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Lime Energy (NASDAQ:LIME)

Q1 2014 Results Earnings Conference Call

May 14, 2014, 4:30 p.m. ET

Executives

Glen Akselrod - IR

Adam Procell - President, CEO and COO

Jeff Mistarz - Outgoing CFO

Colleen Brennan - CFO

Analysts

None

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Lime Energy Company earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host for today Mr. Glen Akselrod, spokesperson. Please proceed.

Glen Akselrod

Thank you, operator, and good afternoon and thank you everybody for taking the time to join Lime Energy's 2014 first quarter financial results conference call. With us today is Adam Procell, president and CEO; Jeff Mistarz, outgoing CFO; and Colleen Brennan, new company CFO.

I hope all of you have had a chance to review the earnings announcement released earlier today, and which can be accessed on Lime's website, www.lime-energy.com, or for the 10-Q on the SEC website.

Before I hand the discussion over to Adam, I want to remind everyone that the call today will include some statements that will be considered forward-looking regarding 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 the purpose of this call. I'd also like to reference you to the disclosures made 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 Web site and also on the Thomson Reuters network. There will be a replay available on either website until August 14, 2014.

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

Adam Procell

Thanks, Glen. Appreciate that. And I want to thank everybody for getting on the call today. It’s been a little over a month since we last spoke at the time of our 2013 earnings call. Little has changed in that time with respect to either to Lime Energy’s focus or Lime Energy’s optimism regarding where the business is headed.

Our focus remains on improving our operations and our people, on getting better at what we do. We’re very focused on delivering energy efficiency goals and customer satisfaction goals for our utility clients. We’re very focused on improving our business model by delivering profitability.

Lime Energy’s optimism continues to be based on everything that the market is telling us, from the evolution of the utilities business model to enhanced customer engagement initiatives that utilities are undertaking, to the regulatory changes that we see public service commissions putting in place in several states.

It’s becoming very clear that as valuable as Lime Energy has been as an implementer of energy efficiency programs, there’s potential for us to play an even more valuable role in future markets. We will do this by adding products and services to our offering and by building on the very unique platform of customer access that we have built.

What we have seen as we moved from Q1 into Q2 is the continuation of a trend that was evident to us even across the three months of Q1. This is a steady improvement in all our key metrics: revenue, sales, acquisition costs, gross margin percentage, among others. This trend is the result of the improvements that we’ve made and we continue to make across everything that we do, and includes investments in our proprietary web-based technology platform, training for our team members, centralization of procurement and other functions.

We are confident that we are focusing on the correct areas for improvement, and our initiatives are paying off, as these trends demonstrate. Jeff will cover the details of our Q1 financial performance in a moment, but I want to hit on a few of our Q1 highlights.

First, with respect to gross margin percentage, our Q1 gross margin percentage was up 30% year on year. Notably, it was also up 15% from the previous quarter. We saw our gross margin percentage moving up, as I said, even across the three months of Q1. This rapid upward movement in gross margin percentage is happening faster than we expected, although it is what we projected, and it’s in large part due to the hard work that Lime team members are putting in to improving the efficiency of our existing programs or developing new or renewed programs with higher margin contribution.

With respect to revenue, our sales and revenue was lowest in January and February. It ticked up significantly in March. This upswing has continued in April, so again, we’re seeing this as we move from Q1 to Q2. Anyone doing business in the Northeast, Midwest, or Southeast was affected by weather in the first two months of this year, disproportionately to previous years. It affected our utility clients, their small business customers, and it most certainly affected Lime Energy.

This is not an excuse. It’s an explanation, and Lime is hard at work to modify our business model and approach so that we are better able to insulate our financials from weather-related impact in the future.

As far as SG&A reduction, we did talk about that on our last call. As we headed into Q1, we reduced our corporate overhead significantly as we completed our management restructuring, consistent with our focus on our single utility energy efficiency program business.

I’ll talk for a minute about our sales force. Q1 was a period of great development for our professional sales force. That sales force is the front line of our utility programs. These are the men and women who interact with hundreds of small businesses each day, and frankly, they’re the true value that Lime Energy brings to our utility clients as we engage their small business customers.

We conducted a company-wide training in March. We rolled out a uniform sales team structure and compensation plan for the first time. It was a period of great maturation for our sales force. As we add products and services to the toolbox that these folks carry every day, they will literally be bringing the clean energy future to the doorsteps of America’s small businesses.

I want to talk for a second about our CFO successor, as Glen mentioned in his introduction. During Q1, we conducted a search for a new CFO to succeed Jeff Mistarz, who will be stepping down following today’s call, after more than 10 years of service.

Naturally, we’ve become fairly dependent on Jeff’s knowledge of the business. It was critical to not only find a solid replacement, but to do so in a timely manner to facilitate a transition before Jeff left. And we were successful in this, and very pleased to announce last month that Colleen Brennan will be joining Lime and succeeding Jeff in this role.

Colleen brings us a strong technical accounting and finance acumen, as well as bringing diversity to our senior management ranks, which is something that is at the heart of the values of Lime Energy as a company.

Finally, I want to just mention financial stability, and we did talk about this with respect to year-end 2013. Most significantly, Lime Energy has made strides from the standpoint of financial stability in Q1. We have a clean balance sheet. We have the working capital that we need to grow our business. We have resolved several outstanding risks, which were inherited from mistakes that were made more than two years ago.

From a standpoint of where Lime Energy is trending, we’re making progress on our key initiatives across these areas. These are initiatives that will allow us to better serve our utility partners, and in that respect, it was a solid quarter.

With that, I’ll turn it over to Jeff, who will cover the financials in greater detail. Jeff?

Jeff Mistarz

Good afternoon, everyone. Thanks for joining us again this afternoon. As on prior calls, I’m going to provide you with a brief overview of the results for the quarter.

Revenue for the quarter was $1.1 million or 9.5% greater than the revenue earned during the first quarter of 2013, but down about $1.8 million from the $14 million earned during the fourth quarter of 2013.

The increase over the first quarter of 2013 was primarily due to higher revenue from our Duke Progress program in the Carolinas, which was still ramping up during the first quarter of 2013. The decline from the fourth quarter was largely related to the harsh winter weather experienced in the Northeast, which put a damper on the results for the quarter.

Construction closeouts picked up toward the end of the quarter as the worst of the weather abated, and we’re hoping that we won’t have any additional weather-related issues for a while. For the balance of the year, we’re expecting revenue to show modest growth over the prior year, as all the programs settle in and start producing on a more steady state basis.

Our gross profit for the quarter increased 42% or $1.1 million to $3.7 million, from $2.6 million the year earlier. Our gross profit margin increased from 23.4% during the first quarter of 2013 to 30.4% during the first quarter of 2014.

The improvement in our gross margin was due to a combination of increased contributions from new and/or renewed utility programs, which general have better gross margins than older programs, as well as improvements in operating efficiency. We expect our gross margins to remain in the range of this prior quarter, with fluctuations up or down in future periods depending on the level of contribution from individual programs.

Our SG&A, or selling, general, and administrative expense, declined $1.1 million from $6 million during the first quarter of 2013 to $4.9 million during the first quarter of 2014. Cost related to the restatement we completed in July 2013 and the associated stockholder lawsuits and SEC investigation declined almost $1 million to $289,000 during the first quarter of 2014 from $1.3 million during the first quarter of 2013.

When adjusted for these charges, our SG&A expense declined $130,000, or 2.8%. All of this decline was due to reductions in overhead related SG&A resulting from cost-cutting moves we implemented late in 2013.

SG&A related to utility programs actually increased approximately $136,000 primarily due to new programs begun or ramped up during 2013. We expect our cost-cutting initiatives will continue to contribute to reductions in our SG&A relative to last year for the balance of 2014.

The increase in our quarterly revenue, in combination with the improvement in our gross margin and reduction in our SG&A expense, all contributed to a 68% or $2.5 million reduction in our loss from continuing operations, which was $1.2 million for the first quarter of this year versus $1.7 million for the first quarter of 2013.

A loss from discontinued operations declined 99.9% to $3,000 from $3 million last year. We have a couple of legacy public sector projects that we are working to close out that are the only ongoing activities related to businesses we have either sold or closed down. We expect we will continue to have small quarterly losses from discontinued operations for the next quarter or two until all of these projects are completed.

All of this contributed to an 82.6%, or $5.6 million, reduction in our net loss for the quarter. Our net loss for the first quarter of 2014 was $1.2 million, as compared to $6.7 million for the year earlier period.

Our adjusted EBITDA loss declined $1.5 million, or 64%, to $867,000 from $2.4 million. Excluding expenses related to the restatement, associated stockholder lawsuits and SEC investigation, the adjusted EBITDA loss declined $550,000, or 48.8%, to $578,000, from $1.1 million.

Adjusted EBITDA is a non-GAAP financial measure we are providing because we believe it provides a meaningful comparison of operating results to prior period results. For information on the calculation of adjusted EBITDA, please refer to our earnings announcement, which is available on the form 8-K filed this afternoon. You can access this on the SEC EDGAR site or through our website.

We converted our outstanding subdebt to preferred stock in September 2013. Therefore, while we had interest expense last year, this year we have dividend expense. Included in the first quarter’s dividend expense of $1.5 million was $1 million of noncash deemed dividend expense associated with the $2 million we raised in February through the sale of the series B preferred stock. The actual dividends accrued on the outstanding preferred shares totaled $487,000 for the quarter.

In terms of our liquidity, we had $1.9 million of unrestricted cash as of March 31, compared to $6.9 million as of December 31. Operating activities consumed $6.9 million of cash during the first quarter of 2014, compared to consuming $1 million last year. Breaking this down further, cash used by operating activities before changes in working capital consumed $655,000 during the most recent quarter, compared to consuming $6 million in the year earlier period.

This improvement of $5.4 million was due to a significant reduction in our cash operating loss for the reasons that we’ve discussed previously. We expect to continue to see improvements in this measure of cash flow relative to last year, and believe it will turn positive before the end of the year if revenue continues to improve and our restatement related costs decline as we believe they will.

Changes in working capital consumed $6.3 million during the first quarter of 2014, compared to generating $4.6 million during the first quarter of 2013. A year ago, our payable balances were growing due to agreements we struck with key vendors to extend our payment terms.

By the end of this year, we had actually stretched many vendors beyond our agreed to terms. During the first quarter of this year, using funds raised in late December and early February, we brought most of these payables back within terms, which was the primary use of funds during the quarter. We expect the changes in working capital to be much more modest in future quarters.

I think that pretty much covers all the material items for the quarter, so I’ll turn it back to you, Adam.

Adam Procell

Thank you, Jeff, and I do want to thank Jeff on behalf of everyone at Lime Energy, and I know that it’s a universal sentiment. I want to thank you for your years of service to Lime Energy, which has seen the company through tremendous growth, really from a very small, regional product company to a national energy services leader.

You’ve seen us through several acquisitions. It’s fair to say you’ve seen us through a period that’s provided some great challenges. You’ve met these challenges and seen us into what I believe is a very strong position to move the business forward.

Personally, I’ve been impressed with your commitment and your hard work over the entire five years that we’ve been here together, and you’ll be missed. We wish you nothing but the best in your future endeavors.

In summary, I want to be sure that everyone who has taken the time to call in today or to listen to this call understands what Lime Energy is and where we’re going. Lime Energy today is a vibrant, innovative company. It’s a great place to work, it’s replete with special people that believe in the job that they do every day.

Lime Energy is a wonderful partner to our utility clients who enjoy working with us and who have helped us to develop groundbreaking approaches to energy efficiency deployments. Together with these utility partners, Lime Energy is winning battles every day, and we’re accomplishing things in clean energy which have never been done before.

Lime Energy tomorrow will be at the forefront of serving utilities in their evolving new business model, helping them to engage their customers in new ways, helping them to deploy energy efficiency, allowing renewables and distributed generation to replace coal power plants, helping utilities to bring new technologies to market, deploy smart grid and smart meter solutions.

Lime Energy is committed to being one of the most important companies in America’s shift to a clean energy economy, and we’re off to a great start. I want to thank our investors again for their support, thank our utility clients for their continued faith in our ability to deliver, and most of all thank our team members for their continued commitment to excellence.

With that, we will open it up for some questions.

Question-and-Answer Session

Operator

[Operator instructions.] Ladies and gentlemen, this concludes our question and answer session. I will now turn the call back to Mr. Adam Procell.

Adam Procell

Thank you. And I just will wrap it up by again thanking our investors, our utility partners, and our team members for sending Lime Energy on a great course. And we’re excited about where we’re headed, so thank you, and we will talk to you all after Q2.

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Source: Lime Energy's (LIME) CEO Adam Procell on Q1 2014 Results - Earnings Call Transcript

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