Pike's (PIKE) CEO J. Eric Pike on Q3 2014 Earnings Results - Earnings Call Transcript

May. 6.14 | About: Pike Corporation (PIKE)

Pike Corporation (NYSE:PIKE)

Q3 2014 Results Earnings Conference Call

May 6, 2014 9:00 am ET

Executives

Frank Milano – Vice President Investor Relations

J. Eric Pike – Chairman of the Board, President & Chief Executive Officer

Anthony K. Slater – Chief Financial Officer & Executive Vice President

Jeffery Calhoun – Chief Accounting Officer

Analyst

[Unidentified Analysts] – Keybanc Capital Markets

Min Cho – FBR Capital Markets

Adam Thalhimer – BB&T Capital Markets

Luke Folta – Jefferies

Liam Burke – Janney Montgomery Scott

[Unidentified Analyst] – Stifel, Nicolaus & Company

Matthew S. Dobson – JWest, LLC

Operator

Welcome to the Pike Corporation fiscal third quarter 2014 results conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Frank Milano, Vice President of Investor Relations for Pike Corporation. Please go ahead sir.

Frank Milano

Welcome to Pike’s earnings conference call to review the results of our fiscal third quarter 2014 which ended March 31, 2014. Joining me here this morning are Eric Pike, our Chairman and Chief Executive Officer and Anthony Slater, our Executive Vice President and Chief Financial Officer. Our Chief Accounting Officer Jeff Calhoun will also be available for the Q&A portion of today’s call.

We will be referencing a slide presentation throughout the call today. For those of you accessing the call through the webcast, the slides will be automatically available. For those of you who have dialed in for today’s call, you can download an adobe PDF version of the slides from the investor center section of our website at www.Pike.com.

Please turn to Slide Two. During this call the company will make forward-looking statements. These are statements that are either not historical factors or represent statements regarding the company’s intent, beliefs, or expectations with respect to trends affecting the company’s operations, financial, general, economic, and market conditions, and growth and operation strategies. Financial expectations and estimates, for example, are forward-looking statements.

During this call the company will reference certain non-GAAP financial information. In accordance with Regulation G we have included a reconciliation of the GAAP to non-GAAP financial information in today’s presentation. We also routinely include the GAAP to non-GAAP reconciliation in our Form 10Q and Form 10K filings. The risk factors and management discussion and analysis sections of the annual report on Form 10K, quarterly reports on Form 10Q, and other SEC filings describe the factors that may affect future results of the company’s operations.

Any forward-looking statements made today contained in Pike’s public statements are made by management and should be considered in light of these factors. The company undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after today’s call. We filed our earnings release on Form 10K last night and a copy of the release is also available in the investor center section of our website at www.Pike.com. A replay of today’s call will also be available online later today.

With that, I’ll turn the call over to Eric Pike, our Chairman and Chief Executive Officer.

J. Eric Pike

I’m going to start out with some highlights from the quarter and after my comments Anthony will provide a complete financial review, and then we’ll open up the call to your questions. Please now turn to Slide Three. While this was a solid quarter for Pike due to our diversified platform of construction and engineering services, winter weather played a factor. Severe winter weather conditions increased our storm restoration activity in concentrated areas but also negatively impacted revenue generation and productivity across a broad footprint.

Total revenue for the quarter, $207.6 million was up 4% year-over-year. This was the highest revenue we have ever recorded in a seasonally slow third quarter period. Gross profit totaled $26.2 million, an increase of 10 basis points year-over-year and 12.6% of revenue. Net income increased to $2.8 million or $0.09 per diluted share compared to $0.08 in the year ago period.

Now, please turn to Slide Four. The left hand chart on Slide Four depicts storm revenue which totaled $33.8 million. Extreme winter weather characterized by snow and ice as far south as the Gulf Coast drove storm response in our third fiscal quarter. By comparison storm revenue totaled $25.4 million in the year ago period. The majority of our storm revenue this quarter was earned from present MSA customers within our existing footprint which represented lower incremental storm margins especially, when compared with the storms of last quarter.

While the increase in storm revenues for the quarter was a positive, the deep snow, rain, and wet off road conditions caused by these factors hampered productivity and adversely affected profitability in our core work across a broader area. We experienced the customary distribution revenue displacement this quarter caused by redirecting our distribution crews to the storm impacted areas. The magnitude of this displacement was the most pronounced revenue offset since Hurricane Sandy more than a year ago because it was often too wet to work for our non-storm related crews during the same period.

Turning now to Slide Five, you see the revenue categories inside our construction segment. Total revenue of $168.7 million was up 1%. Distribution and other revenue totaled $98.3 million and was down 6%. This decrease reflects the storm displacement, the loss productivity from difficult winter weather conditions, and the lower solar construction revenue. The year-over-year decline in distribution and other revenue is somewhat misleading as our distribution power line revenues were actually up year-over-year for the quarter while solar and civil revenues were down significantly compared to the third quarter last year.

As to power line distribution, we believe there is a significant amount of overhead distribution, construction, and maintenance work coming available and our customers continue to embrace storm hardening which is adding to this mix of work. Also, we continue to expand our book of business out west which is a significant long term opportunity for our company.

With respect to our underground distribution business, increased housing construction remains a potential catalyst but that recovery has been protracted. Fiscal third quarter revenue was flat year-over-year and our trailing 12 month revenue trend reflects only slight improvement. We do however, continue to see potential for increased revenue. Based on the work of our distribution engineering team also, we are aware of the fact that many home builders have increased their community counts which bodes well for higher revenue growth in our underground distribution business.

Returning to solar, we have talked about our decrease in ground based solar work on our two previous earnings calls. As we’ve said before, due to the low margin profile we now see in the solar based work in the California and southwestern US, we have shifted the emphasis in our western subsidiaries towards transmission projects and MSA distribution opportunities. We will continue to be selective in the bids we pursue for solar projects and as a result, we anticipate future solar revenues will be sporadic and a lesser part of our business mix.

Transmission and substation revenue totaled $38.3 million, up 1%. This was our eight consecutive quarter of year-over-year growth in transmission and substation revenue. We continue to see strong bid flow in this portion of our construction segment and transmission and substation revenues will benefit from new construction awards as they happen in the next quarter or two.

On Slide Six, we depict our engineering segment. Total revenue of $38.9 million was our third best quarter on record, up 16% year-over-year. The increase reflects higher revenue in both energy delivery and communications and we anticipate engineering will be a catalyst for total revenue growth as we look ahead. We have been awarded several new [mini master] engineering contracts with one of our large communication customers for their continued build out of 4G and gigabyte fiber networks.

Due to this growth in our engineering business and the associated startup costs which included new offices and the hiring of new employees, we were unable to improve the profitability of this segment over the prior year quarter however, we believe this is a short term matter and profit is expected to improve in the near term as a result of this growth and absorbing the startup costs.

I’m also excited about the possibility of expanding our communication engineering relationships into communication construction based revenue. Our engineering team has been growing to meet the demands of our communication customers and as a result, I remain convinced that the potential for communication construction revenue is likely the next phase in these relationships. Lastly, we are also beginning to gain work across distribution engineering, communication engineer, and overhead distribution construction as we design and perform work for our utility customers to make their systems ready for the upcoming Google and AT&T high speed fiber and gigabyte installations. A significant amount of high speed fiber build out will involve improvements to our customer’s distribution power line assets.

That completes my portion of the call for today and I’m going to let Anthony walk you through the financials and then we’ll come back for closing comments.

Anthony K. Slater

My portion of today’s call will start with Slide Seven. Core revenue totaled $173.8 million this quarter and storm revenue totaled $33.8 million. Gross profit totaled $26.2 million this quarter of 12.6% of revenue. A couple of factors constrained this quarter’s gross profit percentage. First, this quarter’s storm work was performed for existing MSA customers within our existing footprint. As a result, incremental storm margins were significantly less than the storm margins we have experienced in recent quarters. Second, as noted in Eric’s comments earlier, the wet weather and significant snowfall accumulation disrupted non-storm productivity.

General and administrative expenses this quarter totaled $19.2 million compared with $18.7 million in the year ago period. As a percent of revenue, general and administrative expenses were unchanged at 9.3%. Operating profit increased to $7.3 million or 3.5% of revenue, up from $6.5 million or 3.3% of revenue in the year ago period. The effective tax rate this quarter was 45% which was up from 44.1% in the year ago period. On a year-to-date basis, the effective tax rate was just below 40% and we continue to suggest you use a 40% tax rate for modeling purposes.

Net income increased to $2.8 million or $0.09 per diluted share, up from $2.7 million or $0.08 per diluted share in the year ago period. Please note that quarterly and year-to-date segment results are available in the appendix on Slides 13 and 14 and we also included these segment results in the tables that accompanied yesterday’s fiscal third quarter earnings release.

Please turn to Slide Eight for a look at the selected balance sheet data. Cash and cash equivalents totaled $3.8 million as of March 31st. Along with the increased storm revenue this quarter, total accounts receivable increased to $195.1 million. By comparison receivables totaled $186.1 million at the end of the fiscal third quarter a year ago. At March 31, 2014 storm receivables totaled $23.7 million. This balance primarily affects the timing of winter storm events this past quarter. These storm receivables are the primary driver of our increased working capital excluding cash of $149.6 million and debt of $237.5 million.

As we collect these storm receivables during our fiscal fourth quarter, the proceeds will be used to reduce our outstanding debt. The current leverage ratio covenant in our revolving credit facility is 4.0 to one and will step down to 3.75 to one effective June 30, 2014. Our current leverage ratio is 3.3 to one at March 31, 2014. EBITDA totaled $17.1 million for our fiscal third quarter and further information is available in the appendix on Slides 15 and 16 for those of you that wish to reference that information. Please note that for purposes of computing the debt covenants, we make certain adjustments to these reported EBITDA amounts in accordance with our credit facility agreement.

On Slide Nine, we provide a few cash flow highlights. We used $9.9 million of cash in operating activities this quarter compared to the generation of $29 million in the year ago period. The increased level of working capital including the increased storm receivables, represented the vast majority of this change. You may recall that with the timing of Hurricane Sandy, the year ago period benefitted from the collection of those remaining storm receivables, even with more than $25 million of storm revenue in the March quarter of last year.

Capital expenditures this quarter totaled $6.2 million. On a year-to-date basis, capital expenditures totaled $29.6 million. We expect total cap ex for fiscal year 2014 to range from $32 million to $35 million. That completes my portion of today’s call. I’ll now turn it back over to Eric for closing remarks.

J. Eric Pike

With total revenue, gross profit, and net income all up on a year-over-year basis, I’d like to say that I’m pleased with our performance this past quarter however, I’m not. While we continue to execute in many areas of the company despite the quarter’s seasonal weather events, our western operations have struggled to consistently contribute to corporate earnings. We have demonstrated the ability to grow revenue in the west but not profits. This outcome is not something we are satisfied with and as a result of this struggling performance, we have changed the management team at our Klondyke subsidiary. This was done to improve our overall leadership, our estimating process, our knowledge of the available talent supply, and to reach a higher level of relationship within our western utility customers.

We are also focusing now on traditional MSA distribution and transmission contracts with less reliance on large EPC projects or renewable energy revenues. Additionally, we are actively working to streamline our western operations to gain better utilization from shared services which includes sales, safety, human resources, and consolidated back office functions. While we are not pleased with the performance in terms of profitability, I am confident that these efforts will bring our western operations back to acceptable margin profiles and will serve to accelerate the profitable growth for the entire corporation. I expect to see these improvements begin to positively impact our financial and operating results beginning in fiscal 2015.

That will conclude our prepared remarks today and now we’ll open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Unidentified Analyst] – Keybanc Capital Markets.

[Unidentified Analyst] – Keybanc Capital Markets

My first question is can you please quantify how much impact the unusually severe weather had on your core operations?

J. Eric Pike

We talk about it from a displacement standpoint but we don’t really breakout the number in terms of what it all said on the core. We’ve given guidance in the past calls that typically storm offsets on core displacements somewhere between 20% and 25% of what the storm revenues were.

[Unidentified Analyst] – Keybanc Capital Markets

The second question would be how does the bounce back in the engineering services segment place you for contract wins in the construction services segment?

J. Eric Pike

As we have continued to grow in our communications engineering it has certainly started dialog around the possibility of also doing some construction work for our large telecom customers and that right now is just in the discussion phase but we think with the build out that is coming and the amount of work that we’re engineering that that is certainly a potential for us as we go into the summer months to possibly begin to add some construction revenue on the communication side.

[Unidentified Analyst] – Keybanc Capital Markets

[Inaudible] California [inaudible] indicated changes in [T&D] pulls at [inaudible] and we also understand that you’re trying to grow your presence in California so, it would be great if you can give us some color on the opportunity you see for yourself in California?

J. Eric Pike

We continue to believe that the California market due to the volume of work as you described there, both in distribution and transmission segment, is a market we want to be in. However, as we have gone into that market, the challenges that you face there from a variety of areas, it’s a difficult market and it’s one, as I mentioned in my prepared remarks, we’ve made some changes in leadership in one of our western subsidiaries to gain a higher more entrenched management group there and we’re also looking to consolidate back office functions and improve and focus on areas where we bring more synergies from the corporation to bear i.e. the MSA transmission and distribution markets instead of the more fixed price larger EPC or renewable markets. We think that we can effectively grow there and do so profitably.

[Unidentified Analyst] – Keybanc Capital Markets

How is the competition you are seeing in the California region?

J. Eric Pike

The competition is really somewhat all over the board. There’s the major players in the country. The large contractors are certainly there but that’s a market that also has a lot of small contractors, a lot of disadvantaged business contractors that work on the various utilities due to the Public Utility Commission Regulation mandating a certain amount of work is attributed to those folks.

Operator

Your next question comes from Min Cho – FBR Capital Markets.

Min Cho – FBR Capital Markets

I was wondering if you could quantify the revenues from your communication related businesses this quarter?

J. Eric Pike

No, we’re not going to breakout communication and sub segment numbers. But, it certainly was the more growing in this particular quarter than the energy side.

Min Cho – FBR Capital Markets

You already talked about construction opportunities potentially in the summer, are you planning on doing that organically or are you looking at a couple of acquisitions? I would assume longer term you’re looking to acquire some businesses?

J. Eric Pike

We certainly still look at out at the market of potential acquisitions but so much of this work that we’re doing the engineering for is in our legacy territories that the initial steps that we would look to is probably going to be organic because we view a small amount of this work when we do joint trench work today so it’s not as though we don’t have the skill set in house, it’s just not been an area of focus in the past and now we’re seeing more opportunity there.

Min Cho – FBR Capital Markets

I know that you really don’t provide [inaudible] guidance, but obviously the last couple of quarters we’ve seen decline in renewable and decline in procurement, kind of masking some of your growth. Now, with that kind of troughing here, do you expect to start to see some more meaningful growth starting in the fourth quarter or do you think the work you’re doing on the western US is going to mask that again and potentially not see more growth until 2015?

J. Eric Pike

Yes, I think we will see some in Q4 because of the very factors that you mentioned. If we broke out into sub segment categories, which we don’t, you would have seen overhead distribution actually grow this quarter which is pretty unusual in a relatively slow third quarter so, the growth is there. As we have talked about in the past, both with renewables and procurement, those were somewhat, to use Anthony’s term, higher calories. I mean, they were not pieces of the business that we could generate significant margin and so we were really trying to remove those to get to the core areas where we have the better margin and the more stability in that margin. As you move into the traditional construction season which is spring and summer, we should certainly see that grow across the end of our fiscal Q4 and Q1 ’15.

Min Cho – FBR Capital Markets

Then the last question, when you were talking about transmission and substation market you alluded to some new construction awards expected in the next quarter or two, can you provide any more detail or just what gives you that type of visibility right now?

J. Eric Pike

Really, it is just these are the jobs that fit more in our wheelhouse. These are the smaller transmission bid jobs in the five, 10, 15 mile range. Just based on the bid flow that we’re seeing we would anticipate being awarded several of those over the next quarter or two. But there are none to specifically call out that are large national projects.

Operator

Your next question comes from Adam Thalhimer – BB&T Capital Markets.

Adam Thalhimer – BB&T Capital Markets

Eric, I don’t want to put words in your mouth but it kind of feels like you’re a little more positive than you have been in the past couple of quarters about the core business?

J. Eric Pike

I certainly am with potentially the exception of the west. I think the west operations have great potential in front of them but it’s just a place we need to do some cleaning up and better focus on the type of accounts as I mentioned to [inaudible] that we bring synergies to. But I think in the legacy territories and certainly as well as the engineering we’re starting to see some good turn in those businesses and some good opportunities coming over the summer.

Adam Thalhimer – BB&T Capital Markets

I know you’re not going to quantify that but how do we think about that because you had this problem before where the storm business rolls off like it happened last summer and those quarters were $0.02 and $0.03 of earnings. So you had good storm revenue the last couple of quarters granted in the March quarter came at a lower margin. How do we think about the core business over the next two quarters without storms because it does seem like the demand is going to be better year-over-year?

J. Eric Pike

I think as we look at it we have given a long term goal of getting into that 15% to 17% gross margin. Right now basically with removing the revenues from the procurement, removing some of the solar exposure, and refocusing out west we’re going to push to try to get to the low end of that right now in the near term on the core and that may be a bit of a challenge as we continue to clean up those pieces out there and get them on the right margin profile. But I think as we look out over the next year that working up to the low end of that range is probably something that is pretty doable on the core.

Adam Thalhimer – BB&T Capital Markets

How do I think about the impact of procurement? I mean, when you say low end could you get to 14%? Is procurement a 100 basis point headwind? I mean, how do I think about that?

J. Eric Pike

Procurement in and of itself it just continues. Outside of our [scanner] project which we have which will continue to push some procurement dollars through, there will be some in there and it just depends really on the project mix that we get but we’re trying to diminish the amount of dollars those are so I’m not really sure I could quantify that piece for you. I mean, obviously if we had a great opportunity for a big project coming up that would require procurement we would certainly do the procurement. But if it’s smaller projects, we would rather stay away from that.

Adam Thalhimer – BB&T Capital Markets

With regards to the activities out west, were there any losses from Klondyke in Q3 or restructuring expenses?

J. Eric Pike

There’s no restructuring expenses yet. There could be some, they will not be large, we don’t anticipate in Q4 but basically we’ve just seen that overall, as I mentioned in my fixed comments, we did not have the right team out there for the type of work we were pursuing.

Adam Thalhimer – BB&T Capital Markets

On housing, all of a sudden everybody is turning more bearish on housing so I just want to clarify your comments on the underground piece in terms of what you’re seeing for the engineering side of the business like new community count commentary.

J. Eric Pike

Yes, there is definitely some there and some coming. You can see that both on the engineering side, you can see that both just physically traveling through our service territory of new developments literally of [inaudible]. But is that an across the board significant front of a way of housing, we’ve just always been reluctant to say that yet. We know that there’s market areas where we’re starting to see and we’ve added underground crews but on a year-over-year basis it’s still sort of single digit growth.

Adam Thalhimer – BB&T Capital Markets

On the communications side what is a [mini master] contract?

J. Eric Pike

A [mini master] is sort of in the telecom jargon somewhat like a MSA contract. It’s a five year contract for engineering services around their 4G conversion, wireless network conversion, and high speed Internet conversion. Each [mini master] typically covers a certain geographic footprint so similar to the MSA.

Adam Thalhimer – BB&T Capital Markets

As that starts to roll in, if you’re doing $40 million a quarter in engineering right now, how incremental is that?

J. Eric Pike

Well, we think it could be pretty substantial but right now we’ve got to gear up to handle the volume of the territories we just picked up and then we’ll see how much additional volume. We should get some clarity on that either at the end of Q4 or into Q1 after we’re fully up and running on all of these. But when you look at the proposed build out that is coming as well as some of the projects that are associated around it, it certainly looks like it is going to be a high growth area.

Operator

Your next question comes from Luke Folta – Jefferies.

Luke Folta – Jefferies

My first question, I wanted to see if you could help us understand what sort of drag the Klondyke business has really had on margins over the last 12 months or so? Just thinking about it, if you get these margins more in line with the rest of the group what the potential upside could be?

J. Eric Pike

Basically the Klondyke and Pine Valley, depending upon the quarter that you look back on, you can look back around our last calls and see they have just not contributed positive earnings, they’ve contributed revenue. In terms of the past quarter, the impact was certainly less but there was still a negative pull by them. Not at a level we fell is material to call out but it is just a continuing trend and it was time for us to make the move and since the impact from them in the past has been a few pennies a quarter, that’s a meaningful impact and we wanted to make sure investors knew that we were certainly aware of it and that we’ve waited about as long as we could to see if that could turn locally and we don’t believe it could.

So, we’ve been pleased to bring in some new management that’s got a lot more west coast and California depth and we think that they also have a lot more of the transmission and distribution as opposed to substation, civil and solar which is where we want to move that market base. Our view is we want to bring it back at least in line with the east coast profit margin profile.

Luke Folta – Jefferies

Just to be clear, if that all happens then that represents roughly a few pennies a quarter as we think about the total impact?

J. Eric Pike

Well, based on the last several quarters behind us, that would be reasonable.

Luke Folta – Jefferies

Then another one, just trying to understand how to best model the storm aspect of the business, how do we think about the difference in margins between MSA regions on storm revenue and then non-MSA regions?

J. Eric Pike

Well, I wish it were honestly, as simple as that. When you come to the MSAs that are long time legacy customers, we have high volumes of crews on. They obviously have our most attractive rate schedule. When you go to smaller or more remote MSAs, or perhaps ones with shorter cycle obviously, that’s a little better return profile on storm, and when you go to non-MSA and especially the upper northeast customers where we have no presence and have to work, and travel, and put a lot of risk profile in that, those are our highest. So you’re really comparing last quarter with the highest versus this quarter with probably our lowest storm margin profile and we don’t call out customers or mix there but that is really what you’re seeing. Unfortunately, at our size and in our business, storm is always generally a positive for us but it is a very hard piece to model. It’s hard for us to model internally and I know it’s twice as hard for you guys externally.

Luke Folta – Jefferies

Right, but if we were to take the upper cortile and lower cortile and just look at the difference in the margin between those two buckets, any sense of just what that would be in terms of the distribution so that we can at least have some sense in how to model it and how to think about it?

J. Eric Pike

I guess if you went on the kind of worst case scenario on margins to the top possible margins, you certainly could be two times or two plus times on a margin percentage basis.

Luke Folta – Jefferies

Then just secondly on that, how important to the core business is it that you offer MSA type pricing to some of your bigger core customers? Is there any chance in the future to kind of change those rates or improve that whole situation longer term?

J. Eric Pike

Well certainly, based on the last several years with coming off a recessionary period too, we’re starting to get opportunities to do some repricing to have some upward movement on the pricing margin. But traditionally, MSA work because it is longer term and higher volume, is going to be your lower price work but those are also the crews that they release to go to do the storm work which is your higher margin work. You somewhat have to think about those two as blended because if you don’t have those MSA crews and the availability to pull them for storm you will not generate those kind of storm numbers.

Operator

Your next question comes from Liam Burke – Janney Montgomery Scott.

Liam Burke – Janney Montgomery Scott

Getting back to Klondyke, you’re taking a shift away from solar and their traditional expertise into what we think as transmission and higher margin projects. Do you have a sense as to how long it’s going to take to reverse yields and begin to start generating not only bids but revenue activity?

J. Eric Pike

Well, I don’t think the revenue is a problem. We’ve been able to get into significant customers in California and western markets, get on bid lists, achieve some short term MSA work. The real challenge has been the old management team was not really knowledgeable about that type work and we did not have the right level of estimating customer interaction. Probably candidly too much duplication in back office and so forth and so really I’m not concerned on a revenue side, I’m more concerned on the margin profile side and I think the changes that we’re making should take that same revenue and make it revenue that you would want to have as opposed to the other.

Liam Burke – Janney Montgomery Scott

Do you have any revenue runoff over a period of time before you start seeing the turn on the profit?

J. Eric Pike

There is some backlog in the businesses out west but you’re looking at maybe a quarter or two.

Liam Burke – Janney Montgomery Scott

Then Anthony, the SG&A as a percent of total revenue was the same, understanding that you’ve got investments projects out there, do you anticipate any kind of leverage off the SG&A line in the near future?

Anthony K. Slater

We really do. We’ve talked a lot about that internally and as we’re looking forward to fiscal 2015, there’s several things going on. We certainly have invested in systems over the last couple of years, we’ve talked about the integration of our legacy engineering business with UCS and the system integration that is ongoing really in that business, and as Eric mentioned in the call today about the continued efforts out west to better streamline the back office and other G&A functions of those businesses. So, if you look at those three opportunities that are ahead of us, each one of those should provide some incremental benefit to the G&A line.

We’re actually still working through even our projections on 2015 G&A but all of those things will move us certainly in the right direction on the G&A line.

Operator

(Operator Instructions) Your next question comes from [Unidentified Analyst] – Stifel, Nicolaus & Company.

[Unidentified Analyst] – Stifel, Nicolaus & Company

Following up on that last question, in the past sometimes you guys have quantified the level of integration or system expenses associated with the USC and legacy Pike engineer. Can you do that for this quarter? Then, was there any impact one way or the other from the diesel hedging?

Anthony K. Slater

The integration costs to start with, relatively minor this quarter, less than $200,000 of a G&A impact on straight integration. I mean, that’s separate from some of the startup costs that Eric mentioned on the growth of telecommunication which had a little bit of additional drain. Then, we would anticipate about the same level of cost in our Q4, probably $200,000 or so, in that range, on integration costs that run through the P&L. On the diesel hedge we did have an unfavorable impact to Q3 results this year of about $300,000 and in the same period last year there was a $300,000 favorable move so compared to the year-over-year, about $0.01 EPS impact.

[Unidentified Analyst] – Stifel, Nicolaus & Company

Then I guess just moving into looking at 4Q, just kind of from a weather perspective, some of the other E&T companies reported some likely continued drag, most of them have a little bit more northern exposure, are you expecting to see any continued drag there? Then conversely, what type of benefit from storms are you guys looking at so far? I know there’s been some tornados in the southeast and the central US, have you already seen some activity related to that?

J. Eric Pike

There certainly, with the magnitude of the winter weather we have had, it has certainly crept into our Q4 a little bit as well. Certainly, it will be nothing on the scale of Q3 but, there could be a bit of that. In terms of the storm work so far, as far as what’s been recognized nationally or on the media, there have been a few tornado events, those by in large are generally not very long storm events. They tend to make very dramatic news coverage and they cause a tremendous amount of damage but in a very isolated location. So we have responded to several of those but those have been primarily local crews and would not be anywhere deemed near a response like the huge Alabama tornados several years ago. So right now those have been smaller responses.

[Unidentified Analyst] – Stifel, Nicolaus & Company

Then I guess just lastly, it seems like the focus is definitely on getting the California business profitable, focusing on your existing territory, but are there any other geographic regions in the US that you feel like you’re underrepresented in and that you still want to try to make a push towards expanding into?

J. Eric Pike

We’ve raised the idea several times around potentially looking to grow more into the northeast. I think that’s still the long term goal but right now with the growth we hope to see over the next quarter or two in the legacy territory and with the opportunity in California and the other surrounding western states, that’s really where our focus is going to be.

Operator

(Operator Instructions) Your next question comes from Matthew S. Dobson – JWest, LLC.

Matthew S. Dobson – JWest, LLC

Can you guys quantify the cost that you had this quarter for ramping up your mini contracts to telecom customer?

J. Eric Pike

It was in the $500,000 to $600,000 range.

Matthew S. Dobson – JWest, LLC

How much will go into Q4?

Hopefully Q4 will be a little bit less. We’ll have to continue to monitor, of course, new wins. We would love to see it be in the same range from a long term perspective, but we wouldn’t anticipate it being any higher. But we wouldn’t anticipate it being any higher.

Matthew S. Dobson – JWest, LLC

Then you talked about your core revenue, your gross margin you want to be the 15% to 17% gross margin range, can you kind of help me understand the timeframe you can get to that low end and high end and what factors kind of go into that?

J. Eric Pike

Well, the biggest factors are getting that western operation up into at least the profit profile we have in the western operations. The factors are really that coupled with the fact of getting less and less mix of procurement and some of the lower margin work that we have. Then if we see the housing come back, that certainly is a catalyst to get us the upper end. The lower end is really controlling the costs, getting the growth and margin profile in the west. To get to the upper end, probably involves a housing return and growth in the underground market.

Matthew S. Dobson – JWest, LLC

Do you guys believe 2015 can get to that low end of the gross margin range?

J. Eric Pike

Well, we certainly think it has opportunity to do that if we’re able to affect the changes that we’ve laid out today in the western operation and also take the cost out in consolidating a lot of the back office functions, we think that it has a reasonable chance of getting towards the low end of that range.

Matthew S. Dobson – JWest, LLC

Then finally you guys have talked about your communication kind of ramping up, you have the ability to kind of get in front of the Google, fiber, and AT&T and Verizon. Can you talk about it, is that a positive mix shift for you guys for your margins?

J. Eric Pike

This is actually just a growth catalyst in a lot of our MSA areas because a tremendous amount of uplift to the overhead distribution system is necessary as Google, or AT&T comes through and wants to attach their high speed fiber. That has been a catalyst already in a couple of our locations and we think it will be a good growth opportunity for us as they roll out to additional cities.

Matthew S. Dobson – JWest, LLC

So I assume it provides you even greater incremental margins because you’re already climbing the pole? Is that a fair way to think about it?

J. Eric Pike

Basically it will be under the same MSA contracts that we work today it’ll just provide higher volume. You should get the leverage off of the G&A supervision costs as we grow but it’s not necessarily climbing the pole to hang Google’s fiber, they may have other contractors hang the fiber. This is going back having to change out and do the energized power line work to place higher poles or to move equipment on the poles to make space for them to attach to it. That’s going to feed not only the construction but also our UCS distribution engineering group because they do a lot of the redesign of these poles and the hardware that is existing on them to make the space for the new attachment. That is why we think it is a nice blend of work.

Matthew S. Dobson – JWest, LLC

We haven’t seen that in your numbers yet, correct?

J. Eric Pike

No, not really.

Matthew S. Dobson – JWest, LLC

When do you think that will start really ramping back up?

J. Eric Pike

Well, as they begin to roll out and start pulling fiber in these new cities. The only place that right now we have felt any of it and it’s just a marginal impact right now, is around the Austin Texas area where we’re doing some pole change outs for the city of Austin. But as we roll into larger metro areas where we have MSA accounts that will certainly come on as they roll into those cities.

Matthew S. Dobson – JWest, LLC

Go you guys believe this is putting pressure on AT&T, Verizon, or some of your other customers to kind of ramp up cap ex to keep up with the trend?

J. Eric Pike

It’s not really ours to do but it certainly seems to be the case with the recent announcement by AT&T of the cities they’re looking at and then as recently as last Thursday there was an announcement from Cox Communications that they too were looking to get into the high speed fiber space. Each one of these that wants to do that will have to negotiate and get onto, in most cases, existing utility poles to do that.

Operator

It appears there are no further questions at this time. Mr. Pike I’d like to turn the conference back to you for any additional or closing remarks.

J. Eric Pike

We’d like to thank you all for joining our third quarter call and we look forward to updating you on our progress next quarter. Thanks everyone.

Operator

That concludes today’s call. Thank you for your participation.

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