Pike Electric Corp. F2Q08 (Qtr End 12/31/07) Earnings Call Transcript

Pike Electric Corp. (PEC)

F2Q08 Earnings Call

January 31, 2008 05:00 pm ET

Executives

Anthony Slater – CFO

Eric Pike – CEO

Analysts

Curtis Woodworth – J.P. Morgan

Tahira Afzal – Keybanc Capital Mkts

David Manthey – Robert W. Baird & Co, Inc.

Tahrik Yufasa - Broadbay Capital (ph)

Presentation

Operator

Welcome to the Pike Electric Corporation Second Quarter 2008 Earnings conference call.

(Operator Instructions)

Now, for opening remarks and introductions, I would like to turn the call over to Mr. Anthony Slater with Pike Electric, please go ahead.

Anthony Slater

During this call we will make forward-looking statements. These are statements that are either not historical facts or statements regarding our attempts, beliefs or expectations with respect to trends affecting the company’s operations, its financial, general economic and market conditions and its growth and operating strategies. Specifically of course, financial expectations and estimates are forward-looking statements. We filed our earnings release on Form 8-K earlier today and we encourage you to review the risk factors and management’s discussion and analysis sections of our 2007 annual report on Form 10-K and other SEC filings that describe the factors that may affect the future results of our operations.

Any forward-looking statements made today or contained in any other public statements of Pike Electric or made by our management should be considered in light of those factors. A replay of today’s call will be available in the Investor Relation section of our website at www.pike.com this afternoon. You can also register to receive Pike Electric financial reports by email. Investor relations questions can also be directed to 336-719 4622.

I will turn the call over to Eric Pike, Chairman and Chief Executive Officer, who will begin the call with a business update.

Eric Pike

Thank you for joining Pike Electric’s Fiscal Second quarter 2008 Earnings Call. Today I will give you a brief overview of the quarter, update you on some of our business initiatives and then Anthony will discuss the financials for the quarter and our outlook for the year. Afterwards, we will open the call to your questions.

Our results this quarter again demonstrate the resiliency of Pike’s business model in a challenging macro-environment. We were able to continue to improve productivity in the quarter and deliver industry leading profitability levels. Consistent with what we said last quarter, we have experienced a softening in demand as the general economics slowed down and uncertainty has weighed on our customer’s spending levels. Our core power-line business is dependent on utility spending and in this type of environment; we have to focus on what we can control. Making sure we maintain the profitability of our business and to take the necessary steps to ensure we are well positioned for the long-term growth that we are confident it will return.

While utilities may defer some spending in the near term on maintenance and upgrades to the distribution network, long-term industry fundamentals remain intact and we plan to be well positioned to capitalize on this growth. While this slowdown continues to pressure our top-line revenue performance, we did benefit from storm activity during the last two weeks of the quarter. The decline in core power line revenues to $123.5 million for the second fiscal quarter versus $134.3 million for the same time last year continue to be driven by our decision in fiscal ’07 to exit certain low-margin contracts along with the moderation in customer demand I just mentioned.

Higher storm restoration revenues also contributed to this core revenue decline as we temporarily diverted some of our power line crews to storm affected areas. Storm restoration revenue increased approximately 39% year-over-year to $19.6 million as winter storms in the mid-west and mid-Atlantic regions spurred demand both within and outside our traditional service territory.

While our model enables us to quickly mobilize our crews when these situations arrive, storm work is highly unpredictable quarter to quarter. Year to date storm revenues are tracking roughly in line with last year’s levels. There are few areas that I would like to highlight during the quarter that demonstrate our ability to weather a challenging economic environment.

First, our focus on profitability has continued to pay off. We are again delivering industry leading gross margins for the quarter. Our gross margins increased approximately 60 basis points year-over-year to 17.1% for the Fiscal Second Quarter and 40 basis points on the sequential basis from last quarter’s 16.7%. This increase continues to reflect improvements in operational efficiencies and our efforts in the latter part of fiscal 2007 to exit on profitable business. Consistent with our ongoing strategy, we believe it is critical in this type of environment to continue to selectively pursue accounts that made our targeted profitability metrics and not chase on profitable business merely to drive top line revenue.

Second, we continue to improve productivity. We increased our core power line revenue per billable hours by approximately 7.1% year-over-year reflecting the realization of improved pricing and additional steps taken to improve productivity. On a sequential basis, we have increased our core power line revenue per billable hour by 70 basis points despite experiencing a decline in headcount. Again, the flexibility of our business model enables us to mobilize reallocate or adjust levels of staff as necessary based on our customer’s needs enabling us to more effectively manage our workforce level.

We will continue to make profitability our priority and we will balance our revenue producing employment levels with our customers demand. While we did experience a decline in headcount this quarter consistent with the decline in core demand, the quality of our workforce continues to improve. Looking ahead, we expect employment levels to increase modestly in the back half of our fiscal year driven by higher demand in the spring construction season. It essential for us to not only carefully build our employee base but also to implement initiatives that ensure we are improving the quality of our workforce so that our line man will remain a part of Pike team for the long term. The line man we are developing today will be foreman of the crews we expand when the market returns.

This strategy is how we have built Pike’s workforce and grown our company for over 60 years. Finally, we continue to enhance our financial position in capital structure through debt pay down and this will remain a key focus for us going forward. I would like to conclude by addressing what we are seeing in the market. We remain confident in Pike’s prospects for long term steady growth. Approximately 90% of our work is performed under a long term master service agreements which means there might be short term fluctuations in our workflow, but overall, we have a recurring and fairly stable revenue stream.

While we have not seen a significant deterioration from last quarter, our utility customers have full back spending due to the general macroeconomic factors which include a slow down in the housing market, taking the credit market and difficult consumer spending environment. Looking ahead, we expect near term growth to remain moderate in light of these challenging economic conditions, but we remain focused on capturing profitable business and building the capability, capacity and quality of our work force. In addition to expecting a slight pick up in our head count through the balance of the year, we anticipate seeing some opportunities for market share gain.

Historically during down economic cycles, we have been able to leverage our scale and operational capabilities to expand when smaller competitors are not able to weather the economic head winds in the market place. Longer term, industry fundamentals continue to support growth in the business as well. Utility companies continue to increase outsourcing particularly as larger segments of their workforce are expected to retire. Consumers incremental electric usage continues to rise putting increased demand on the distribution networks, and finally, infrastructure investments and upgrades to the distribution network will be required in the future.

We cannot drive near term demand, but we remain proactive in taking steps to ensure that we are in the best possible position to capitalize on opportunities that we are confident will be coming.

With that, I will turn the call over to Anthony to take you through the financials and our outlook for the year.

Anthony Slater

I am going to walk you through the income statement for the quarter and then provide some additional highlights on the balance sheet and cash flows.

Total revenues for the second quarter ended December 31, 2007 decreased to 33.5% to $143.1 million as compared to $148.4 million for the comparable period last year. Core power line revenues were $123.5 million, an 8% decrease from $134.3 million for the comparable quarter last year. Breaking this down a bit further, core power line revenue per billable hour increased 7.1% year-over-year which reflects more favorable pricing from contract negotiations, the elimination of certain accounts during fiscal 2007 that did not meet our profitability goals and increased efficiencies of our crews.

Core power line billable hours decreased approximately 14.1% year-over-year, the decline in billable hours was due to the reduction in headcount as a result of exiting certain contracts and the moderation in our customers demand. In addition to increases in storm restoration work which diverted some core power line revenues. Revenue generated in the second quarter of fiscal 2007 from exited accounts totaled $8 million. Excluding revenue from exited accounts, core power line revenue decreased 2.2%. Storm restoration revenues totaled $19.6 million, a 39.3% increase from $14.1 million for the comparable quarter last year.

As Eric mentioned, winter storms in the mid West and mid Atlantic regions drove demand for our storm work in the quarter. Gross profit for the second quarter was $24.5 million or 17.1% of revenue compared to $24.5 million or 16.5% of revenue for the second quarter last year. The 60-basis point year-over-year improvement in gross margins was due to a number of factors. As with previous quarter, gross margins continued to benefit from operational efficiencies as well as the prior elimination of certain lower margin accounts and more favorable pricing which we achieved in the latter part of 2007. In addition, a greater contribution from higher margin storm revenues also contributed to the increase in the quarter.

These factors were partially offset by a $500,000.00 investment in retardant uniform shirts.

General and administrative expenses decreased $100,000.00 to $10.6 million, from $10.7 million for the comparable quarter last year. This decrease is primarily due to reduced legal and accounting fees partially offset by an increase in cost related to the implementation of changes in IT staffing and other IT initiatives. G&A expense as a percent of revenues increased to approximately 20-basis points year-over-year to7.4% primarily on lower revenues, but it remains flat on a sequential basis.

In addition, we recorded an impairment charge in the quarter of $1.9 million which is $1.2 million net of tax or $0.03 per diluted share on certain idle equipment that would be sold in the near future and not placed back into service.

Interest expense for the fiscal second quarter of 2008 decreased $1.3 million to $3.8 million compared to the second quarter last year primarily due to lower debt balances. Our effective tax rate was 38.4% in the quarter.

Net income for the fiscal second quarter of 2008 was $5.1 million, or $0.15 per diluted share, slightly down from approximately $5.2 million, or $0.16 per diluted share from the same quarter last year. EBITDA was $21.2 million for the second quarter of fiscal 2008 versus $24.2 million last year. EBITDA was negatively impacted in the quarter by the $1.9 million impairment charge discussed earlier.

Appreciation and amortization for the second quarter of fiscal 2008 totaled $9.1 million versus $10.5 million last year. A reconciliation of paid income to EBITDA is posted on our website under the Investor Relations Section.

Cash flow from operations totaled $7.8 million for the quarter and were negatively impacted by the increase in receivables related to our storm response in December. We reduced our total debt by $8.2 million in the second quarter. DSO for billed and unbilled receivables stood at approximately 90 days at the end of the second quarter compared to 68 days reported this same time last year.

DSO was significantly impacted by the storm response billings that occurred in December, but were not collected until the third quarter.

Now turning to our year-to-date results.

Total revenues for the six months ended December 31, 2007 were $282.9 million as compared to $298.2 million for the same period last year. Core power line revenues were $258.4 million for the six months ended December 31, 2007, as compared to $271.9 million for the same period last year. This was driven by an approximate 8.6% increase in core power line revenues per billable hour offset by 12.5% decline in core power line billable hours.

Revenue generated in the six month period ended December 31, 2006 from exited accounts totaled $17 million. Excluding revenue from these exited accounts, core power line revenues increased 1.4%. Storm restoration revenues totaled $24.5 million for the six-month period compared down from last year’s $26.3 million in storm revenues. Net income for the first six months of fiscal 2008 totaled $10.4 million or $0.31 per diluted share compared to net income of $6.8 million or $0.21 per diluted share for the same period last year.

Now I would like to take a moment and address our revenue guidance.

Based on a challenging economic environment and current market conditions, we now expects core power line revenues for fiscal 2008 to be in the range of $520 million to $530 million down from our previously issued guidance range of $550 million to $560 million. Looking ahead, the level of storm activity is unpredictable for the rest of the year, and in any period and any significant storm response would displace core core power line revenues.

We continue to expect total gross profit margins for fiscal 2008 to be in the range of 16% to 17% and general and administrative expenses to be in the range of 7% to 8% of revenues, although seasonality and the timing of investments can result in some variability quarter-to-quarter. As Eric discussed, maintaining profitability and improving productivity is a key focus for us in the upcoming quarters.

Now I would like to turn the call to Eric for some closing remarks.

Eric Pike

In closing, we continue to manage our business for the long term. We remain focused on executing a strategy that will not only allow us to weather the challenging economic environment, but also assure that we are positioned for growth that we believe will occur in the upcoming years. With our high quality customer base, a dedicated work force and solid industry fundamentals, we continue to believe Pike is positioned to deliver stable, profitable growth an in turn build shareholder value in the years ahead.

We would like to thank our employees, especially those employees that stayed in the Oklahoma markets throughout the Christmas holidays to continue to put power back on as well as our customers and our stock holders. At this time, we will open the call to your questions.

Question and Answer Session

Operator

(Operator Instructions)

We will take our first question from Curtis Woodworth with JP Morgan.

Curtis Woodworth – J.P. Morgan

Eric, it sounds like the guidance in the utility is pretty much under operating budget for ’08 and it seems that they have pretty specific spending plans in place right now. I mean, because basically what happened relative to where you were last quarter is that your customer base just kind of said they are going to want less cruise in what you initially had anticipated?

Eric Pike

It is basically just the way Kirk we have discussed in the past of how we received our work. It tends to come out from the utility based on what they see in their workplan or a very near term basis to us and they are not projecting as much work as they try to pull back and they see as we have mentioned before, some of it is related to housing, some of it is timing in turn with their budgets.

So I guess, in a macro sense, yes, they are not needing additional crews that they might normally at this stage in a year that did not have as many economic challenges.

Curtis Woodworth – J.P. Morgan

So, when you say pulled back, does that mean that they are taking crews off system or do you feel like spending during this year is going to be kind of status quo flat? I just want to get a sense for kind of what you think the market is going to look like this year?

Eric Pike

I mean, I think we are trying to give you some guidance around that and that we believe it is going to be down from what we originally projected. That is going to involve some crews that will come off we believe certainly that we are related directly to the housing.

Curtis Woodworth – J.P. Morgan

So, you do think the spending on distribution at least for the customer base you serve looks like right now it will be down relative to last year?

Eric Pike

Yes.

Curtis Woodworth – J.P. Morgan

And then, I guess, in terms of looking longer term, in terms of the gross margins for the company, if the utilities are pulling back, does that make it more difficult to get priced than could you see price pressure and it seems like if anything, we are hearing that overall demand is relatively good for these services and if anything there could be a tight market 12 months from now. Can you just comment on what you see currently going on with the price and maybe expectations for how this is going to affect gross margins going forward?

Eric Pike

I think most of our pricing is in place with most of our accounts. We went through over the last year of renewing those.

Curtis Woodworth – J.P. Morgan

And those are usually two to three year kind of agreements under the MSA’s.

Eric Pike

Right.

Curtis Woodworth – J.P. Morgan

So if prices in place, does that mean gross margins are seemingly locked in for that time period? Is that not kind of the main variable?

Eric Pike

Well I mean, you obviously have fluctuations in costs that goes through there that can have impact on them, but in terms of pricing pressure there is not nearly as much volume of work out there at a pricing piece as what we had a year or two ago.

Curtis Woodworth – J.P. Morgan

Looking back to like ’05 and you did develop 530 million of power lines and there was a big storm here with 150 million, so you can say that power line would be significantly higher, had you not had that type of storm year or so, three years have passed and the company is doing, it is going to be lower than that. We have had a pretty good market the past three years and I am just wondering in terms of the organic growth strategy of the company, I mean, is what happened there mainly an issue relative to loss of some of some of the guys issues with over in Florida. I am trying to frame it maybe on a longer term perspective if you can help me.

Eric Pike

Well, the majority of it is, I think that the work that we actually did through ’07, we did not retain the headcount. And when we had quite a few hundred more people back in ’05 that we are generating that 530 at the same time we generated almost 185 million storm. That is really the difference. We retracted the headcount down. We do not feel like that we are going to seek a large continued retraction in headcount. As a matter of fact, we think the fundamentals of the business and the profitability that is generating really demonstrate that we have now got the foundation probably in as good a shape as it has been in the many, many years and it has really positioned well to grow now in a fashion to where all the growth that we would pursue would be profitable rather than just top line revenue growth.

Operator

We will take our next question from Tahira Afzal with Keybanc Capital Markets.

Tahira Afzal – Keybanc Capital Mkts

Just had a couple of questions in regards to the same line of questioning as Curt, if you look at outsourcing trends, are those continuing and if so, how much are they offsetting some of this housing weakness that you are seeing?

Eric Pike

I think the trend to continue utilizing outsource services, I do not believe has diminished to here, but it is not really impacting or offsetting any kind of the housing reduction.

Tahira Afzal – Keybanc Capital Mkts

So you would say the housing reduction is much larger now than the outsourcing trend right now?

Eric Pike

Well the outsourcing trend was to outsource to companies like Pike to put in those services for the houses. When they do not need the housing services, they do not need that particular piece of outsource service.

Tahira Afzal – Keybanc Capital Mkts

That makes more sense. And then if I look at your region, are there any regions that are getting more impacted or is it fairly broad based?

Eric Pike

In our view to here, this is fairly broad based across our service territory. We do not view where we are now as dissimilar to other competitors what we see them facing in the marketplace within our service territory. I cannot really speak outside of that.

Tahira Afzal – Keybanc Capital Mkts

So I mean, this headcount that you have reduced as you have exited out of unprofitable contracts that you had, do you have an idea, are those people just laid off? Are they going to smaller shops? Do you keep an eye on that?

Eric Pike

During the time in ’07 that we exited those accounts, in many cases, those folks went to other companies in the space. The level of drop is certainly diminished from last year and barring the little bit of an economic slow down, normally we would have projected being a net positive right now. The only reason we feel like we are still down a bit is primarily due to the economic slow down. As I mentioned in the earlier part of the call, historically, we have seen opportunities to actually gain market share during these downturns in which a lot of times, there are smaller competitors in the market place that do not survive them, and that does not necessarily mean those customers do not still need some work performed, so while we are not certainly projecting that, we know that that is a realistic possibility that there could be some positive headcount gained.

Tahira Afzal – Keybanc Capital Mkts

I know earlier on, you have talked about looking at other customers that you could target in terms of expanding your clientele base, is that something still that you are looking at on a strategic level?

Eric Pike

Yes, I mean, we continue to talk to new customers and look at business opportunities with them. Often times, our storm response enables our customers that may not have been familiar with Pike or all the services we offered to see that and there could be some business up tick out of our storm response that took place at the end of last quarter.

Tahira Afzal – Keybanc Capital Mkts

Just one last question, in regards to your debt and your efforts to bring that down, do you have a targeted level for the end of the year. If I look at your interest expense, it came down fairly notably in the second quarter of the year. Should we expect a sequential reduction of similar levels going forward?

Anthony Slater

At least the current plan right now is to continue to focus on debt reduction. Of course, we continuously look at all of the potential uses for cash, but we do not provide future cash flow projections.

Tahira Afzal – Keybanc Capital Mkts

As you look and talk with your customers, do you feel that the feedback that they are giving you kind of indicates that the amount of bearing they had to do in terms of their distribution spending, that kind of reaching a bottom level so that there is less risk of a down side going forward to your core power line numbers?

Eric Pike

I think most of the industry information that we are seeing from both our customers and just general data that is out there, most of everyone seems to be consistent with the view that we have sometimes at the latter part of calendar ’08, we will see some pretty firm recovery in the spending and that most of our customers are still projecting solid spends for ‘09.

Operator

We will take our next question from David Manthey with Robert W. Baird.

David Manthey – Robert W. Baird & Co, Inc.

I was just wondering, you talked about the crew utilization and that being better, as soon you put some numbers run. Could you give us the idea of the number of line men you have in this quarter versus what you would have had a year ago, and then if you talk about the crew utilization and if you put any numbers around that, say this quarter versus the prior quarter and then the year ago quarter.

Eric Pike

David, the only real numbers we give out on that are revenue per billable hour increase. We could go back to those for if you would like.

David Manthey – Robert W. Baird & Co, Inc.

That was a new release, right?

Eric Pike

Right!

David Manthey – Robert W. Baird & Co, Inc.

But you cannot give us any indication on the number of crews and the number of linemen as that would impact the core power line business?

Eric Pike

I mean, quarter-over-quarter, we clearly look at the hours and the headcount generates those hours, but we really look at total productive power line hours and those billable hours decrease 14% year-over-year.

David Manthey – Robert W. Baird & Co, Inc.

But yet, I think you mentioned in the monologue that the productivity was actually up, is that the case?

Eric Pike

We have efficiency improvements in certain accounts during these periods, our fiscal Q1 and Q2 compared to prior year.

David Manthey – Robert W. Baird & Co, Inc.

But overall, would you say that your productivity was better?

Eric Pike

Yes! It is not a metrics that we track across the company outside of what metrics we just gave you. That is how we would view it in terms of quality and productivity is on that revenue per billable hour headcount. There is nothing else for me to provide you really.

David Manthey – Robert W. Baird & Co, Inc.

Would it be a safe assumption to say then that the number of linemen you have out there is down something less than 14% year-over-year, is that a fair statement?

Eric Pike

David hold on, actually I have change here in headcount. I think it was a smaller decrease than 14%.

David Manthey – Robert W. Baird & Co, Inc.

Okay, but you do not have a specific number. In terms of your outlook and thinking that spending will be slightly weaker this year, I think you mentioned, if I heard you correctly that you are going to add to headcount in the second half, which for you guys would be, like now, those two things do not seem to add up for me, were you talking about the calendar year or the fiscal year?

Eric Pike

We think there is going to be some headcount add in the spring construction season. But if you look at the core work, a modest headcount increase is going to put us about in the range that we just gave as a revised guidance especially if we have any storm that defers from that.

Operator

We will take our next question from Tahrik Yufasa with Broadbay Capital.

Tahrik Yufasa - Broadbay Capital

Just a quick question, it is interesting that your margin assumption or the guidance that you have for margins is upheld while the top line has been brought down because presumably in a weak economic environment, your customers are also going to be rather pricy as well and I just wanted to know to what to what extent are you guys being more selective in the contracts you are taking, are you not chasing top line for price as opposed to saying “we are seeing absolute weakness in economic condition.”

Eric Pike

Well a little bit as we mentioned earlier, we are being selective and not chasing top line revenue that does not match those profitability targets. A large percent of our work has already established pricing in the go forward which in turn focuses you on more cost management and productivity enhancements which we feel like our coming in aligned where we want them to be in our sustainable borrowing something unusual taking place there, and so it is not a component against the majority of our work right now that is a surprising component.

Tahrik Yufasa - Broadbay Capital

When you look at the utilities budget, I think someone else brought this issue up earlier, for the most part T&D spending seems to be on an increase, so again, it seems a little inconsistent unless you are referring to exclusively on the distribution side related to housing where you are seeing neighborhood connections brought down, is that what you guys are referring to when you say economic slow down or are we seeing stuff on the transmission side stuff that I guess takes longer term view you get for returns, big budget items.

Eric Pike

Well the majority of our work is on the distribution side and obviously the initial impact is definitely on the housing sector.

Operator

That concludes the question and answer session for today. At this time, Mr. Pike, I will turn the conference back over to you for any additional closing remarks.

Eric Pike

We thank you for participating in our call and the question and answer period following up and we look forward to the update next quarter. Thank you.

Operator

Thank you for your participation. This concludes today’s conference. You may now disconnect.

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