Lime Energy Management Discusses Q1 2013 Results - Earnings Call Transcript

Aug.12.13 | About: lime energy (LIME)

Lime Energy (NASDAQ:LIME)

Q1 2013 Earnings Call

August 12, 2013 4:30 pm ET

Executives

Glen Akselrod

John E. O'Rourke - Chief Executive Officer, President and Director

Jeffrey R. Mistarz - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Treasurer and Secretary

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Lime Energy Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the conference over to Mr. Glen Akselrod, spokesperson for Lime Energy. Please proceed.

Glen Akselrod

Thank you, Derek. And good afternoon, and thank you, everybody, for taking the time to join Lime Energy's 2013 First Quarter Financial Results Conference Call. With us today is John O'Rourke, CEO; Jeff Mistarz, CFO. I hope all of you had a chance to review the earnings announcement released on Friday after the close and which can be accessed on Lime's website at www.lime-energy.com, or for the 10-Q on the SEC website.

Before I hand the discussion over to John, I want to remind everyone that the call today will include some statements that would be considered forward-looking statements regarding the company's strategy, operations and financial performance. Those statements are subject to many uncertainties in the company's operations and business environment, some of which we'll talk about on the call. I'll also refer you to the complete forward-looking statement disclosure in the earnings release, which is incorporated by reference for purposes of this call. I'd also like to refer you to the disclosures in the company's quarterly and annual filings with the SEC.

Finally, before we get started, I want to mention this call is being broadcast live over the Internet and can be accessed on the Lime Energy website and also on the Thomson/CCBN network. There will be a replay available on both websites until November 8, 2013.

With that, I'll hand the discussion over to John.

John E. O'Rourke

Thank you, Glen. Thank you, and good afternoon, everyone. Today, we are current with our financial reporting. We would like to especially thank all of our employees and, in particular, our finance and accounting team for all of their hard work to get us to this point.

On our call 2 weeks ago, we spoke about the opportunity in our business to leverage a market leadership advantage in the delivery of a cost-effective energy efficiency to our utility clients for their small to medium commercial and industrial customers. We spoke about directing all of our focus as a business there, investing in our technology, capitalizing on our deep experience in energy efficiency and building a sustainable business model in the energy efficiency industry over time.

We also spoke about the challenges the company faced in the wake of the restatement process and discussed key initiatives underway at the company to tackle those challenges head on and get on about the business of creating shareholder value, expanding the business gross margin profile and shoring up balance sheet in anticipation of a much improved operating environment later in the year.

As we continued to execute against our business initiatives, we are realizing improved financial and operational results over last year when adjusted for the $1.3 million of costs related to the restatement and stockholder lawsuits. The focus on technology and operations is beginning to yield measurable and tangible results. We believe that these trends will continue through the remainder of 2013, positioning the company for a stable operating environment in 2014.

The highlights for the quarter are: we completed the sale of the ESCO business on February 28, generating approximately $1.9 million in cash; revenue from our utility programs increased approximately 27% over the prior year first quarter; improving gross margins and strong cash management resulted in a 64% reduction in cash used by operating activities compared to first quarter of 2012; and our major suppliers expanded our credit facilities approximately 200% based on improving volumes and a shared strong outlook for the rest of the year.

As I said 12 days ago on our last call, our goal is to put a string of profitable quarters together, starting in the fourth quarter of 2013. But to meet that goal, we will need to overcome several difficult and important challenges that will require comprehensive and aggressive measures to overcome: improving our margin profile, strengthening our balance sheet, reducing SG&A as a percentage of revenues and enhancing our technology and IT infrastructure.

In lieu of further guidance at this time, we will strive for transparency and better visibility into our operating environment. To that end, we will develop key metrics that offer insight into day-to-day operations of the business. We will set and define these metrics on our next call next week and track improvement, or lack of thereof, for subsequent quarters on future calls.

And with that, I will hand it over to Jeffrey Mistarz.

Jeffrey R. Mistarz

Thanks, everyone, for joining us again today. Since we spoke to you only 12 days ago, I'm going to keep my remarks focused on the first quarter results. Our consolidated revenue increased 4.1%, or $474,000, during the first quarter of 2013 to $12 million when compared to the $11.5 million earned during the first quarter of 2012. Revenue from our utility business increased about 27%, or $2.4 million, but this was largely offset by lower revenue from our FRR contract with the Army Corps of Engineers. The FRR contract varies from period to period depending on the number of project we're working on and the phase of the project.

We had 3 active projects during the first quarter of 2013 and 2012. However, the projects we were working on during 2013 were either in the design phase or closeout phase, during which projects generate less revenue. We expect projects that are in the design phase will move into construction during the second half of the year, at which time revenue under this contract should increase.

The utility business benefited from contributions from new programs started up during the last year and increased revenue from some of our existing programs. Programs that were not around a year ago included Central Hudson, NSTAR, Duke Energy Progress, AEP Ohio and PSE&G. We also saw increased revenue out of our existing Long Island Power and New Jersey clean energy programs. We expect the new programs will be the primary contributors to higher quarterly revenue during the second half of the year relative to last year in the first quarter of 2012.

Our gross profit for the first quarter increased $572,000, or 27.9%, over the levels earned in 2012. This increase was the result of higher revenue in combination with an improved gross margin. Our consolidated gross margin for the first quarter increased from 17.8% in 2012 to 21.9% in 2013. This improvement was due to a change in the mix of business that included a larger portion of our revenue from our higher-margin utility business and the smaller portion coming from the lower-margin FRR revenue.

We also saw improvements in the gross margins we earned in our utility business as the result of improvements in our operating efficiencies and increased contributions from our newer programs. We expect that our margins will fluctuate depending on the mix of FRR and utility revenue and the mix of revenue from individual programs. But at the same time, we expect to see generally improved gross margins during the balance of 2013 due to the higher margins we were generating from our utility programs.

Our SG&A expense increased $927,000, or 17.3%, to $6.2 million during the first quarter of 2013 from $5.3 million reported in 2012. Our first quarter of 2013 includes $1.3 million of costs related to the restatement in the ongoing stockholder lawsuits. Without these costs, our SG&A would have been down $358,000 despite the addition of 5 new utility programs and 1 more that we're in the process of starting up. Many of the new utility programs were still just starting to generate revenue during the first quarter of 2013. As a result, our SG&A expense was 52% of revenue during the quarter compared to 46.2% during the first quarter of 2013.

We expect to see a steady decline in this figure throughout the balance of 2013 as the new programs generate increased revenue and our restatement and legal costs decline. We need to get this into the low 20s in order to begin generating a profit. As John said just a few minutes ago, our goal is to put a string of profitable quarters together starting in the fourth quarter of 2013. But to do so, we must overcome the challenges he discussed, among them being a reduction in the SG&A as a percentage of revenue, which will result primarily from higher revenue.

Our loss from continuing operations increased $536,000 during the first quarter of 2013 when compared to the prior year as a result of restatement and legal costs. Absent the $1.3 million in costs, our operating loss would have declined $742,000, or about 22%. This should continue to improve if our revenue increases as we expect it will later in the year.

The loss from discontinued operations increased $2 million due to low activity levels in this business, resulting from our inability to obtain surety bonds required to starting projects as we exited the business. We sold the majority of the public sector on February 28. However, we did retain a few contracts that were either close to completion or we felt would be too difficult to obtain consent from the customer to transfer. These remaining contracts should be closed out before the end of 2013.

Our liquidity position has not changed from what we reviewed 12 days ago. Our cash balances increased by $45,000 from the end of December to the end of March. We continue to manage our working capital and expect improvements to the cash generated by operations as revenue picks up in the second half of the year. Fortunately, our utility clients and the Army Corps are all pretty dependable and not excessive in terms of the time it takes them to pay our invoices. So the key to increasing our liquidity is to increase our billing, which we expect to occur steadily throughout the year.

With this filing, we are officially current in our filings for the first time in over a year. We're currently working on completing our quarterly report for the second quarter of 2013 and expect we will be able to file that within the SEC's extended filing deadline, which is August 19.

With that, I'll turn it back to John. Thanks, everyone.

John E. O'Rourke

Thanks, Jeff. So I'd like to summarize our thoughts before we hand it over for questions. As Jeff detailed, losses from discontinued operations and restatement costs were significant this quarter. We expect, however, that discontinued operations will have a significantly reduced impact going forward. We are pleased with 27% year-over-year revenue growth in our utility business for the quarter despite the major disruption of the restatement process over the last year. We are also pleased with the 28% expansion in year-over-year gross margins.

We anticipate strong growth in the business through expansion of existing programs and the signing of new utility deals later in the year, and we look forward to a steady decrease in our SG&A as a percent of revenue, mainly as a result of increasing revenue levels through the remainder of the year.

Lastly, our employees have performed an amazing job in achieving these performance metrics, considering the disruptive nature of the restatement and investigatory environment over the last year.

Thank you. And with that, I will hand it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] At this time, I'm showing no questions in queue. I would like to turn the call back over to Mr. John O'Rourke for any closing remarks.

John E. O'Rourke

Thank you, all. Once again, we'd like to thank our customers, and we'd like to thank also all of our suppliers in our supply and most important, our employees. And with that, we look forward to our call a week from now. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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