Modtech Holdings Inc. Q2 2008 Earnings Call Transcript

Modtech Holdings Inc. (MODT)

Q2 2008 Earnings Call

August 14, 2008 4:30 pm ET

Executives

Dennis L. Shogren - Chief Executive Officer and President

Kenneth Cragun - Chief Financial Officer

Analysts

Joe Giamichael – Rodman & Renshaw

John Gruber – Gruber & McBain Capital Management

Presentation

Operator

Welcome to the Modtech Holdings second quarter 2008 results conference call. (Operator Instructions) Representing Modtech today, are Dennis Shogren, President and Chief Executive Officer, and Kenneth Cragun, Chief Financial Officer. Before I turn the call over to Mr. Cragun, the company has requested that I read the following Safe Harbor statement.

During the course of this conference call, we may make projections or other forward-looking statements regarding the future events or the future financial performance of the company.

We wish to caution you that the actual results may differ substantially. We refer you to the document the company files with the Securities and Exchange Commission. Specifically, the company’s last filed form 10-K, filed in Washington, D.C.

These documents contain and identify important factors that could cause actual results to differ materially than those contained in our projections or forward-looking statements. I would now like to turn the call over to Mr. Cragun. Please go ahead, sir.

Kenneth Cragun

Thank you [Jamirah], thank you all for joining us today. Earlier today, we provided you with some financial information for the second quarter of 2008. We have filed our form 10-Q today, and I encourage you to review it and other recent filings for additional information regarding our recent operating results and other transactions.

Net sales were $13.4 million for the quarter. We saw a significant year-over-year declines in Arizona, and Florida as school and construction spending, has slowed tremendously in those regions.

The California education market continues to decline, in part due to the uncertainties of the state of California’s current budget deficit and current proposed budget cuts. These uncertainties have caused delays in school construction projects. In spite of voter approved bond measures for classroom and school construction.

We have also seen a decrease in the commercial market, which can be attributed to the slowdown in the overall construction of housing markets. Although sales volume in the quarter was insufficient to adequately cover our fixed manufacturing costs resulting in negative gross profit margins in the second quarter of 2008.

SG&A expenses for the quarter were $3.6 million, which includes a non-cash stock compensation expense of $416,000. This compares to SG&A expenses of $3.7 million in the prior year quarter.

The decline in overall SG&A expenses was primarily due to a 15% decrease in salary costs, partially offset by a $250,000 increase in legal expenses in the second quarter of 2008 related to litigation on projects from 2004 and 2005.

In July of 2008 we took further actions to reduce overhead and administrative costs through plant consolidation and personnel reductions. We have temporarily idled our Arizona factory and are currently manufacturing all buildings for the southwest region from our Paris, California factory. These actions taken in July have reduced overhead and administrative expenses by approximately $4 million on an annualized basis.

Our operating loss for the quarter was $4.3 million and our adjusted EBITDA was a loss of $3.5 million for the quarter. Adjusted EBITDA is defined as EBITDA excluding the significant non-cash items consisting of stock compensation expense and gain on derivatives.

As of July 31, 2008, the backlog of sales orders was $73.7 million. The backlog by region was as follows; California $67.5 million, Arizona $1.5 million, Florida $4.7 million. As of July 31, 2008, approximately $31.2 million, of the residential backlog is subject to final developer or end user financing for the projects.

Cash decreased from $2.4 million at the end of the first quarter to $2.2 million at the end of the second quarter. In spite of operating losses in the first half of the year, we were able to proactively manage our working capital, increasing collections, including collections of insurance receivable, and reducing inventory levels, resulting in positive cash flow from operating activities for the first six months of 2008.

I will now turn the call over to Dennis for a more detailed discussion of certain issues. Dennis.

Dennis Shogren

Thank you, Ken. The second quarter was disappointing as the anticipated volume was not achieved. Project delays and outright cancellations due to general economic conditions, the California State budget crisis and construction financing difficulties for our customers, resulted in lower volume than previously forecast.

Our diversification efforts, especially in multi-family housing are beginning to show results. However, these projects, some of which were planned for 2008, are now all pushed to 2009 and later. This will be a very important segment for Modtech as we move beyond this current construction slowdown.

Acceptance of our recently introduced block head restrooms and ground level offices have been very good. But significant growth and volume for these products is tied to a general recovery in the economies of the regions we serve.

Due to the current economic conditions in construction financing uncertainties, our pipeline has been reduced to $875 million from the previous reported $1 billion. We continue to be pleased with the diversity represented in the pipeline and believe that diversity will help smooth volume and earnings as the economy rebounds in construction spending increases.

In broad strokes, our current pipeline breaks out like this. Public schools $125 million, private Schools $75 million, commercial construction $50 million, residential, including multi-family and motels of $300 million, our concrete and block restrooms $25 million, and government $300 million.

Of this $875 million pipeline amount, more than one third has already been bid and is awaiting award. The awarding agency for the largest pending awarded is indicated in award date of September 12, 2008. We will keep you all posted.

General economic conditions and the significant declines in construction spending, especially in education, have significantly impacted our results for the first half. And we do not see significant improvement in the outlook until 2009.

We will continue to focus on our new market opportunities in multi-family housing in the government sector. And our resolve to keep our cost structure in line with our volume so we can return to profitability as quickly as possible.

This concludes our prepared comments. We'll now be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Joe Giamichael - Rodman and Renshaw.

Joe Giamichael - Rodman & Renshaw

Good afternoon, gentlemen. We haven’t seen the cash list statement yet but I can see from the balance sheet that you’ve squeezed your working capital pretty well. In terms of additional sources of funding, what other means do you have at your disposal at this point?

Dennis Shrogen

Well right now we are operating under the assumption that we need to provide that working capital from operations, Joe.

Joe Giamichael - Rodman & Renshaw

Okay and the backlog has grown but how much of those – I know there’s been a lot of project delays obviously, how much of the value of that backlog right now are projects that have been delayed at least a quarter?

Dennis Shrogen

Well the – I’ll start off with the reference that Ken made to the little over $30 million of residential. And those projects have all been delayed by more than a quarter. And there’s another $10 million, probably of education business that still is delayed from the original schedule date.

And that could be a little bit more than that, but you asked, for more than a quarter, and certainly $10 million of that's been delayed that much.

Joe Giamichael - Rodman & Renshaw

Got it, that’s fair. Can you just remind us what the – what if any potential covenant levels are out there right now, that we should be focused on?

Ken Cragun

Yes, we are at – currently we are at $9 million cash and eligible receivables, beginning July, and that’s – and forward.

Joe Giamichael - Rodman & Renshaw

And what’s the level that you are required to maintain?

Ken Cragun

No, that is the level, Joe.

Joe Giamichael - Rodman & Renshaw

Oh, that is the level you are required. Okay.

Ken Cragun

$10 million.

Joe Giamichael - Rodman & Renshaw

Got it. Okay great Ken, and I guess, last question, it sounds like you're kind of piecemealing some of these things together and controlling costs to the best of your abilities in a negative environment. In your minds does this September 12th deadline for the large contract award; it’s got to be very hard for you to gauge, but, I know that’s been pushed out a few times as well. Are you getting any feedback that makes it seem like that's a more firm deadline?

Dennis Shrogen

Really the only feedback is, is that that date has been communicated by the awarding agency.

Joe Giamichael - Rodman & Renshaw

Okay, got it.

Dennis Shrogen

And just in terms of process, the process is one where there have been two rounds of questions as they’ve come back to the bidding parties. And as the second round of questions was presented basically as, this is the final round of questions.

Joe Giamichael - Rodman & Renshaw

Okay and at this point, it’s, I believe you guys said before that there is sort of a binary. It was between yourselves and another group, is that?

Dennis Shrogen

That is what our understanding is.

Joe Giamichael - Rodman & Renshaw

Okay, got it. Okay well thank you very much.

Dennis Shrogen

Thanks Joe.

Operator

(Operator Instructions) Your next question comes from Jon Gruber - Gruber & McBain.

Jon Gruber - Gruber & McBain

Hi guys, I tuned in a little late so you might have answered this, but the big contract, that you were just asked about, the military contract. What – if you win that, what would be the annual revenue to Modtech? And can you, actually be – given the financial situation, can you do that without taking on more? Can you finance the inventory, et cetera, and the purchases there?

Dennis Shogren

Answer to the first question – first part of the question Jon, and hi, I’m sorry we didn’t respond to that. We believe that our share of this award would be between $250 and $300 million over five years, so somewhere $50 and $60 million per year for five years.

And in terms of the financing for that, the prime contractor is in a position to finance that on short terms with us. So we essentially have 30 days terms. That should match our need for inventory.

John Gruber - Gruber & McBain

Okay and then assuming you – if you do win it what kind of gross margin or more importantly, operating margin would you hope to make on that government contract?

Kenneth Cragun

That one is high teens, between 15 and 20%.

John Gruber - Gruber & McBain

Fifteen to 20 gross and what would flow to the bottom, most of it?

Kenneth Cragun

Yes in 10 to 12 range.

John Gruber - Gruber & McBain

Okay, thank you very much.

Dennis Shrogen

You bet, thanks, John.

Operator

(Operator Instructions) And there are no questions at this time.

Dennis Shrogen

Very good, thank you for joining us today and we look forward to speaking to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s Modtech Holdings second quarter, 2008 results conference call. You may now disconnect.

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