quarters has proven out to be pretty good, is to take our near term project based backlog, that $100 million number, spread it according to the percentages I just described, 32.5% in the first quarter, 35% in the second quarter and 32.5% in the third quarter and a $5 million of revue on top of that to each quarter to account for recurring revenues and other regular revenues that we just don’t capture in the backlog. And then layer in and make assumptions about other project sales you expect we’ll make and complete between now and the period you’re estimating and add that to that quarterly revenue base and you can derive your estimates. If you apply this approach, you’ll see the reasons why we’re confident in a very strong 2013.

So now that was all excluding ESCO. Now let’s talk about ESCO, which is incremental to what I just talked about. The $27 million of projects we took over related to our ESCO acquisition that we announced last week will be reflected in our backlog once the customer transition, permitting and bonding matters are finalized, many of which we actually expect to be finalized fairly near term. That said, I’m sure everyone wants to incorporate the positive impact of the acquisition into their 2013 expectations. So here’s what I think – here’s the approach I would suggest.

Number one, assume the $27 million of projects are recognized evenly, these incremental projects are recognized evenly from 2Q to 4Q and again this will be incremental to everything I just said. $9 million a quarter, 2Q to 4Q. second, assume 20% gross margins on these projects. As we discussed last week, our intention is to help increase those margins over time through bringing our own proprietary products through those channels to better serve and increase the value offerings to our ESCO customers. But for now let’s assume 20%.

Three, assume approximately $1.4 million per quarter in incremental operating expenses related to the business. That includes depreciation and amortization. At this point by the way that depreciation and amortization really is an estimate. We need to finish our accounting on that which we won’t have done until we get to the end of this first quarter and we report. That formula should basically deliver about a penny of accretion each quarter from 2Q to 4Q on top of your core estimates. And the first quarter impact really should be a push and not much time left in the first quarter obviously.

Okay, there is the backlog, there is the estimates, there is the P&L discussion. Now let’s switch gears and go to the balance sheet which remains very strong. Our cash balance at the end of the fourth quarter was $19 million, which is a very strong number and just to lay it out there, we hit that number despite the fact that we made $4.6 million of stock repurchases during the year. Purchased PowerSecure Solar for $4.5 million and invested $10.4 million in CapEx, which included $3.9 million for recurrent revenue projects and $6.4 million in equipment primarily for our growing Utility Infrastructure business.

In the fourth quarter, we utilized $2.4 million for stock repurchases, $1.3 million for recurrent revenue projects and $4.7 million for equipment, again primarily to support the significant growth in utility infrastructure. Another data point I would like to share is that our first $5 million of share repurchase authorizations had an average buyback price of $5.71 a share. So we’re obviously very pleased with that ROI. And just to clarify, we have an additional $5 million of dry powder on that authorization already and available.

We still continue to have zero drawing on our $20 million revolver and we sit with over $20 million of cash, even after our transaction to purchase the ESCO business last week. As we look into 2013, we are currently forecasting a full year CapEx budget of $8 million for the combination of DG recurrent revenue projects, Utility Infrastructure equipment and general CapEx which is very small. The general maintenance CapEx is very small.

So overall an exceptional quarter for us and the fundamentals are in place for a very successful 2013. With the new business wins we’ve already announced and the ESCO business acquisition opportunity we’ve been able to capitalize on, we really couldn’t have gotten 2013 off to a better start. Our performance in 2012 has us on an excellent path towards achieving our 2015 goals of 300 million in revenue and mid double digit operating margins. We’re on that path organically and accretive acquisitions like the one we did last week reinforce our confidence in reaching these goals and we’re focused on continuing to deliver the increased bottom line leverage you saw consistently growing throughout 2012 as we move into 2013.

And now we’d be happy to take your questions. Operator, could you begin the Q&A session?

Question-and-Answer Session


(Operator instructions). Your first question comes from the line of William Bremer with the Maxim Group. You may proceed.

William Bremer – Maxim Group

Great quarter, great year and a special call out to Ronnie. Excellent job there, Ronnie. All right. Let's go into Utility Infrastructure a little more granular here. Could you give us an idea throughout the year, some of the projects that you performed both on the transmission side, distribution side, substation, some gathering pipelines? Can you like break it down a little bit for us, a little granular please?

Sidney Hinton

I’ll break it down a little bit, but not too much. I wish I had my statistics I use at a recent training session with that group on the percentages. Trying to remember off the top of my head what percentage of our revenue this year came from transmission. If I remember right it’s around 35% and that would have been up from two years ago it had been zero. I think it was maybe 15% from substation and 50% from distribution and our distribution is two different phases of that. There’s what we would call maintenance work in the industry. All the major companies that have Utility Infrastructure do it. So you serve your big investor-owned utilities and cooperatives doing traditional maintenance, pole replacement and so forth and that’s where you put crews and trucks. They were there every day taking orders and working for the utilities. They either do that on cost plus or unit price basis. And then in the distribution there’s also work that you do on a fixed fee where you’re building new lines and our distribution work I would say is about 50, 50 between those two categories. New work versus maintenance work and I think that’s very unusual in this space.

I doubt anybody else would have that much higher percentage of new distribution, simply because the economy if you think about it, it’s not hard to envision. If the economy is not growing, you’re not building new facilities. If you’re not building new facilities, you’re not stringing new wire. It’s as simple as that. If you don’t have new housing, you don’t have new connections. If you don’t have new major construction for C&I, you don’t have new lines running for that. So the majority of the work going this year has been maintenance, but we’ve been blessed to land a good bit of new distribution. The transmission work is scattered among a number of major customers. I’m pretty sure I’ve said on this call before. If not, this is publicly disclosed so it’s all right, right? I can say whatever here, right?

That we work for eight of the top 15 investor owned utilities in the United States and that those are the people we’re serving with these big contracts. It really is amazing the people we’ve been blessed with the privilege to serve and the ones we work for, they love our people. They love the equipment, they love the productivity. We continue to expand the opportunities of serving them and then we also do some substation work. So about 15% of our revenues, if I remember correctly in 2012came out of substations. Hopefully that gives you enough granularity, William.

William Bremer – Maxim Group

It does help, no doubt about it. It does help. Okay, let's go into DG. Specifically I'm curious about the pricing environment there, especially in the turnkey contracts. Do you feel as though pricing will be better in '13?

Sidney Hinton

In DG?

William Bremer – Maxim Group


Sidney Hinton

No. I think I’d be – I know the answer that tickles everybody’s ears, but I’d be stupid to say yes. Our job is to penetrate the market deeper and deeper which what we try to do for our customers, we try to lower our price every single year and increase our margin every single year. So pricing in general I would say would have downward pressure on it and we’re the ones pushing it because we want to grow the market. My view there is very simple on the backup power. Everybody wants it. You yourself, you want backup power at your house. You might say no, I don’t. If the utility offered it to you for $1 a month I bet you’d pay $1 a month and take it. So what that tells me is there’s elasticity that if there’s a huge demand there people haven’t gotten the price points. Well, that’s what we’re out doing. We’re driving the price down, down and we’re driving the cost down even further. So I would say there’s hopefully downward pressure. I really do pray that there’s downward pressure on pricing and upward pressure on our margin. That means we’re doing a win-win. We’re winning for our investors. At the same time we’re winning for our customers. But that’s how I would view the pricing market on the DG.

William Bremer – Maxim Group

And one final one on the stock buyback plan. Is it active at this time, the new $5 million?

Chris Hutter

It’s dry power, Bill sitting there ready when we decide to use it, but I’m going to back off any specific in terms of specific actions, specific times. We’re just real careful about that.

William Bremer – Maxim Group

Does it have to hit a certain level or is this one that you forward plan?

Chris Hutter

We’re going to back way off of that one, Bill.


Your next question comes from the line of Eric Stine with Craig-Hallum. You may proceed.

Eric Stine – Craig-Hallum Capital Group

Congrats on the quarter. I was wondering if we could just start in DG and in particular the hospital market. I'm just curious where you feel you are in the growth curve. That was good clarity on what 2012 looked like, but I know that the business at this point has been more in the smaller hospitals. So how that plays out in 2013 and part of that is getting into some of the larger hospital chains.

Sidney Hinton

Yeah and not just the chains, but also the engineering firms that are serving those big chains that we couldn’t be – I feel like my analogy would be I’m in Caesar’s palace. There’s this big ramp. I’m Evel Knievel. There’s all these buses or fountains or whatever it was he was drinking or jumping and he’d just hit the bottom of the stinking ramp. I’m fixing a flat right over those things honestly. We’re in a great spot. We’re blessed. The people that we were blessed to recruit to come build that business unit for us, they’re doing unbelievable work, getting great traction. We see nothing but acceleration ahead. The momentum is behind us to do that and we’re really, really bullish on where we stand with that. I’ll answer the question you didn’t ask because I would contrast it. And on the data center market, I would say that fountain is out there. We took a swing at it truthfully. We did a practice run. We wrecked the stinking motorcycle trying to jump the thing. We had a misfire. We brought in a sales person. He’s a great guy. He’s from a different industry and he served the same industry but different products.

He just didn’t gain any traction fast enough. He’s moving on to do something different and we’ve helped him make that move. Again he’s a good person. Don’t mean to put him down, but we’re building – we feel like we know the formula based on the success we’ve had in our hospitals and we’re implementing replicating that success. We think we know the skillset it takes to succeed, the background they need to have and that’s the path we’re taking. So hopefully that’s helpful. And we think that a year from now we’ll be in a similar spot on the data center. We still have them in the pipeline and they’re still – we’re growing in the business we do, but the hospitals we’re just in a great, great spot in the data center spot. We’re just a little further back than that. Same grade leadership overall, which he’s doing a phenomenal job as well. But just not as far down the path.

Eric Stine – Craig-Hallum Capital Group

Okay. No, understood. That is very helpful. Good to hear on that. Maybe then just turning to Utility Infrastructure, I know that oil and gas build out there has been a big part of the growth. The same question, just curious how you view 2013 versus 2012. And also as part of that, I guess my impression is that that business is a fair amount concentrated and just wondering number one, if that's the case and number two, any visibility into getting into other customers for that type of work.

Sidney Hinton

Great questions, Eric. As always you show your insight into the business with your questions. It really is. Kudos on the questions. Concentration, not nearly as much as one would think. It make sense. We’ve had more concentration in the past. We don’t have anybody that would be above the upper teens in terms of concentration. We do have one that’s in that range, but below that it drops off pretty fast, startlingly fast and it just shows the breadth that we’ve built and from a positioning standpoint. So that’s a concentration answer. Let me be clear for you. That’s the answer on concentration, relative to where we stand here in 2013, relative to that same curve. Unbelievably given that we’ve had a year – in the five years we’ve been in the business we had 100%, 100%, 100%, 100% and then what, 40%. I don’t remember what it was this year, 29% I think. But it’s incredible the growth we’ve been blessed to experience and I would tell that we’re sitting here awful bullish on 2013.

We feel great. It’s unbelievable that big utilities that we’ve been blessed to get in and serve. Once we serve them they’re definitely drawn to the value proposition we bring which is very attentive service, unbelievable workforce, great equipment, high productivity when we’re working on their lines. The attention to safety, attention to timeliness is, we really feel bullish about where we’re at with it and candidly I would say if that same analogy was Mr. Evel Knievel, we’re flying right down the – we’re up on the top of the ramp flying down to hit the big ramp to jump over the thing and we’re no further than halfway up that ramp. We are in position to totally hit it. It is really, really, really good.

Eric Stine – Craig-Hallum Capital Group

Okay. So just to clarify, so really though for oil and gas you’re not that concentrated. Is that right?

Sidney Hinton

No. we’ve got in all of oil and gas we’ve got less than 15% in the whole thing. Now we’d like to grow that percentage and grow our topline. There’s definitely an opportunity there and we’re doing very well in it, but we’re not – any time you got I guess more than 5% or 6% you have some exposure to it. But our view is there’s a big diversity there. The whole focus on moving into production quicker with those companies, their own pressures from their shareholders, it all bodes well for us. And the growth that we see, there’s growth there, but man the big growth that we see is just serving the big IOUs. This feels really good.

Eric Stine – Craig-Hallum Capital Group

Good. Well a great place to be in heading into the year. Maybe last question just on the ESCO business and thanks for all the details there, that was great. But you talked about last week the $75 million in the pipeline, just curious how you might think about that as far as where that stands. Some things that could maybe turn into order awards and things that are more long-term.

Sidney Hinton

Yeah and actually the pipeline has broke down that way. But if you don’t mind, I’ll give you a little color, but I’m going to refrain from diving deeply only from lack of experience with how they rate things. I know one of our sales people says it’s 88%. Well, some of them I know that means it’s 98% because they’re so conservative and some of them I know that’s about 1% probability will get because they’re just unduly optimistic. I don’t know their system yet well enough to handicap it. They’ve done it for 20 years. So I assume they’re pretty good at it. But they certainly have some that we think will roll into – hopefully it will occur and we’ll get signed and actually deliver some of it in this calendar year. We do anticipate that, but we just don’t have enough of a feel for that pipeline, their percentages which they have very specific just how accurate is it converting it and candidly, are there any hiccups because we’re involved totally, it would actually accelerate because we have a much better financial situation than they were previously in. I apologize for being evasive. Hopefully that gave enough color.

Eric Stine – Craig-Hallum Capital Group

No, that's helpful and hey it was worth the question, but I understand. So thanks a lot.


(Operator instructions). Your next question comes from the line of Rob Brown with Lake Street Capital Markets. You may proceed.

Rob Brown – Lake Street Capital Markets

Congratulations on a good quarter as well. On the LED lighting business, you indicated that you saw that kind of recovering this year and some spend recovery, but could you give us a sense on how that looks, what products drive that, and how that maturity happened?

Sidney Hinton

Sure. And I’ll be relatively specific and if I go down a path Chris you can tell I’m over I should stop just interrupt. But from a product specific standpoint, I would say the recovery is driven product specific in the grocery we’re under our shelf life. It’s the newest light that’s not been widely adopted yet and we’ve started seeing significant traction already this year in terms of order flow. The second would be our area light with our utilities that the order of flow and the commitments on that have picked up dramatically. Big percentages. Granted the numbers are small to start with so percentages can be a little misleading. But it’s very, very encouraging where we sit today relative to order commitments with who we had hoped to get by the end of the year that candidly that business is approaching. I’m looking at Chris. I actually believe we’re very close on commitments to where we had anticipated to be by the end of the year revenue, that we have the commitments for that type of volume and if not it’s very, very close. It’s very, very encouraging. It’s a little hard to predict. We’ve won all that in small bites from smaller utilities relative to the big investor owns. But we see traction with bigger utilities as well and even some big cooperatives, really big ones.

We’ve been blessed to penetrate one in a big way. We have another one that we’ve penetrated and it has the potential for really significant orders. It starts turning into growth where you’re well over 100% growth. You’re at multiples of 100% in that product line and in that portion of our business. And then the third area would be the parking lot light where we’re seeing that adopted by retailers and it holds strong promise for us. And then we have a couple of other lights that we haven’t announced. They’re kind of nichy. If we announce them we kind of give the niche away, but we’re really bullish particularly on one of those where we stand with the customer. It could be material for us. It wouldn’t be material to a GE who’s got x hundreds or billions of dollars of sales in them, but when you’re a company our size and you’re doing $25 million, you get a business – the niche will be very material for us.

Chris Hutter

Hey Rob, I’ve just got a little bit there. You remember on second quarter’s conference call last year, right before we got on that call, we got some news from some of our retailers that a little skittish on the economy and they were going to be pushing some stuff out and you remember we talked about that on our call and we said – we called it. We said look, we think the second half is going to be soft because of that. As we sit here today, I’d say we’ve seen just the opposite types of signs over the last three, four weeks from some of our largest retail customers that starting second and third quarter that things are going to firm up for us and that that spigot is going to turn back on. So we’re in an opposite spot right now as we were six, seven months ago.

Rob Brown – Lake Street Capital Markets

That's good color, thank you. And then to look back to ESCO, I know you're not giving a lot of detail, but what’s the -- I think that business historically had $40 million revenue run rate. Do you think you can get back to the range and grow from there?

Sidney Hinton

Yeah. I’m using the word think and that’s exactly what we think. Feel free to nick that, Chris if you want. But that’s exactly what we think. We looked at it. That’s what they had done. They didn’t do it in 2012. We don’t have financials, but it didn’t’ look like they were going it and part of it was because they couldn’t’ execute because they couldn’t post bonds on jobs. But yeah, it seems to us that that’s where they’re at. And candidly, we hope by embracing the business we tend to be very aggressive going out and embracing those big super ESCOs. We want to serve you. We’re not confused. We do not want to be in the business. We want to support you in serving your customers and drive more value to you. Those folks do over $1 billion of this stuff. We want to grow our percentage of that pie and help grow this business and at the same time grow our own margins because we’re adding more value.

Chris Hutter

Hey Rob, if what you hear is us holding back a little, honestly it’s true and just read from all that that remember we acted very swiftly to get the opportunity to buy the business. And so we’ve really only been engaged in it for a couple of weeks. And so that’s part of what you’re hearing. We’re obviously very confident about the book of business we bought, but we just need to get our feet wet a little more before we go too far with the depth at which we describe our opportunity there.

Sidney Hinton

And the same we brought over, that’s what they expect as well though, Rob. Just being clear as we can, the historical performance is what we’re looking to repeat, but at the same time grow margins if we can get our own product in there.

Rob Brown – Lake Street Capital Markets

Okay good, I understand. Thanks, I appreciate the conservative approach there. I'll turn it over.


There are no further questions in the queue at this time. I would now like to turn the call over to Mr. Sidney Hinton for closing remarks. You may proceed sir.

Sidney Hinton

Thank you. Thanks everybody for investing their time tonight. I want to give you one free tidbit before we hang up, that in looking back in 2012 and I say this because the storm is hitting the northeast right now. Those of you who are without power but you visit yesterday or today and you visited your grocery store and they had power, most likely you’re standing in one of our customers. We have had 100% success rate thus far during the storm and it’s a record we’re very proud of and we’re delighted to serve our customers with that. Looking back at 2012, we had 13,000 operations of our generator systems that were either for load management or standby and the average time was just slightly under three hours. And from a standby standpoint, a grocery store starts losing product at four hours. So you can see the level of value that we deliver on the standby operation and you know the value on the peak savings because you’re familiar with the returns we make off the systems we invest in. that’s the last free tidbit. To close, I want to point out, we had a record year in 2012. We had a record quarter and we completed this call I believe in record time. So with that, we will thank you and say goodnight. Thanks for all your support.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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