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Integrated Electrical Services, Inc. (NASDAQ:IESC)

F3Q08 Earnings Call

August 12, 2008 9:30 am ET

Executives

Michael Caliel - Chief Executive Officer

Randy Guba - Chief Financial Officer

Tendon Nod - Investor Relations

Operator

Welcome to the Integrated Electrical Services third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Tendon Nod of DRGNE.

Tendon Nod

We appreciate you joining us for IES’s conference call today to review fiscal 2008 third quarter results. We would also like to welcome our internet participants listening to the call as it is being simulcast over the web and before I turn the call over to management I have the normal housekeeping details to run through.

If you didn’t receive an email of the news release yesterday afternoon please call our offices at DRGNE, the number is 713-529-6600 and provide us with your contact information and we will make sure you are on that list. Also there will be a replay of today’s call which will be available by going to the company’s website for the archive webcast and there is also a telephonic instant replay available for the next seven days and the replay information is in the press release yesterday.

As a reminder the company announced on its first quarter 2008 earnings call that it has revised its format of its regularly scheduled earnings call and is providing a more comprehensive review of results and management’s prepared remarks along with a slide presentation, but in a non-interactive format. Therefore management will not be taking questions at the end of this call and you are encouraged to download the slide deck which is in the wpdf format, so that you can all read it. That correspondence with today’s presentation and that company’s website is www.ies-co.com and it’s on the Investor Relations page.

We encourage feedbacks of the quality of this content. If there is any information you think might be of value in future calls, please let us know. Also please note that information reported on this call speaks only as of today August 12, 2008 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any reply or listening. At the end of this call, I will come back and provide greater detail related to forward-looking statements that may be made in today’s call.

General information about IES could be found on the company’s website under Investor Relations and the company’s annual report on 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as well as amendments, press releases etc., all are available free of charge at the website as soon as reasonably practical after filing with the SEC.

Now with me this morning are Michael Caliel, Chief Executive Officer and Randy Guba, the Chief Financial Officer. I would now like to turn the call over to Mike.

Michael Caliel

We appreciate you joining us today to review our third quarter 2008 results. Let me start by saying we are encouraged by our third quarter profit performance as well as the trajectory of the business despite the very tough economic environment.

We continue to make progress on our comprehensive transformation program and if you move ahead to slide three we said we solidified the foundation of the business and we’ve made significant progress through process enhancements as well as investment in systems and infrastructure to make us more efficient and effective.

To that end we’ve invested almost $10 million back into the business in the form of infrastructure and new systems. Specifically, we just completed the automation of our project management operating system which has standardized our cost to complete review process. It will provide our business units significantly enhanced visibility into project performance and enable a more effective management of our projects.

We also completed the implementation of an accounting consolidation and reporting program across the business waiting to improve financial reporting, transparency and productivity. We have also invested in our people, strengthening and enhancing our work force to our recruiting, training and retention efforts and have made additional investment in organizational development.

We’ve implemented leadership development program that’s transforming our leadership team to operate as one and to establish an overall culture of performance and accountability. We’d restructured what were previously 27 independent companies into three business groups aligned to the markets and the customers we serve and during the fiscal year we’ve reduced SG&A by $18 million as a result of our restructuring and other cost production measures.

We’ve responded to further softening economic conditions by expanding these efforts. All the while we’ve invested in critical areas of the business, continuing to improve the quality of our operations. To better position and market the company, these groups are operating as a fully integrated national brand. On slide four you can see our new images reflecting this change with IES Commercial, IES Industrial and IES Residential.

We have managed to address each of these strategic priorities and deliver positive results, all to position the company for strong profitable growth. Now before turning the call over to Randy, let me point out some of the highlights of our third quarter. If you would turn to slide five, our adjusted income from continuing operations excluding restructuring costs was $0.18 per diluted share for the third quarter; this compares to $0.07 per diluted share in the third quarter of 2007 and is $0.06 per diluted share in the second quarter.

SG&A was lower by approximately $6 million from the third quarter year ago, a decrease of almost 18%. SG&A is 13.1% of revenues in this quarter significantly better than the 15.3% of revenues in the third quarter of 2007. This is also a sequential improvement from 14.1% of revenues in the second quarter. Gross margin was 15.8% compared to 17.2% in the third quarter a year ago. Sequentially gross margin was 15.7% in the second quarter.

Our restructuring cost year-to-date totals $4.4 million and our overall restructuring program remains on track to achieve a 15% to 20% reduction in non-operational field resource compensation cost by year end and we’re extremely proud of our safety record which continues to show significant improvement and has continued to outpace the industry average for some time now. We have an unwavering commitment to safety throughout the organization and we’re pleased to have achieved the following this year.

Our on shore recordable incidents are down 49%, loss time incidents are down 60%, lost and restricted days have been reduced to 81% and claims cost are down 61%; in fact several of our businesses in the industrial and commercial groups have recently been recognized for excellence in safety and we are very proud of these achievements.

Now let me turn the call over to Randy to review the financial performance in more detail.

Raymond Guba

As you can see on slide six, revenues for the third quarter of fiscal 2008 were $215 million compared to $223 million reported in last year’s quarter. Revenue decline was primarily attributable to softness in our residential business due to the nationwide decline in demand for single family housing.

Parts of our commercial business have also been negatively affected by housing market pressures; however we have seen strength in our commercial segment particularly in institutional projects such as data centers, office towers, health care facilities. In addition revenues in our industrial group increased from a year ago.

Year-to-date revenues were $609 million compared to $606 million in the first nine months of 2007 and an 8.6% decline. Gross profit for the quarter was approximately $34 million or 15.8% of revenues compared to approximately $38 million or 17.2% of revenues a year ago. This decline was primarily due to lower consolidated revenues and decreased gross profit margins in our industrial and commercial groups partially offset by improvement in gross margin in our residential group.

Lower gross profit margins in our commercial and industrial groups were primarily due to increases in certain operating costs such as fuel and other input costs. Competitive pricing pressures and a change mix and some higher margin work was completed. Looking at a year-to-date comparison, our gross profit margin for the first nine months of 2008 was 16% compared to 16.8% for the first nine months of 2007.

Turning to slide seven sales, general and administrative expenses for the quarter declined to $28 million or 13.1% of revenues, a decrease of $6 million from the same period in the prior year where SG&A was 15.3% of revenues. As Mike mentioned earlier, the decrease in both overall spending and as a percentage of revenues was in part due to our strategic efforts to steam line our operations and eliminate redundancies.

Notable declines in our SG&A expenses during this quarter include $900,000 in salaries and headcount reductions as a result of our restructuring efforts; $2 million reduction in professional fees, $2.2 million decrease in target management incentives and $1.2 million decrease in other general business expenses. Year-to-date SG&A expenses dropped by $19 million or 18% to $86 million in the first nine months of 2008. As a percentage of revenue, the SG&A expenses were 14.2% for the first nine months of 2008 compared to 15.7% in the first nine months of 2007.

On slide eight, operating income for the quarter prior to restructuring charges were $6 million compared to $4.3 million in the prior year which didn’t have restructuring expenses. Year-to-date, operating income prior to restructuring charges was $11.5 million compared to $7.4 million in the prior year which had no restructuring charges.

On slide nine, net income from continuing operations for the quarter was $2 million or $0.14 per diluted share which includes restructuring charges of $600,000 or $0.04 per diluted share on after tax basis. Excluding these restructuring charges adjusted net income from continuing operations was $2.7 million or $0.18 a share. Net income from continuing operations for the third quarter of fiscal 2007 was $1 million or $0.07 per diluted share and it included no restructuring charges.

For the first nine months of 2008, net income from continuing operations was $1.1 million or $0.07 cents per diluted share which includes unusual items totaling $3.7 million or $0.24 per diluted share on an after-tax basis; these unusual items include restructuring and other charges. Excluding these items adjusted net income from continuing operations was $4.8 million or $0.31 per diluted share. This compares to net income from continuing operations of $500,000 or $0.04 per diluted share for the first nine months of last year which included no restructuring charges or unusual items.

If you turn to slide 10, you can see that our adjusted EBITDA for continuing operations for the quarter excluding nonrecurring restructuring charges was $7.8 million for the quarter compared to $7.1 million for the quarter a year ago. We believe that EBITDA is a useful metric to provide investors with comparable numbers to peer companies. That provided a full reconciliation of adjusted EBITDA to net income in the third quarter earnings release.

Year-to-date adjusted EBITDA from continuing operations, excluding nonrecurring restructuring charges and one time settlements was $19.2 million compared to $15 million for the same period in 2007. Regarding our operational restructuring, we are still on track to deliver a 15% to 20% reduction in non-operational fuel resource compensation cost through the restructuring, along with improved operational efficiencies.

We expect to incur total pre-tax restructuring charges of approximately $5 million to $10 million of the gross profits which we expect to be substantially complete by September 2008. These charges will include compensation, severance benefits, consulting charges as well as facility consolidations and closings.

Now I’ll give you a little bit of an insight into our group data; if you turn to slide 11. Third quarter revenues for commercial work increased 11% to approximately $426 million at a gross margin of 13.8%. This group was affected by the reduced demand for light construction projects such as restaurants, movie theaters and local shopping centers which is correlated to the slowdown in the housing sector.

We have also experienced increased competition for low end retail work from residential contractors who have been impacted by the housing slowdown. Helping to offset the decline in this group were several significant institutional projects such as university buildings, data centers and health care facilities. Year-to-date revenues for our commercial group were $347 million compared to $340 million in the same period of 2007, an increase of 2%.

Our commercial groups’ gross margin percentage declined to 13.8% in the third quarter from 15.7% a year ago, principally the result of competitive pressures and market conditions. Also one of our business units has recently completed several underperforming legacy projects and another one continues to out flow our margins legacy projects. Year-to-date gross margin in our commercial group was 14.3% compared to 15.5% in the same period last year.

On slide 12, our third quarter revenues for the industrial group rose by approximately $4 million from last year to $34 million. Our gross margin declined 17.8% versus 19.4% last year as a result of an increase in certain operating costs, notably transportation expenses as well as the completion of several lower margin projects prior to phasing and more profitable work.

The industrial market is generally not as cyclical as the rest of the construction industry due to the nature of the projects which are often large scale, multiyear contracts financed by large corporations or government agencies. For the 2008 period our industrial group has seen growth in utility line service projects as well as increased construction of electrical substations, ethanol plants, wing farms and pulp and paper mills. Year-to-date, our industrial groups revenues were $101 million, compared to $88 million in the same period of 2007, a 16% increase. Gross margin in this segment was 16.4% in the first nine months of 2008 compared to 16.8% in the first nine months of 2007.

On slide 13, our residential group generated revenues of approximately $55 million in the third quarter, with a gross margin of 19% compared to $18 million and a gross margin of 18.5% in the last year’s third quarter, a reduction in revenues due to the well-known drop in demand in the residential sector, in particular the single-family housing. However, residential gross margins continue to improve again this quarter despite of the competitive pressures in this industry. Primarily attribute this to better project execution and improved labor productivity, facility consolidation, as well as increased demand for moving family housing.

Year-to-date, revenues in our residential segment were $161 million compared to $239 million in the same period of 2007, a 33% decline. Gross margin in our residential segment year-to-date was 19.6% compared to 18.7% in the first nine months of 2007.

Now turning to backlog on slide 14, our backlog at the end of the third quarter was approximately $367 million compared to $382 million at the end of the second quarter and $323 million at the end of the third quarter a year ago. Backlog for both the industrial and commercial segments declined in part due to seasonal fluctuations where a significant portion of the project work is performed during the summer months.

Backlogs for the residential group improved primarily due to the market shift away from single family which does not create backlog, to multifamily housing which does. In addition as we have said before we continue to be selective with the quality of our backlogs.

Now turning to slide 15, we ended the third quarter with approximately $57 million in unrestricted cash and cash equivalents compared to approximately $32 million in the preceding quarter and $69 million a year ago. We also had approximately $14 million available under our revolving credit facility; therefore we had liquidity totaling to $71 million which we believe is adequate to meet our operating needs.

Our quarter end cash balances are lower than a year ago as a result of paying down debt, repurchasing our stock, reinvesting in infrastructure and an increase in working capital. An update on our share repurchase program; to date the company has purchased 507,398 shares totaling $9 million. We have established a rule of the 10b 5 1 plan which allows us to purchase during blackout periods.

Now I will turn the call back to Mike.

Michael Caliel

To review improving execution across the businesses is one of the cornerstones to enhancing our performance. As I've stated in the past, we're in the midst of a major turnaround at IES in our overall cost structure, our operating disciplines and our work processes and while we intend on reducing our cost base during our restructuring we’ve also been strategically investing in productivity enhancement tools such as project management processes and systems, upgrading our financial and operational reporting system to better manage the business and strengthening our leadership team, all to create a sustainable and scalable platform for growth.

With the progress we’ve made in stabilizing our restructured operations, we are now beginning to focus on organic growth. Accordingly we developed and installed the sales pipeline management tool to drive visibility and accountability in meeting our growth targets. With respect to our markets, we expect to see continued softness in the residential market and while there has been softening in some commercial sectors we are seeing strength in other areas of the commercial group, especially institutional and health care.

The industrial market is still solid and we continue to focus on opportunities in that sector. So in summary, despite the head wins in the economy, profitability for the first nine months showed improvements over the last year, orders have picked up, the size and quality of our backlog remains strong and our capital structure has been significantly enhanced.

We are also reinvesting in the business by retooling our systems and processes to make us more efficient and effective and investing in our leadership to develop a world class team and while we have made measurable progress, we still have a lot to do. As always we thank you for your support and for attending today.

Tendon Nod

Now, certain statements in this conference call including statements regarding the restructuring plan and total estimated charges and cost reductions associated with the plan are forward-looking statements within the meaning of section of 27A of Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934; all which are based upon various estimates and assumptions that the company believes to be reasonable as of the date hereof. These statements involve risks and uncertainties that could cause the company’s actual future outcomes to differ materially from those set forth in such statements.

Such risks and uncertainties include, but are not limited to the inherent uncertainties related to estimating future operating results and the company’s ability to generate sales or operating income, potential difficulty in addressing material weaknesses that have been identified in the company, fluctuations in operating results because of downturns in levels of the commercial and residential construction, delayed payments resulting from financial difficulties affecting customers, inaccurate estimates used in entering into contracts, inaccuracies in estimating revenue or percentage of completion on projects, the high level of competition in the construction industry, both from third parties and ex-employees, increase in the cost of commodities used in our industry, including steel, copper, plastic, aluminum and gasoline, weather-related delays, accidents resulting from the physical hazards associated with the company’s work, difficulty in reducing SG&A, loss of key personnel, particularly presidents of business units, litigation risks and uncertainties, difficulties incorporating new accounting control and operating procedures and centralization of back office functions and disruptions in or the inability to effectively manage consolidations.

You should understand that the foregoing, as well as other risk factors discussed in this call are in the company’s annual report on Form 10-K for the year ended September 30, 2007 could cause future outcomes to differ materially from those expressed in such forward-looking statements. The company undertakes no obligation to publicly update or revise information concerning these restructuring efforts, borrowing availability or cash position or any other forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Forward-looking statements are provided in the conference call pursuant to the Safe Harbor established by the Private Securities Litigation Reform Act of 1995 and should be evaluated in context of the estimates, assumptions, uncertainties and risks described herein.

General information about Integrated Electrical Services Inc can be found at the website www.ies-co.com under Investor Relations; the company's annual report on 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as well as any amendments to those reports and they are available free of charge to the company’s website as soon as reasonably practical after they are filed or furnished with the SEC and with that, that concludes our call.

Operator

Thank you ladies and gentlemen. This conference is available for replay and if you would like to access the replay you may do so by dialing 303-590-3000 and entering in the passcode number of 11116515. The phone number again is 303-590-3000 and the access code is 11116515. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Question-and-Answer Session

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Source: Integrated Electrical Services, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

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