Pike Electric Corporation (PEC)

F4Q08 Earnings Call

August 4, 2008 5:00 pm ET

Executives

Anthony Slater - Chief Financial Officer

Eric Pike - Chairman, Chief Executive Officer

Analyst

Alex Rygiel - FBR

Tahira Afzal - KeyBanc Capital Market

Curt Woodworth - J.P. Morgan

Presentation

Operator

Welcome to the Pike Electric Corporation fourth quarter 2008 financial results conference call. (Operator Instructions) Now for opening remarks and introductions, I would like to turn the call over to Mr. Anthony Slater, Chief Financial Officer.

Anthony Slater

During this call, we will make forward-looking statements. These are statements that are either not historical facts or are statements regarding our attempts, beliefs or expectations with results 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 you should 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 Relations section of our website at www.pike.com this afternoon. You can also register to receive Pike Electric financial news alerts by email and also Investor Relation questions can be directed to 336-719-4622.

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

Eric Pike

Good afternoon everyone and thank you for joining Pike Electric’s fiscal fourth quarter 2008 earnings call. Today I will address the business over the last quarter including our recent acquisition of EDS. Then Anthony will walk you through the financials for the quarter and the full year as well as our outlook for fiscal 2009. Following my closing remark we’ll open up the call to your questions.

Fiscal 2008 was an important year for Pike Electric. We took a number of steps to better position our sales to diversify and grow the company. We have significantly strengthened our balance sheet paying down $51 million in debt over the past year. First we ended the quarter with more than $11 million in cash. We have continued to see improvement in our revenue per billable hour despite headcount reductions due to the softening in the residential housing market as well as the general economic down turn.

We have also successfully completed our first acquisition since 2004. As we enter our fiscal 2009 we are well positioned with a solid balance sheet and more efficient workforce and with the acquisition of a more diversified company. This should enable Pike to continue to grow further scale in our distribution markets, but also provide meaningful opportunities for diversification of services into additional markets within the T&D space.

While Electric distribution remains our core business, we are placing increasing emphasis through our acquisitions of EDS on diversifying our service capabilities and the operating market. These new services are extremely synergistic to the T&D space and involve engineering, substation construction, comprehensive EPC projects, as well as wind and solar projects. They provide Pike service and territory expansion to diversify our revenue stream and provide enhanced customer services which we believe will offer long-term upside opportunities.

In terms of our core business we continue to see an impact from deferred utility spending in the distribution space. The pickup in headcount that we have previously anticipated only resulted from the additional headcount we achieve with the EDS acquisition. Looking ahead we expect to see continued pressure on our customer spending for both overhead and underground distribution work and do not expect to see any meaningful recovery until at least the second half of the fiscal 2009.

That being said, distribution lines are a critical component of the electrical grid. Our distribution projects can be delayed but they can rarely be cancelled as our work connects the utility customer to the grid and completes the revenues stream for Pike’s customers. In addition we believe that as spending of large scale transmission and renewable energy projects continues to accelerate this will only further enhance the need for upgraded distribution infrastructure in the future.

Again we cannot force our utility customers to spend on upgrade and maintenance to the distribution network. What we can do is manage our operations and balance sheet to ensure that one, our core business is positioned to meet the needs of our customers when the workload returns and two, expand our service offerings to capture growth in other segments of the Electric T&D market. We believe we have made significant progress on both of these fronts this year.

I’d like to take moment to highlight some of steps we’ve taken in to position Pike to seek new areas of growth. First we maintained our profitability levels with a 16.8% gross margin for the fourth quarter. This was accomplished by concentrating on accounts that met our target profitability levels and managing our cost.

As we grow our business going forward Pike will continue to be committed to maintaining the profitability we have worked so hard to achieve and will carefully evaluate our mix to ensure we maximize both revenue and profits. We do however face a number of headwinds including rising diesel fuel prices, increased benefit and interest cost, as well as cost and attention required to fully integrate the EDS acquisition.

Second we have significantly enhanced our capital structured through substantial cash flow and debt reduction initiatives. We paid down $51 million of debt this year brining our debt to total capital ratio to that of 39%. This is down meaningfully from 49% at the end of the last fiscal year and from 59% at the end of fiscal 2006.

Our ability to generate significant cash and pay down debt over the past two years has enhanced our capital structured and positioned us to pursue other growth opportunities such as the recent acquisition of EDS, which diversified our service offerings, expanded our geographic footprint and further solidified our presence in our core markets.

I would like to take a moment to further address the recently completed acquisition of EDS, which closed on September 1 and the benefits it will bring as we integrate this business into the Pike platform. As a previous division of the Shaw Group, EDS’s operations consisted of several different business units.

One was focused on the maintenance and construction of distribution and transmission powerlines, which is very consistent with Pike’s core business. Another focused on substation construction, a third consisted of engineering design procurement and construction management services and finally our renewable energy group. Both the engineering and the renewable energy group are entirely new business launch for Pike.

EDS adds new opportunities in the following ways, first EDS brings more T&D resources to our core business. The addition of EDS’s highly skilled construction workforce will be a valuable addition to the Pike core team. Approximately 60% of the EDS business is related to T&D construction. EDS is focus on higher voltage transmission work up to 345 kV will further bolster Pike’s growing presents in the transmission market. Second it expands Pike’s total service offerings.

The integration of EDS transitions Pike’s focus from solely that of a construction and maintenance operator into the engineering and design business. Pike is now a full service contractor for our customers across the transmission, substation and distribution segments of the market. Having the capabilities to design, procure and construct and manage projects opens significantly more opportunities than construction alone.

The integration of EDS expands Pike’s geographic footprint. EDS currently performs engineering and design work in markets outside of Pike’s present maintenance and construction business. These markets include the West Coast, the South West and the Pacific North West. We expect EDS’s engineering and design presence to service as an attractive entry point into these markets.

Finally EDS also provides an in-road for Pike into the rapidly growing renewable energy market with capabilities on a number of levels from engineering to final phase construction. Our ability to offer the complete spectrum of services for these renewable energy projects will differentiate us from other players emerging in this space, who are often limited to providing only one step in the supply chain.

Our new engineering and design division is already working on a large solar project and several win projects throughout the country. We look forward to leveraging our capabilities, established customers base and recognize track record in the T&D space as we grow in the renewable energy market in the years to come.

For fiscal 2009 let me briefly address the trends in the market as we look ahead to next year. In our core business we expect our utility customers to continue to differ on distribution spending well into fiscal 2009. While we are very encouraged by early indications for projects in the renewable energy market, it is still too early to determine what if any impact these new projects would have ’09. Longer-term we are expecting to benefit from these, but we will update you during the year on our progress in this new market.

In summary we have been focusing on optimizing our productivity and positioning our sales for future growth and a challenging environment and we are excited about the new opportunities that lie ahead. The maintenance and construction we perform on distribution lines is a well establish business. It is however affected by macro economic conditions, including the overall housing market, interest rates and fuel prices.

Our business model is built on our ability to provide flexibility for our customers. We have to weather these down cycles with them and capitalize on the growth when their tide turns better, at the same time continuing to generate meaningful cash flow that enables us to invest in acquisition opportunities and strength in the balance sheet.

We are continuing to execute on this strategy, however as we are demonstrating we will not stand still. We will continue to look for opportunities to better serve our customers as we diversify and expand our operations. With that I’d like to turn the call over to Anthony to take us through the financials for 2008 and our outlook for fiscal ’09.

Anthony Slater

First I’m going to walk you through the income statement for the quarter and the full year, provide some additional highlights regarding the balance sheet and cash flows, discuss our recent acquisition and finally provide our outlook for fiscal 2009.

Total revenues for the fiscal fourth quarter ended June 30, 2008 decreased by 5%, to $138 million from the comparable period last year. Core powerline revenues were $124 million in the fiscal fourth quarter, a 9% decrease from the comparable quarter last year. Core powerline revenue per billable hour increased 6% year-over-year. This reflects continued favorable pricing from contract renegotiations and increased efficiencies of our crews.

Core powerline billable hours decreased 14% year-over-year, primarily due to decreased demand for our underground distribution services. Underground distribution revenues decreased $10 million or 27% from the comparable period last year. Underground distribution demand has been impacted by housing market slowdown in our service territory.

Storm restoration revenues were $14 million in the fourth quarter of fiscal 2008, compared to $8 million in the comparable quarter last year. You may recall that our end of year guidance estimate contains zero Storm revenues for the quarter.

Gross profit for the fourth quarter of fiscal 2008 was $23 million. Gross profit was 16.8% of revenues, a 100 basis point decrease from the fourth quarter of last year. The year-over-year decrease was largely due to the impact of higher fuel prices, which more than offset the increased contribution from higher margin Storm revenues.

Fuel cost increased to 7.4% of total revenues in the fourth quarter compared to only 5.2% in the same period in the prior year. Our business is primarily impacted by diesel fuel pricing given that only 10% of our volume is gasoline.

General and administrative expenses decreased approximately $1 million year-over-year to $11 million in the fourth quarter of fiscal 2008. This decrease is primarily due to reduced legal fees. As a percentage of revenue general and administrative expenses were 7.6% in the fourth quarter of fiscal 2008, a 60 basis point decrease from last year.

Interest expenses for the fiscal fourth quarter of 2008 decreased 46% to $2 million compared to the fourth quarter last year due to significant debt reduction during fiscal year 2008. Our effective tax rate for the quarter was 40.2%. Net income for the fiscal fourth quarter of 2008 was $5.6 million or $0.17 per diluted share flat versus last year.

EBITDA was $20.5 million for the fourth quarter of fiscal 2008 versus $24 million for the same period last year. Depreciation and amortization for the fourth quarter of fiscal 2008 totaled $8.6 million versus $10.3 million last year. A reconciliation of net income to EBITDA is posted on our website under the Investor Relations section.

Now turning to our full year results; total revenues for our 2008 fiscal year decreased 8% to $552 million from the same period last year, with core powerline revenues coming in at $503 million, an 8% decrease from last year and within our guidance range of $500 million to $510 million. Breaking this down, core powerline revenue for billable hour increased 6% year-over-year which was offset by a 14% decline in core powerline billable hours.

Revenue generated in fiscal 2007 from exited accounts totaled approximately $23 million. Excluding these revenues from exited accounts core powerline revenue decreased $18 million or 3%. The decrease in core revenue net of the exited accounts is due to lower demand for our underground distribution services.

Underground distribution revenues decreased $22 million or 14% from the prior year. Storm restoration revenues total $49 million for fiscal 2008, a 7% decrease from last year. Net income for fiscal 2008 totaled $20.2 million or $0.60 per diluted share, an increase of $1.9 million or $0.05 per diluted share from the same period last year.

Turning to the balance sheet and cash flows; cash flow from operations totaled $55.8 million for the year. In fiscal 2008, we reduced our debt by $51 million or 27% to $140.5 million. Our debt to total capital ratio was 39% as of June 30, 2008. In addition we increased our cash position by $9.9 million to $11.4 million as of June 30, 2008.

I would now like to discuss our recent acquisition of EDS which we completed on September 1. We acquired this business for approximately $24 million in cash, which is subject to an adjustment based on working capital as of the closing date, plus the assumption of certain liabilities. We will not know the exact amount of operating liabilities until the August 31, 2008 EDS financials are finalized, but we expect the assumed liabilities to range from $10 million to $15 million.

In addition we assumed operating leases for the majority of the EDS fleet that will have payments in fiscal 2009 of approximately $7 million. The entire purchase price was paid with available cash. While the EDS results have not been finalized, we do anticipate EDS’s revenues and pretax loss for the fiscal year ended August 31, 2008 to be approximately $100 million and $9 million respectively.

While we are still early in the phases of integration, we see significant revenue and cost synergies as Eric mentioned. In addition to realizing substantial synergies within our core business, EDS allows us to expand our service offering, our geographic presence and provides in roads into new markets like renewable energy. While we are very excited about these opportunities, it’s difficult to gauge their full impact and timing. It is important to note that EDS will be included in Pike’s results for only 10 months during our fiscal year ended June 30, 2009.

In terms of our outlook going forward we are introducing our fiscal 2009 guidance. We expect the total revenues to range from $620 million to $650 million for our fiscal 2009. We expect earnings per diluted share to be in the range of $0.55 to $0.65. Our guidance includes EDS’s operations for 10 months.

This guidance range also reflects the uncertainties including macro economic environment, housing market, the volatility in fuel prices and new employee benefit heading into fiscal 2009. There are however potential growth opportunities for Pike particularly related to our recent acquisition and recent hurricane activities, which are still too early to be weighed heavily into our guidance for this year.

I’d like to take a moment to lay out the assumptions behind our outlook. First our guidance assumes that macro economic environment remains challenging and our customers continue to defer spending in our underground distribution business until early calendar year 2009. Second, we’ve assumed storm revenues of approximately $50 million. We’ve experienced this approximate amount of storm revenues in each of the last two years.

As you know the last two years did not have major hurricane activity, but included more seasonally dispersed storms including significant winter storms. This year started with more significant hurricane activity, including Fay and Gustav. Our crews were dispatched to both of these events. We will update you with more details on these efforts during our quarter earnings call.

Third, we have faced a surge in diesel fuel prices, which reached $4.77 per gallon in the month of July. Our fiscal 2009 guidance assumes that fuel costs in the range of approximately 7% of total revenues compared to just over 6% for fiscal 2008. To reemphasis, our guidance assumes a 100 basis point reduction in gross margins due to the expected diesel fuel expenses in 2009. We continue to negotiate fuel surcharges and other customer pricing adjustments and have implemented a diesel hedging strategy to decrease our exposure to diesel price volatility.

Fourth, we are incurring increased cost associated with our initiatives to attract and retain the highest quality workforce. Even with lower demand in certain territories and in certain services, demand for high skilled workers remains high. We’ve implemented a leadership retirement program and other benefit changes beginning in fiscal 2009. These programs will increase our cost by approximately $3 million during fiscal 2009.

We have assumed a modest improvement in productivity based on these programs, but given the intricacy of these programs we need to continue to monitor cost and benefits going forward. Fifth, we’ve estimated capital expenditures will range from $30 million to $40 million including fleet replacement, system initiatives and fleet requirement related to the EDS acquisition.

Finally, while we do not anticipate any obstacles related to the integration of EDS, like any acquisition this process carries risk and can create some short-term disruption in operations. As noted above the EDS business incurred operating losses during its most recent fiscal year end.

We have assumed a modest level of revenue growth for EDS given cross selling opportunities and engineering and construction growth potential in renewable energy markets. In addition we have identified synergies related to the T&D construction management, fleet operations and bank office functions. All staffing changes were effective at the closing of the transaction. We assumed EDS growth and noted synergies are expected to bring EDS to a breakeven position for fiscal 2009.

With all that being said, our outlook does not factor in the impact of potential large scale engineering and design projects or large scale renewable energy projects. These are clearly high growth areas of the market for significant project volume; however since we are still in the early bidding stages we feel that it’s prudent at this time to reframe from assuming any incremental revenue or profit contribution from these large scale contracts.

We look forward to updating you on future project wins in these new areas as they materialize. Now I would like to turn the call back to Eric for closing remarks.

Eric Pike

In closing we are very pleased with the step we’ve taken during a challenging economic year to position the business. Over the past 63 years we have demonstrated the strength and we resilience of Pike’s business model and we believe that success will translate as we grow and expand into new markets.

As a full service contractor we are rapidly becoming a utility solution provider to our high quality customer base. Pike now offers our customers a full basket of services that can offer value at every point in their supply chain and these services are backed up by a dedicated workforce, solid geographic footprint and a strong track record.

We believe this strategy coupled with future moves will continue to differentiate Pike from our competition. As we work to diversify revenues and expand in the new areas we’ll always remain keenly focused on delivering stable, profitable growth and in turn building shareholder value in the years ahead.

With that I’d like to thank our employees for the continued dedication our customers for partnering with us and our stockholders for your ongoing support. At this time, we’ll open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Curt Woodworth with J.P. Morgan.

Curt Woodworth - J.P. Morgan

Eric, can you comment on why there is such a big discrepancy between the EDS margin and your margin given the fact that they do have this renewable platform that seems to be promising as well as a engineering and design capability which tend to be relatively high margin too. Is it gross margin issue? Is the SG&A much different than yours and then if you could provide a little bit more details or quantitative numbers around the cost synergies and sales synergies you see with EDS, that will be great.

Eric Pike

Yes, Curt I think the biggest area and the reason that this looked promising to us and we believe it ultimately will be; the two parts that you’ve mentioned that did have typically higher margins do as best we can tell, but they are the smaller pieces of the work.

As we mentioned in the earlier part, approximately 60% of their work was in the T&D construction business; that was the business that we’re struggling and pulling down margins, thus the reason we think that we can provide some synergies there on a cost basis, a back office G&A basis and perhaps a fleet basis that brings those back more inline with Pike’s core profitability levels; that’s certainly our assumption.

In terms of going through the SG&A and pieces that build up their margin, really with the acquisition just fully closing earlier in the week, we have some ideas and some modeling, but until we have sometime to put that in actual Pike’s cost basis, I’m not sure I could give you an accurate number there.

Curt Woodworth - J.P. Morgan

Okay great; and then Anthony in terms of the ’09 sales outlook if you strip out the 10 months you’re including for EDS, what would that equate to on a core basis in terms of core sales growth and if you add visibility down to what you think the billable hours would be down relative to what pricing would be up, would be very helpful?

Anthony Slater

Ultimately as we mentioned in the script we still do see some softness on the core distribution business and so we’re modeling in within the range a small amount of variance plus or minus from the current year core revenues.

Curt Woodworth - J.P. Morgan

Okay and given that you think the underground business will be pretty weak at least until early calendar ’09; would that imply that you are looking for growth to be negative in the first couple of quarters and then go positive in the back half, that kind of net you out to little plus or minus, is that fair?

Anthony Slater

I do believe we’ll have some weakness in Q1 and Q2. It’s going to be netted to a certain extent with the additional headcount that we’re adding on from the EDS acquisition.

Curt Woodworth - J.P. Morgan

Okay and when you look at the distribution business or maybe you want to segment more the underground or the market, what percent of that is new network build that would be associated with either new commercial or residential builds?

Anthony Slater

The closest information that we have right now given the current information we get from the field, current information we get from our customers and what we can track in our current systems is really just tracking the work between underground versus overhead and of course it’s very difficult for us to ascertain whether all underground is directly related to retail or residential or other commercial applications.

We have started a process given the new domestic production, tax deduction, section 199 deductions to begin tracking more detail on that this year. What we can tell you is that if you look at the core business for distribution, which is about 80% of our total revenues, about 30% of the 80% is related to underground distribution.

Curt Woodworth - J.P. Morgan

And most of all the underground work would be considered I guess like new build, new installation?

Anthony Slater

There is some maintenance work in underground and those are the pieces that we currently don’t have a lot of information to break that out.

Operator

Your next question comes from Tahira Afzal with KeyBanc

Tahira Afzal – KeyBanc Capital Markets

Just a couple of questions about those diesel costs that you’re building in; if I try to calculate back and you said that approximately 7% in the fourth quarter this year versus fourth quarter ’07, it seems the impact was let’s say around diesel costs on an apples-to-apples basis increased around $3 million and so which translates into let say around $0.03 to $0.04; is that kind of the quarterly run rate that you kind of hampered or sort of built in as a handicap into your ’09 EPS guidance?

Anthony Slater

As we looked at fiscal ’08 on average for the whole year, we were looking at an average price per gallon of about $3.50 and of course we’ve seen high force with diesel early in this first quarter. We’re certainly looking at estimating diesel prices in the 420 to 430 per gallon range.

Tahira Afzal - KeyBanc Capital Markets

So if diesel prices, lets say start to reverse direction around the middle of the year, I’m just trying to assess your sensitivity to prices going both not only up, which is what you’re factored in?

Anthony Slater

Yes, about a $0.50 change and pricing per gallon equates into about a $5 million cost variance.

Tahira Afzal - KeyBanc Capital Markets

So that’s a pretty big impact that you’re factoring into ’09?

Anthony Slater

Yes.

Tahira Afzal - KeyBanc Capital Markets

So that would in essence end up adding close to a dime to your earnings, would that be correct if I’m doing the math right, which might not be so.

Anthony Slater

Yes, that’s about right.

Tahira Afzal - KeyBanc Capital Markets

So your guidance of $0.55 to $0.65 if diesel prices end up going down by the same amount they’ve gone up over the last year or so, it could end up pushing your guidance up? Okay that’s fair enough.

The second question I had was in regards to EDS, you’ve talked about which is pretty interesting about the fact that EDS has the engineering portion and the renewable portion and that you could see some large scales type of bidding activities and prospects over there. Looking back in terms of what EDS has done over let’s say last couple of years, could you kind of give an idea of what scale of award?

Eric Pike

Right now Tahira, the awards have been on a smaller dollar scale because they’ve been more engineering based. They have won some awards to do collector systems as well as substations for various wind projects, but I think as we look forward going out we believe that we can enhance the construction side of those bids to take on the much larger piece or the larges volume of the overall bids.

Tahira Afzal - KeyBanc Capital Markets

And then if you look at, let’s compare the engineering to the construction sides, I mean from what I understand then the engineering portion ends up being a much smaller portion, so the construction portion that you can tag on, would it be fair to say it could be fairly large?

Eric Pike

Yes, I mean right now we would be looking at projects we would certainly deem to be fairly large, especially if you are able to combine the two pieces.

Tahira Afzal - KeyBanc Capital Markets

Right and given where you are right now, would you be just to highlight some of the type of projects out there like a cress opportunity or something would you be bidding on projects such as those or am I thinking about our projects that might be too big?

Eric Pike

I think at this point, we would certainly be looking at projects that we’re between the probably $20 million and $40 million projects. We’d have to evaluate them pretty heavily at this earlier stage with EDS to go beyond that, but we certainly see quite a few of those type of projects out there that would utilize a whole host of skills that we now have put together from the distribution tie line that tie turbines together to the collector system substation construction to the sub-transmission that ties them back to the grid, also working out the interconnect with the power companies to get on to the grid and balance that load and the entire engineering that goes with that entire project; that’s where we see the opportunities.

Tahira Afzal - KeyBanc Capital Markets

Okay and can I get one last question along those lines. When you bundle up the engineering portion with the construction element, what type of margins do you think you could potentially end up seeing? Would they be closer to the margins you have right now in your mix or even potentially more than that?

Eric Pike

I think it’s still probably too early for us to state anything definite, but we would certainly look at those projects -- our estimation to deliver at least where we are today.

Operator

Your next question comes from Andrea Wirth with Robert Baird.

Andrea Wirth - Robert Baird

I was wondering if you could just talk a little bit more about your expectation of maybe starting to see some improvement when we get into the second half of fiscal ’09 or the beginning of calendar ’09. Yes, I believe this last quarter you were talking a little bit more like you had set thought, things would start to pick up in the first quarter and I’m just curious is this just more of the environment actually getting worse or the underground piece getting worse or, because its really everything aside from underground starting to show improvement. Just wanted to get a little bit more color as to really what’s driving this assumption as when we start to see an improvement?

Eric Pike

Yes, I think Andrea the premise that we’ve seen, we expected to see a little bit of what we would consider seasonal up tick through the summer months, late Q4 and into Q1 and while we certainly can attribute all of it, I think that no real recovery in a housing market as well as the impact that fuel has had just on the general economy has kept things more flat than we had expected the last time we talked.

As we look out to the early part of calendar ’09, that typically will have had us in a down cycle for most of our customers fiscal year; usually that’s about as long historically as we’ve seen them defer anywhere from 12 to 18 months is about as long as we’ve seen them defer that work.

General housing data that we have obviously new starts are still down, but there is some indication in the data that we’re looking at, which is just national and regional data that there could be some up tick there beginning next spring. Those are really the factors that we are basing that on.

As we’re looking out, we’re seeing now we obviously have the addition of the EDS workforce to our core workforce, but outside of that we’re really seeing a pretty flat space going forward at least through the end of this calendar year.

Andrea Wirth - Robert Baird

Sure and then maybe talk a little bit about the competitive environment; have there been any market share shifts out here, have you been gaining any share in this environment?

Eric Pike

No, it’s been relatively stable. I think things are certainly becoming more competitive in certain markets. We’ve had some ads, we’ve had some losses during the quarter, but overall the competitive nature of the business hasn’t changed tremendously.

Andrea Wirth - Robert Baird

Okay and then just a little bit on EDS; is it fair to assume that EDS is probably actually dilutive during at least the first or second quarter of the year and is there any -- I guess assuming that is there some extra amortization charges or things like that as you take on the business?

Anthony Slater

There certainly will be some additional amortization of intangibles and we’re still going to that process of evaluating that and we’ll certainly have more information on that as we release Q1 results. I think there is certainly a potential for there to be slight dilution earlier in the year, but for a full-year picture we’re expecting to be at a breakeven position.

Andrea Wirth - Robert Baird

Okay and then just a little bit on renewable energy that there has been some talk of some delays in this space as we looks for hopefully a renewal of the tax credits for next year. I’m just curious, if what you’re seeing in that environment right now is that having any impact on the projects that EDS is working on right now or if you’re expecting any issues?

Anthony Slater

Right now the projects that EDS is working on should not be affected at all by that, they’re already in place. The projects that we are looking at with the developers that we are talking to right now, most of them are not -- at least from the discussion we are having they don’t believe that their plans or timelines are going to be altered by the tax renewal piece.

Andrea Wirth - Robert Baird

Okay great and then just one last question Anthony, what’s the tax rate that you have assumes in the EPS guidance for ’09?

Anthony Slater

We would expect between 39% and 40%.

Operator

Your next question is from Alex Rygiel with FBR.

Alex Rygiel - FBR

First, sort of a follow up on that last question, it clearly sounds like if we were to exclude the non-cash amortization charge which you haven’t exactly quantified at this moment of time, but there will be one associated with EDS, that EDS on a cash bases will be accretive in 2009, is that correct?

Anthony Slater

EDS if you look at their fleet information which we’ll release certainly more information on this is as we actually get their final information and have our purchase accounting adjustments available for Q1 on an estimated basis, the majority of their fleet is under operating leases; they do have some owned equipment and we have a schedule in place to replace some of that equipment that is aging up and so we would anticipate EDS to have a -- lets call it a $3 million to $5 million cash usage during fiscal ’09.

Alex Rygiel - FBR

If you look at your core business, it looks like obvious on a year-over- year basis is minus $0.10, therefore your core business you’re anticipating obviously is about a 10% improvement. It seems like most of that’s coming from pricing, is that fair based upon the contract renegotiations?

Anthony Slater

Could you go though that one more time Alex, I’m sorry, so I make sure I understand your question.

Alex Rygiel - FBR

Your guidance in ’09 suggests that you have got a head win of $0.10 but your full year guidance is flat basically year-over-year suggesting you’re core business excluding the rise in fuel is actually growing $0.10. I’m assuming that’s all coming from just price increases.

Anthony Slater

I see what you’re saying. We have assumed price increase, I would say relatively on track with what we’ve seen in prior years.

Alex Rygiel - FBR

Does EDS have a backlog right now?

Anthony Slater

They have a small backlog; their mix of work is different than ours. As you know we are mostly longer term MSA contracts. They do more lump-some work as you may anticipate especially on substation and engineering and even on some of their transmission work and so they will have a small amount of backlog and we are currently evaluating whether that’s material enough to disclose going forward.

Alex Rygiel - FBR

And as it relates to Hurricane Gustav, how many men have you mobilized so far?

Eric Pike

Right now Alex we have right at a 1000 folks mobilized on Gustav; that’s one of the pieces with hurricanes that makes them challenging. We have one or two that may be threatening the East Coast. Customers on the East Cost obviously want to protect themselves, so we’ve engaged as many folks as we can engage in the gulf right now coming from the west and close to the gulf states, but we still have a lot of folks on stand by in the event that Hanna or Ike should make landfall sometime this weekend or next week.

Alex Rygiel - FBR

What about Fay?

Eric Pike

Well Fay, pretty much is just a clean up. At its height we had, I want to say about 800 people, but Fay was not nearly the event that Gustav or any of the other two may or may not be.

Operator

Your next question comes from Curt Woodworth with J.P. Morgan.

Curt Woodworth – J.P. Morgan

Just a quick follow up. In terms of the $3 million of incremental cost to attract and retain the work force, I assume most of that is going to be to retain people. So I’m just curious, are you seeing the work force in general shift; people going after transmission work where the growth is better right now, the distribution work or where are you seeing the dislocation in your work force?

Eric Pike

I think Curt, Obviously part of what we are doing is, we are still feel very strongly about the distribution piece in the long term nature of it. We fell like we are still extremely well positioned and while in a public market where the cycles tend to be viewed in a lot shorter time frame this seem to be a long down cycle.

It’s not particularly dissimilar to other ones that we have seen in the past, we are still really confident about that business but we also recognize the opportunities and need to move into them. EDS represents a couple of those moves. Obviously we picked up a portion of the construction work that was transmission oriented that gave us a bit more tower erection capability as well as slightly higher voltage capability, we obviously want to move in that direction and expand our presents in that market.

From a size and scale, we are not interested path 15 type projects, but we believe we can certainly take on much larger transmission projects as well as we look at opportunities though the renewable side to utilize more our distribution folks.

As you get into these Wind Farmers there is a significant amount of distribution power instillation that goes to feeding those farms from the turbans back to the collectors station, so that’s really the areas that while we are going through the continued slow down in the core those are ways to argument that growth and utilize core competencies.

Curt Woodworth – J.P. Morgan

If you exclude EDS what’s the expectation for head count, either growth or contraction for ‘09?

Eric Pike

Right now I would say that we are just showing a small amount of growth in the back half of the fiscal year, relatively flat.

Operator

Your next question comes from Tahira Afzal with KeyBanc

Tahira Afzal – KeyBanc Capital Market

I just had a couple of quick follow-ups; number one, what is your assumption in terms of debt reduction for ‘09?

Eric Pike

As I mentioned here in the script, we did use available cash to pay the purchase price for EDS and so as we look at cash flow and the uses of cash for 2009, of course we have to take that into consideration and also as you know from our reporting for the last couple of years we have slowed down the CapEx on the fleet and the fleet’s still in great shape, but we are committing this year to go ahead and replace some our older unites and so we will be using cash again for EDS in the capital expenditure that we discussed. On top of that we are in the range of $15 million to $25 million of debt reduction.

Tahira Afzal – KeyBanc Capital Market

And then if you do see lets say a wind fall from a huge hurricane, would you be more aligned to then use that incremental cash towards more CapEx and reinvestment or would that go towards debt reductions?

Eric Pike

It would certainly be evaluated; the use of cash between both of those options, but those would be the top options.

Tahira Afzal – KeyBanc Capital Market

And the second question, if I look at progress energy in Florida, they are laying off 300 people on their delivery side, so I assume on the distribution side because they don’t see trends improving and that sort of very much ties into what you’ve just commented on and having consistently saying; given they are permanently laying off these people though, does that end up accelerating a tick up for you once the market pucks up given that in essence you might see the outsourcing trends sort off accelerate as well.

Anthony Slater

I think that’s certainly a valid assumption to hear and one that we would agree with. We are no seeing any of our customers as I’ve said in the past hiring at a level that does anything more than maintain their craft work force and when you see an exit of that number of people; obviously right now the workload justifies that, but Florida is a typically pretty high growth area and when it comes back we would certainly see that as an opportunity.

Tahira Afzal – KeyBanc Capital Market

And would you be hiring any of those people that are getting laid off?

Anthony Slater

If we have the opportunity to add crews in the near term in the Florida market and they are available that would certainly be a possibility, but we’d have to have the work before we would hire them.

Operator

Our final question comes from Alex Rygiel at FBR.

Alex Rygiel - FBR

Thank you. Eric I know you said something as it related to head count changes taking effect upon the closing of the transaction. Could you expand upon that a little bit more?

Eric Pike

It was really not a lot of head count changes; they were a small amount overlap Alex in the back-office function and a little bit of T&D management that at the time of the transaction, we went ahead and right-sized that part of the organization then. There were opportunities for some of those folks to remain with Shaw and we worked out agreements to do that, so that’s really what that was intended to explain.

Operator

And that concludes the question-and-answer section today.

Anthony Slater

Alright, well thank you very much for your questions. We appreciate your interest in the company and we look forward to providing you with some more information and detail on our acquisitions and market places in our Q1 call. We’ll talk to you then, thanks.

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