Integrated Electrical Services, Inc. (NASDAQ:IESC) F1Q09 (Qtr End 12/31/08) Earnings Call February 10, 2009 9:30 AM ET
Steve Gray - Investor Relations - DRGNE
Michael J. Caliel - President and Chief Executive Officer
Raymond K. Guba - Senior Vice President and Chief Financial Officer
Ladies and gentlemen thank you for standing by Welcome to the Integrated Electrical Services First Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Steve Gray with DRGNE. Please go ahead sir.
Thank you Good morning everyone. We appreciate your joining us for IES's conference call today to review fiscal 2009 first quarter results. We would also like to welcome our internet participants listening to the call as it is being simulcast over the web. Now before I turn the call over to management I have the normal details to cover.
If you did not 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'll 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. There is also a telephonic instant replay available for the next seven days and information on how to access the replay is in yesterday's news release.
As a reminder the company announced on its first quarter 2008 earnings call that it has revised its format of its regulatory -- 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. You are encouraged to download the slide deck which is in Adobe PDF format, so that you can read what corresponds with today's presentation and that is on the company's website at www.ies-co.com on the Investor Relations page.
We encourage feedback regarding the quality of this content and if there is any more additional information you would value in future calls, please let us know. Also please note that information reported on this call speaks only as of today February 10, 2009 and therefore you're advised that time sensitive information may no longer be accurate as of the time of any reply 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 can be found on the company's website under Investor Relations and the company's report on 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as well as amendments, press releases et cetera. All are available free of charge through 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, Chief Financial Officer. I would now like to turn the call over to Mike.
Michael J. Caliel
Thanks Steve, good morning everyone and welcome. And thanks for joining us today to review our first quarter fiscal 2009 results. If you would move ahead to slide three, let me start by saying that we're disappointed with our performance in the first quarter, especially with our volume and backlog level. However, we have made measurable progress in our cost reduction programs and we continue to right-size the business to address the current economic environment.
It's also important to note that during our 2008 restructuring we shifted our go-to-market strategies and in the near term this adversely affected our backlog primarily in our industrial segment. As a reminder we completed the restructuring of our operations during 2008, integrating 27 companies in the three major business segments; commercial, industrial and residential. And that operational restructuring was part of our long term strategic plan to reduce our cost structure, reposition the business to better serve our customers, strengthen our financial controls and as a result position us to implement a growth strategy in our targeted markets.
The program consolidated certain leadership roles and administrative support functions and eliminated redundant positions. We began the operational restructuring program in June of 2007, and we recorded total of 5.6 million in restructuring charges pertaining to that program. During the same period we also removed approximately $20 million from our overall cost base and are now beginning to gain traction from that cost out program. With the restructuring complete, we're beginning to realize benefits from those actions.
For example despite volume declines in all three of our business segments during the first quarter gross margin improved in both our commercial and residential groups did a better execution, our ability to adjust our labor to meet project demands along with the stabilization of material costs. Our focus now is on building backlog and growing the business. In that regard we've made investments in sales personnel, as well as tools and processes to better manage and build our pipeline of opportunities. We believe that this is a unique approach in the electrical contracting marketplace, building a sales model and evolving from a localized opportunistic approach to a more structured method that's based on targeted markets and national strategic relationships.
As a result, we are already beginning to see encouraging progress from our sales team. And based on our opportunity pipeline; we believe our backlog will grow in fiscal 2009. A key element of our transformation involves further optimization within our three business segments; and to that end as well as in response to the current economic environment, in the first quarter we began a new restructuring program designed to further reduce cost and consolidated operations within our three business segments.
Our plan in fiscal 2009 is to streamline our local project and support operations which will be managed through regional operating centers and to capitalize on the investments we've made over the past year to further leverage our resources. Under this restructuring plan we expect to incur pre-tax restructuring charges of approximately $2 million to $3 million it's implemented over approximately 12 months.
Now before I turn the call over to Randy let me point out some of the key aspects of the first quarter. If you would turn to slide four; our adjusted net income from continuing operations excluding restructuring cost was $0.2 million or $0.01 per diluted share for the first quarter. This compares to adjusted net income from continuing operations excluding restructuring charges and a debt refinancing prepayment penalty of $1.3 million or $0.09 per diluted share. Our overall gross margin rose to 17.1% compared to 16.8% in the fourth quarter a year ago, despite volume decline in all three of business segments.
We have seen weakness in construction nationwide. However, as I mentioned earlier gross profit margins rose in our commercial and residential groups primarily due to improved execution. Our ability to adjust our labor to meet project demands, as well as the stabilization of material costs. We reduce the SG&A and other restructuring charges by over 5% in the first quarter to approximately $29 million. SG&A as a percent of revenues in the fiscal '09 first quarter increased to 16.6% compared to 15.4% in the first quarter of last year, as the result of the 12% volume decline.
The investments we made during the last fiscal year in systems and organizational capabilities have yielded savings and productivity gains. In light of the difficult market and disappointing first quarter volumes, we will certainly continue to remove costs through consolidation and optimization during the fiscal 2009. A backlog with 319 million at the end of the quarter, this compares to $348 a year ago.
Backlog in our residential segment actually improved year-over-year due to multi-family housing projects, while backlog in the commercial and industrial segments declined primarily due to competitive market pressures, project deferrals, as well as our ongoing selectivity regarding new work. Again, the shift in our go-to-market strategy has had an adverse impact on backlogs especially in the industrial groups. Now let me turn the call over to Randy to review some of the financial highlights in more detail.
Raymond K. Guba
Thanks Mike. As you can see on slide five, revenues for the fiscal '09 first quarter were $173 million, compared to $197 million in last year's first quarter. Decline in revenues was attributable to decreases in volume in each of our three business segments; consistent with the nationwide decline in construction activity. Along with the changes we drove in our go-to-market strategy, which temporarily impacted volume. In our commercial group, revenues declined as key sectors began to scale back, delay or cancel proposed construction projects; including high-rise office towers, hotels and condominiums.
Additionally we continue to see increased competition for residential contractors for their (ph) specialized retail oriented commercial work and typically has lower barriers to entry. However there are some relatively healthy sectors in this market such as healthcare, institutional, government and services.
Revenues in our Industrial segment declined as projects have been delayed, cancelled or awaiting financing. Also some customers extended holiday shutdowns in respond to current economic conditions. Additionally the shift in our go-to-market strategy had adverse impact on sales in the first quarter.
The residential segment, the revenue declined was primarily attributable to reductions in building activity throughout the markets we served, to a lesser extent to the effect of lower prices in response to the competitive market conditions and falling input prices. Our multi-family business was the brave spot in this segment with revenues rising slightly compared to the first quarter of last year. Gross profit for the first quarter was approximately $30 million compared to 33 million in the first quarter of last year. Gross profit margin was 17.1% of revenues, compared to 16.8% of revenues a year ago. This improvement in gross margin was due to the better of gross margins in our commercial and residential groups, once again due to the better execution, our ability to adjust our labor to meet project demands, as well as stabilization of materials cost.
Now turning to slide six; payroll, general and administrative expense for the first quarter of net of restructuring charges were approximately $29 million, compared to $30 million in the same period a year ago; a decline of 5% as we continue to see the benefits to our restructuring efforts. SG&A expenses as a percentage of revenues were 16.6% in the first quarter of 2009, compared to 15.4% in the first quarter of fiscal 2008 driven by the lower volume. Our investments in systems and organizational capabilities are reflected at higher headquarters costs that are more than offset by reductions in our business groups.
We continue to take out costs to respond to our weaker first quarter volume and expected market weakness. The charges in the first quarter of 2009 included approximately $400,000 in restructuring costs associated with our 2009 restructuring plan. In the fiscal 2008 first quarter we incurred restructuring charges of $1.3 million. On slide seven; adjusted operating income excluding restructuring charges for the first quarter was $1 million compared to $2.7 million in the prior quarter. Net loss from continuing operations including restructuring charges was $75,000 or a loss of $0.01 per share in the first quarter of fiscal 2009. This compares to a net loss from continuing operations including restructuring charges and a debt refinancing prepayment penalty for the first quarter of 2008 $0.9 million or loss of $0.06 per share.
Excluding the restructuring charges, adjusted net income from continuing operations for the first of fiscal 2009 was $0.2 million or $0.01 per diluted share. This compares to adjusted net loss from continuing operations excluding restructuring charges and debt refinancing repayment penalty of $1.3 million or $0.09 per diluted share for the first quarter of fiscal 2008. You can see that our adjusted EBITDA for continuing operations excluding restructuring charges for fiscal '09 first quarter was $3.3 million compared to $6.4 million in the first quarter a year ago. We believe that EBITDA is a useful metric to provide investors comparable numbers to peer companies. We provided a full reconciliation of adjusted EBITDA to net income in the first quarter earnings release.
Now I'll give you a bit of insight into our group data. If you turn to slide eight; first quarter revenue for commercial work decreased 7% to approximately $102 million. However, the commercial group's gross margin rose to 15.6% from 14.8% a year ago as a result of improved project execution, our ability to adjust our labor to meet project demands, along with lower input prices such as copper, steel and fuel.
On slide nine, our first quarter revenues for the industrial group declined 19% from a year ago to approximately $26 million. The industrial group's gross profit margin declined to 13.3% versus 18.3% a year ago, primarily due to lower project volumes and a mix of projects with lower risks and lower margins. Last year's gross margin also reflected a closeout of several particularly well executed projects.
On slide 10, revenues in our residential group declined 18% to approximately $45 million in the first quarter. However in spite of competitive pressures in the industry and revenue declines, residential gross margins continue to improve this quarter, rising to 22.8% from 19.7% a year ago. This increase is primarily attributable to improved execution in our multi-family division, our ability to adjust our labor to meet project demands as well as stabilization of material costs.
Now turning to slide 11, our backlog at the end of the first quarter was approximately $319 million compare to $337 million at the end of the fiscal 2008 and $348 million at the end of the first quarter a year ago. The overall quality of the backlog has remained strong quarter-over-quarter and has improved year-to-year reflecting the company's ongoing selectivity regarding the business. Once again our backlog was impacted by the shift in our go-to-market strategies and transition to a new sales model.
Now, turning to slide 12; we ended the first quarter with approximately $49 million in unrestricted cash and cash equivalents compared to approximately $65 million in the preceding quarter and $36 million a year ago. We also have approximately $6 million available under our revolving credit facility for liquidity totaling approximately $55 million. Total debt was approximately $29 million as of the end of the quarter. We believe we have adequate liquidity to meet the company's operating needs.
For update on our share repurchase program as of December 31, 2008 we have repurchased a total of 886,000 shares or common stock for $14.4 million at an average price of $16.24. As you know we have a 10b5-1 plan in place which allows us to purchase during black out periods. Now I'll turn the call back to Mike.
Michael J. Caliel
Thanks Randy. If you would move to slide 13; it is important to note that we've made significant changes to the business over the last 18 months. In 2007 we announced the restructuring program designed to align our business for the markets we serve, in order to position us for growth and to consolidate in the three business segments.
Additionally we invested in systems to better supporter operations and as a result we removed approximately 20 million in costs during the last fiscal year. As you would expect, we continue to drive cost reductions in our structure as we enter another restructuring phase to further consolidate operations within our three business segments. This is the next logical step as we move to optimize the business within each segment and to further improve our execution and address the current market environment.
We have shifted our go-to-market strategy and established a new sales model, shifting from a local opportunistic market approach to a more structured method, based on targeted markets and national strategic relationships. This will enable us to build and better manage our pipeline of opportunities and as a result we're beginning to see encouraging progress from our sales team. And based on our opportunity pipeline we believe backlog will grow in fiscal 2009.
We believe the substantial changes we've made to the business combined with our strong financial condition, our expanded surety capacity, our national presence, our excellent safety record and new sale capabilities enable us to weather the current economic environment and position us for the anticipated increases in infrastructure spending over the coming years. As also we appreciate your interest and we look forward to speaking with you again on our fiscal second quarter conference call.
Thank you Mike. Now to close up the call I will make some forward-looking statements. 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 The 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. Fluctuations in operating results because of downturns in levels of commercial and residential construction, delayed payments resulting from financial difficulties affecting customers, inaccurate estimates used in entering into contracts, delayed payments resulting from financial difficulties affecting customers, inaccurate estimate 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.
The 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 from the company's work, difficulties in reducing SG&A, loss of key personnel particularly Presidents of business units; litigation risk and uncertainties, difficulties in incorporating 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 and in the company's annual report on Form 10-K for the year ended September 30, 2008 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 establish under the Private Securities Litigation Reform Act of 1995 and should be evaluated in context of estimates, assumptions, uncertainty and risks described herein.
General information about Integrated Electrical Services Inc can be found at the company's website www.ies-co.com under Investor Relations; the company's annual report on Form 10-Q, and current reports on Form 8-K as well as any amendments to those reports. They are available free of charge at the company's website as soon as reasonably practical after they are filed or furnished to the SEC. With that, that concludes our call.
Ladies and gentlemen, thank you so much for your participation today that does conclude the Integrated Electrical Services First Quarter Earnings Conference Call.
You may now disconnect.
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