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Lime Energy (NASDAQ:LIME)

Q2 2013 Earnings Call

August 19, 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 Second Quarter 2013 Lime Energy Earnings Conference Call. My name is Crystal, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to our host for today, Mr. Glen Akselrod, spokesperson. Please proceed.

Glen Akselrod

Thank you, Crystal, and thank you, everybody, for joining our call this afternoon, Lime Energy's 2013 Second Quarter Financial Results Conference Call. With us today is John O'Rourke, CEO; and Jeff Mistarz, CFO. I hope all of you have had a chance to review the earnings announcement which was released earlier today 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 will be considered forward-looking regarding the company's strategy, operations and financial performance. Those statements are subject to many uncertainties and some 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 the purposes of this call. I'd also like to refer you to the disclosure made on the company's quarterly and annual filings with the SEC.

Finally, before we get started, I want to mention that 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 19, 2013.

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

John E. O'Rourke

Thank you, Glen, and thank you, and good afternoon, everyone. Results for the quarter were encouraging. Improved performance in gross margin and revenue growth led the way, firm indicators that our efforts to execute against our key initiatives are gaining traction. Highlights for the quarter were: revenue for the utility business increased 61% year-over-year; consolidated gross profit increased 99.4% year-over-year; and excluding one-time expenses, SG&A increased only 4.5% year-over-year.

Our key initiatives remain the same and our focus is unwavering. Our efforts over the last 6 months have been effective as evidenced by the financial and operating results for the quarter.

On our call last week, we spoke about providing key metrics that provide insight into the business. We are in the process of refining our data reporting systems to support accurate and meaningful reporting on a go-forward basis. We hope to provide these metrics in the very near future.

In the near term, our gross margin may fluctuate as we continue to ramp our utility business, refine our back office and administrative processes, and experience changes in revenue contribution from our lower-margin FRR business.

On balance for the year, we are moving in the right direction, and provided we execute against the key initiatives outlined in our annual results call on July 31, we should see continued improvements in gross margin into 2014.

The combination of annual contractual price escalations in our utility contracts, a shortened pace cycle to our supply chain partners once we strengthen our balance sheet and build cash, and improving efficiencies as a result of our technology investment, all will contribute to what we hope will be 30% gross margin levels by 2014.

Our SG&A, as a percent of revenue, remained high at these revenue levels. However, we expect this to decline as revenues increase later in the year. We are striving to achieve the right balance between reducing SG&A as a percent of revenue, supporting and managing our growth, and continuing to make investments in our technology platform that eventually will drive efficiencies in the business, improve service engagement levels with our clients, resulting in better program pricing levels and expanded program opportunities in 2014 and 2015.

I would like to take a minute here to share my perspective on performance for the rest of the year. As I stated on my previous calls, our goal is to turn a profit in the fourth quarter, absent any commercial or operational interruptions in the business. I discussed the need to overcome several difficult and important challenges, including improving our gross margin profile, strengthening our balance sheet, reducing SG&A as a percent of revenues, and continuing to invest in our technology and IT infrastructure. I feel like we're making good progress in addressing each of these challenges.

Our efforts in the gross margin area are showing strong improvement as evidenced in the published results, we are accelerating our efforts to strengthen the balance sheet, and we are continually rolling out new enhancements to our technology.

I would now like to turn the call over to Jeff Mistarz, our Chief Financial Officer.

Jeffrey R. Mistarz

Good afternoon, everyone. I'm glad you're able to join us this afternoon. I'm going to give you a quick overview of our results for the 3-month and 6-month periods ended June 30, 2013.

Beginning with the results for the quarter. Our consolidated revenue increased 35.8% or $3.6 million to $13.7 million during the most recent quarter, from $10.1 million for the year-earlier period. Contributing to this was a $4.9 million or 61% increase in revenue from our utility business, which benefited from increasing revenue contributions from new utility programs begun within the past year, and increased contributions from some of our existing programs.

New programs contributing to 2013 revenue include AEP Ohio, Central Hudson, Duke Energy Progress, NSTAR and Efficiency Maine. This was just the first or second quarter of revenue contributions for most of these programs. The continued ramp-up of these programs is expected to be the primary driver of increased revenue in the second half of 2013.

The increase in revenue from our utility business was partially offset by lower revenue generated from our contract with the Army Corps of Engineers. As I've explained previously, we have several projects we are working on under the Army Corps FRR program. The amount of revenue derived from these contracts varies from period to period depending on the number of active projects and the stages the projects are in. Last year, we had 3 active projects, all in the construction phase. This year, we have 4 active projects, however, 2 of them are in the design phase and 1 is in the closeout phase. Projects generally generate lower revenue during these phases of their life cycle.

Our gross profit for the second quarter of 2013 increased 99.4% or $2 million, to $4 million from $2 million earned in the second quarter of 2012. This increase was due to higher revenue and an improvement in our gross profit margin. Our gross profit margin for the second quarter increased from 19.6% in 2012 to 28.8% in the second quarter of 2013. This increase in our gross profit margin was the result of a decline in the portion of our revenue derived from our lower-margin FRR contract and improved margins earned by our utility business.

The utility business continues to benefit from improvements in our operating efficiencies, and due in part to the continued development of our IT platform and increased contributions from newer utility programs where we generally have better margins.

Our selling, general and administrative expense increased $534,000 or 10.1% to $5.8 million during the second quarter of 2013, from $5.3 million in the year-earlier period. Included in the 2013 figure is $287,000 of expenses related to our restatement and the ongoing stockholder lawsuits. Absent these one-time expenses, our SG&A increased $247,000 or 4.7%. This increase was all related to the new utility programs started within the past year. All of this combine to contribute to a $1.3 million or 37.6% decline in our loss from continuing operations, which declined from $2.8 million -- sorry, $2.5 million during the 3-month period ended June 30, 2013, from $3.4 million during the same period in 2012. Excluding the one-time cost of $247,000, the operating loss declined by $1.6 million or 46% to $1.8 million.

Discontinued operations generated a profit of $95,000 during the second quarter of 2013, compared to losing $1.3 million in the year-earlier period. Discontinued operations include the results from the public sector projects we did not transfer as part of the sale of our ESCO business because they were nearly complete.

Our net loss declined $2.6 million or 56.3% to $2 million from the most recent quarter -- I'm sorry, for the most recent quarter, from a loss of $4.7 million for the second quarter of 2013.

Now turning to the 6-month results. Our revenue for the 6-month period ended June 30, increased $4.1 million or 18.9% to $25.7 million. Revenue from our utility business increased $7.3 million or about 43% due to the reasons outlined earlier. This was partially offset by lower revenue on our FRR contract. We expect our revenue for the second half of the year will exceed the revenue for the first 6 months, with revenue peaking during this fourth quarter, as the new utility programs continue to ramp up and the FRR projects move into construction.

However, we do have 2 contracts up for renewal later this year, those being our contract with National Grid and the contract with the New Jersey Clean Energy Program. We have been the top performer under both of these programs since joining them, which we believe will help our chances of getting renewed. However, this is not guaranteed. One of the factors that may affect whether we are renewed, that the New Jersey Program is changing program managers and we're not sure what the implications of these changes are likely to be.

The nonrenewal of either of these contracts is likely to have a greater impact on 2014 results than 2013. Our gross profit for the first half of 2013 increased 63.1% to $2.5 million -- or, I'm sorry, or $2.5 million, to $6.6 million. Again, this increase was driven by the higher revenue and improved margins from our utility business.

Our consolidated gross profit margin improved from 18.6% to 25.6% over -- year-over-year. We expect our gross margins will fluctuate period-to-period as a result of changes in the mix of our business, in particular as revenue from the FRR contract increases later this year. It will tend to pull down our average consolidated gross margin.

Our SG&A expense increased $1.5 million or 13.7% to $12 million during the first half of 2013, when compared to the $10.6 million of expense for the first half of 2012. All of this increase in SG&A was due to expenses associated with our restatement and the stockholder lawsuits, which totaled $1.6 million during 2013. Absent these one-time costs, our SG&A expense would have been $110,000 or 1% lower than the year-earlier period. This is despite the startup of 5 new utility programs during the period.

Our SG&A, as a percentage of revenue, decline from 48.9% to 46.8%. However, when adjusted for the one-time expenses, the SG&A declines to 40.7% of revenue, still a-ways from where we want it to be, but a good step in the right direction.

Our loss from continuing operations declined $747,000 or 11% to $6.1 million for the first half of 2013, from a loss of $6.8 million for the same period in 2012. Adjusting for the one-time restatement and legal expenses of $1.6 million, our loss from continuing operations declined 2.3% -- $2.3 million or 34% to $4.5 million.

If you examine our segment footnote in the 10-Q, you'll see that our energy efficiency business, which is comprised of our utility business, the FRR contract and our small HVAC service business, turned profitable during the quarter due to the increase in revenue and improved gross margin. Also our corporate overhead cost declined by $1 million from the year-earlier period, and $1.1 million from the first quarter of the year. The reduction from the first quarter was due to the decline in the restatement and legal expenses. But the decline from 2012 was actually larger when you adjust for the $287,000 of these one-time costs included in the second quarter 2013 figure.

We are very focused on continuing to increase the profitability of our energy efficiency business, primarily through increases in revenue, which should come as new programs ramp up, while continuing to control the growth of our overhead costs. This we believe, is the path we must follow to achieve profitability.

Net cash used in operating activities consumed $1.8 million during the first 6 months of 2012 compared to consuming $6.7 million during the first -- during the year-earlier period, representing a decline of $4.8 million or 72.6% over the year-earlier period. The cash consumed by operating activities before changes in assets and liabilities, which is basically our net loss excluding non-cash items, declined from $5.9 million in the first quarter of this year to $972,000 for the second quarter. It was down almost 65% from the $2.7 million consumed during the second quarter of 2012.

The changes in assets and liabilities versus the change in net working capital generated $5.1 million during the first half of 2013 compared to consuming $788,000 during the year-earlier period. This $5.9 million improvement was primarily due to an improvement -- improved payment terms we have been able to get from some of our larger suppliers, and collections and receivables from our discontinued businesses.

Our billed and unbilled receivables were about 34% higher than they were at the end of the second quarter of 2012, but this is pretty much in line with the growth in our revenue. The cost and earnings in excess of billings is what I'm referring to as unbilled receivables.

Some of the new utility programs are still working through their billing processes, so we hope that once this is all ironed out, the growth in the billed and unbilled will be less than the growth in our revenue in future periods.

We continue to closely monitor our working capital position and believe that if the profitability of our core business, the energy efficiency business, continues to improve as we believe it will, our operations should turn cash-flow positive before the end of the year.

I think that covers everything for this period. So now I'll turn it back to John.

John E. O'Rourke

Thank you, Jeff, and I would like to summarize our thoughts here before we hand it over for questions. Once again, we are pleased with 63% 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 a 99.4% expansion in year-over-year consolidated gross margins. These improvements in our operating results, in combination with the reduction in the restatement and legal costs, and the elimination of the loss from discontinued operations, all contributed to the reduction in our net loss for the period.

We anticipate continued growth in the utility business through expansion of existing programs and, hopefully, the signing of new utility deals later in the year. Although, we expect flat to moderate third quarter growth in our utility business as compared to the second quarter of this year, with growth accelerating again in the fourth quarter.

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, and improving operating efficiencies as a result of executing against our key initiatives.

Lastly, our employees have performed an amazing job in working to improve our performance quarter-over-quarter despite the headwinds of this past year.

So thank you, and with that, I will hand it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Vivela Bernard [ph].

Unknown Attendee

Look, I'm a private investor, but I wanted to commend you for operating under very difficult circumstances and helping to stabilize things and hopefully, turn things around. The one thing I did want to ask about and, of course, I think it's probably on many shareholders’ minds, is it possible that funds can be achieved without diluting the stock given where the share price is? Or is that not something that's going to be possible to do? I mean, I know, maybe perhaps you can't answer this directly as I would like, but any kind of sense you could give on that would be much appreciated.

John E. O'Rourke

Sure. We have a need right now to raise some capital or at least to improve our stockholder's equity because at the end of the second quarter, our stockholder equity has fallen below the requirements for NASDAQ continued listings. So we have initiated conversations with the holders of our sub-debt about converting at least a portion of their sub-debt into preferred stock, so that we could meet the continued listing requirements of NASDAQ. And we are also discussing with them the possibility of a small capital raise at the same time. Hopefully, nothing that is -- well, the plans are nothing excessive so that the resulting dilution would not be all that great.

Operator

[Operator Instructions] There are no questions in the queue.

John E. O'Rourke

Okay. Well, thank you all for joining us today, and we will be back on the call in November. Thank you. Bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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