Powell Industries Inc (POWL) 2021 Q1 法說會逐字稿

Welcome to the Powell Industries Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I'd now like to turn the conference over to Ryan Coleman, Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries Conference Call today to review fiscal year 2021 first quarter results.

With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 10. The information on how to access the replay was provided in yesterday's earnings release.

Please note that the information reported on this call speaks only as of today, February 3, 2021, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward-looking statements.

These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission.

With that, I'll now turn the call over to Brett.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's Fiscal 2021 First Quarter Results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.

In many respects, not much has changed over the past 60 days or so since we shared our 2020 full year results. However, Powell's order activity showed a modest improvement with the sequential increase and net new orders, which totaled $91 million for the quarter. The onset of the COVID-19 pandemic, which began a little less than a year ago, had an immediate impact on the short-term business outlook for portions of our customer base, and this continues to affect confidence levels in our customers' capital investment plan.

Our core industrial markets in the oil and gas, petrochemical sectors remain under pressure, many projects have had their schedules pushed to the right. However, we continue to see sustained demand in other sectors we serve compared to last year. While the mix shift remains a headwind, the higher utility and traction activity coupled with a steady flow of engineering-only work we are seeing enables us to leverage our overhead while working our existing backlog until the broader markets recover.

First quarter revenues totaled $107 million, down 20% when compared to the prior year and lower by roughly 7% sequentially. The decline was driven by lower revenue from both our oil and gas, petrochemical customers, which were down 33% and 70%, respectively, compared to the first quarter of fiscal 2020. Those declines were partially offset by the sustained demand we are seeing in our utility and traction markets, which grew by 22% and 60% compared to the first quarter of last year. As a reminder, our first quarter results typically experience seasonality from a revenue and new bookings perspective.

First quarter gross margin, as a percentage of revenue, was 17.1%, which is an increase of 80 basis points compared to 1 year ago. The year-over-year increase resulted from restructuring activities that we took in May of fiscal 2020 as well as continued strong productivity in our domestic operations. We continue to prudently manage travel and other discretionary expenses in this environment. We are also closely monitoring dynamic regulatory changes in geographies that we serve, regularly evaluating our cost structure to ensure we are aligned with the current environment.

With that said, we are in a long-cycle business, and it is essential that we retain the know-how to remain properly staffed for the eventual recovery of our major end markets.

At the bottom line, we were slightly below breakeven as we reported a net loss of $364,000 in the quarter compared to net income of $2.8 million in the prior year, primarily due to lower operating earnings, resulting from a decline in revenues and gross profit amidst lower new orders and adverse market conditions.

We ended the first quarter with backlog totaling $465 million, slightly lower than the $477 million at the end of the fourth quarter but solidly above $426 million in backlog at the end of the first quarter in the prior year. The year-over-year increase includes the previously announced large industrial order that was booked in the second quarter of fiscal 2020 to support the design, manufacture, integration and testing of a Powell-custom integrated electrical distribution solution. As previously reported, this project will convert to revenue over the total of a 3-year horizon. We also ended the first quarter with $150 million of cash and short-term investments and essentially 0 debt, which speaks to our strong liquidity position as well as the optionality afforded to the company.

Visibility remains challenged for many of our customers as they grapple with the currently weakened state of both the cyclical and secular growth drivers for their businesses, and we continue to work in close concert with them to respond accordingly. Powell's platform is a full electrical solutions provider with extensive technological expertise and an exemplary track record of execution makes us a trusted partner during these periods of the cycle. And I believe we are benefiting from that earned reputation.

Looking forward, we believe the economics of low-cost abundant natural gas will continue to provide favorable opportunities in the LNG, gas pipeline and gas chemical process industries. We are also seeing developing opportunities in the renewable markets of hydrogen, biofuels, biodiesel as well as carbon capture and sequestration. We are also closely monitoring the possibility of tightened environmental regulations that may require a lower level of software attributable to the emissions of transportation fuels. Our strategic focus on improving operational excellence over the last few years positions Powell to quickly help our refining customers respond quickly and safely to upgrade facilities in order to meet improved emissions requirements.

Before I turn the call over to Mike, I'd like to reiterate our key focus areas for fiscal 2021. First and foremost is the health and safety of our employees, customers and suppliers. We are also focused on maintaining our solid execution performance to ensure that we continue to meet the high expectation stakeholders have at Powell. Next is the continuous evaluation of our current cost structure, supply chain and resource planning to optimize operations across the geographies and markets that we serve. And last, it is also critical that we continue to lay the foundation for future growth opportunities while also broadening the markets for Powell. Our human capital, balance sheet strength and technological expertise allow us to be proactive in the current environment.

With that, I'll turn the call over to Mike to provide more detail around our financial results before we take your questions.

Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2021, we reported net revenue of $107 million, a 20% reduction versus the same period in the prior year. Bookings for the first fiscal quarter were $91 million, $46 million lower versus the prior year. As a result, our book-to-bill ratio was 0.9, with $465 million of backlog at the end of the first fiscal quarter, which was $39 million higher as compared to the same period a year ago.

Compared to 1 year ago, domestic revenue decreased by $26 million or 25% to $80 million. And international revenue fell 4% year-over-year to $27 million. These declines reflect the continued softness across our core industrial end markets.

From a market sector perspective, revenues across our oil and gas and petrochemical sectors were lower by 46% versus the prior year, while the utility sector was higher by 22%, and traction volume experienced a 60% increase versus the first fiscal quarter of 2020.

Compared to the first quarter of fiscal 2020, gross profit decreased by $4 million to $18 million on the lower revenue. However, as a percentage of revenue, gross profit increased by 80 basis points to 17.1% versus the same period 1 year ago on favorable project closeout and settlement as well as overall continued focus on productivity and cost management.

Selling, general and administrative expenses were $17 million in the current quarter, flat versus the same period a year ago. SG&A as a percent of revenue increased to 16% in the current quarter on the lower revenue.

In the first quarter of fiscal 2021, we reported a net loss of $364,000 or a loss of $0.03 per diluted share compared to net income of $2.8 million or $0.24 per diluted share in the first quarter of fiscal 2020.

During the first quarter of fiscal 2021, net cash used in operating activities was $25 million, driven by annual variable incentive compensation as well as a buildup of working capital for the projects that are currently in the manufacturing stages of production. Investments in property, plant and equipment totaled $1 million.

At December 31, 2020, we had cash and short-term investments of $150 million compared to $179 million at September 30, 2020. Long-term debt, including current maturities, was $400,000.

As we look forward to the remainder of fiscal 2021, we anticipate continued commercial headwinds driven by the ongoing uncertainty across our industrial end market and the overall pace of recovery. Considering the long cycle nature of our business as well as the associated softness across our industrial end markets, we do foresee a more challenging fiscal 2021 versus the prior year.

We are, however, anticipating that based upon our solid backlog and increasing orders cadence that we are well positioned to improve our financial performance as we progress through the balance of fiscal 2021.

With that in mind, our fundamentals are solid, we're maintaining our cash and cost vigilance, while ensuring that we execute on our backlog. Our strategy of maintaining minimal debt and ample liquidity is essential during this down cycle. And it also provides an element of optionality as we continue to focus on opportunities to grow the business and diversify our revenue and mix going forward.

At this point, we'll be happy to answer your questions.

(Operator Instructions) The first question today comes from Jon Braatz of Kansas City Capital.

Oil and gas prices have been moving up a little bit. Do you think where they're in a position, they're at a level, I should say, that we might begin to see some pickup in your core business? And what are you hearing from your customers as these oil and gas prices moved up?

Jon, I guess I'd say that's the answer, not yet. I think it's a positive sign for sure for the longer term, but I haven't seen it move the needle yet on larger activity.

Okay, okay. And then can you talk a little bit more, you mentioned a little bit of a pivot towards some of the alternative energies like hydrogen, carbon sequestration and so on biofuels. What kind of activity levels are you seeing in there? And might we see that become a more meaningful piece of the business as we go forward?

I do absolutely believe. It's pretty broad. We have some projects that are actually in the bidding and working through the commercial stage right now as well as a very broad geographically speaking set of opportunities, not just in the States. We're seeing some things in the U.K. as well as some things in the Middle East that are pretty exciting in the hydrogen arena. So lots of activity coming in on -- some of it is early stages, some of the larger projects, but it is very broad across different segments. And I think there's a huge opportunity for Powell, it fits us well.

Can they -- how sizable can those projects be should you be awarded a contract? I mean, are they $30 million, $40 million, $50 million in size or much smaller than that?

Yes, it depends. So like on carbon capture sequestration, we've participated in a few in the past, kind of more smaller facility localized projects that have driven some projects. Those are kind of more $5 million to $10 million in the past. Some of the conceptual projects we're seeing now. There's a couple out there that are pretty decent that can't get up to the $50 million, $60 million, if it truly will fund but right now. So there's some big ones out there, but they're still -- the bigger they are, the further out they are.

Sure. Okay, okay. Mike, we talked a little bit in the last conference call about your cash flow expectations for the year-end. In cash flow, cash balances were down as you had noted, it probably would be after the -- in the first quarter. How do you see cash flow expectations from this point forward in 2021?

Yes. I think the large project that Brett alluded to, we'll continue to build working capital probably through 3 quarters of the way through the year. And then at that point, we'll probably plateau out. And fourth quarter is probably going to be neutral. But overall, as I communicated last quarter, I think when you look at year-over-year 2020 versus 2021, we will be in a cash usage position, just really due to that working capital build up for that large project.

(Operator Instructions) The next question comes from John Franzreb of Sidoti & Company.

I would like to talk a bit about the gross margin on a sequential basis, December versus September, because it was down rather meaningfully. I'm wondering if you could talk to us about how much of that is commodity costs and how much of that is pricing of jobs? And how much of that maybe is under absorption?

Yes. Really, we aren't seeing a lot of price impact at this point, John, because our backlog that we came into 2021 with, as we've communicated previously, is really we didn't have much adverse price impact. When you look at the gross profit margins sequentially, it's a little bit unfair because you've got that seasonality impact in first quarter versus our fiscal fourth quarter, very, very strong typically. So we do see a considerable amount of under liquidation, under recovery across the landscape for Powell in the first quarter, and that's really what's driving most of it. Price is not a significant factor at this point.

And commodity costs?

Yes. Why don't you add commodity. I want to add 1 comment on price there, John. In terms of quality, the backlog and commodity with Mike. Going forward, I think we talked about this in December. A couple of questions that came up in December on this. I think coming back from the New Year, the -- looking forward, I do believe price continues throughout this year to be more of a challenge on various jobs. Not -- it's still not consistent across the board of all markets. But coming back from the holiday, seasonality piece here, I do see some sort of -- I do see renewed competition sort of starting to ramp up a little bit.

Okay. And Mike, do you want to add about the commodities before I follow-up on that.

As far as the commodities, again, when you're talking sequential comparisons and what we booked in the prior year, again, we are -- our commodity pricing is not yet leaking through. I do think with particularly copper in the 350 range at this point. We do have -- we will see some inflation in the commodities as we go forward, we book these jobs that we're booking today that will ultimately execute later this year and into next year.

Okay. So Brett, is it fair to assume based on seasonality, the March quarter and the pricing of the jobs that you have, the March quarter gross margin will be better than the December quarter gross margin?

Due to recovery, we'll get more liquidation and more efficiencies through the facilities, yes, guess so. But it is something to watch going forward on the mix. You might hear -- I wouldn't be surprised as we go forward. Again, a lot of near term uncertainty. So under that umbrella in the market, which looks like it's going to continue for a little while longer this year. There is just more -- it feels like, John, and what I'm seeing in the first couple of weeks of the New Year, there seems to be some more ramp-up in competition, more people are reporting. You can kind of see it from other folks that are public, especially that have a market tied to oil and gas, petrochem, which is a big segment for us.

Certainly. Okay. Which brings me to my next question. Can you give us some updated thoughts about expanding the business into new product lines in adjacent markets, either through internal R&D development or the M&A into something adjacent that's kind of outside your core competency?

So organically, you recall, a little over a year ago, we -- in some of the calls, we talked about ramping up some efforts. We had some trouble last year, getting some technical things where we needed them. We're still on that plan. We've retooled and are executing -- still executing that plan and putting some things in place to look at really the longer term trends, things that will happen. What will sustain on the grid, how will things change, how will things on the distribution side really evolve to handle all the new supply and demand that's happening on the grid and how can pulp best positions. So we're doing some organic development there in R&D. And adding -- we've added some people to help us there as well as retooled some of our just core investment programs around product development. So that's one.

In terms of inorganic, as we've talked about, there are kind of 3 areas that we're looking at, I'd say, definitely in the product area, anything in electrical distribution still within the space of low voltage and medium voltage. We do play a little bit higher than the 38,000 -- 38 kV level on an integration basis. But in terms of adding to the portfolio, we are having a lot of chats around the lV and the mV level. And then also talked in the past, we've rolled out some R&D on the sensor side.

So we are running right to the big data and AI and Internet of Things. But I mean, we are, but not in the sense of running to big, massive server-based solutions that crunch data, where we're focused is on the end of getting the data out of the system and moving up to scale from that standpoint. So we've got a lot of sensors that we rolled out last couple of years. They continue to roll into the market across multiple sectors, very broad acceptance, not just oil and gas, we're seeing it in commercial as well as utility. So a very broad acceptance into the market on the sensor side.

And the feedback is driving our thought process around that next evolution of what do you do with the data? How do you best crunch it, what's that role that Powell could play to monetize the next level of business opportunity, whether we can do that inside the company or outside the company, that's an area. And then strategic thoughts around service. Again, not at all things for all people type of model, but select markets, select geographies where it makes sense.

And just on the R&D side, what do you anticipate your full R&D expectancy for 2021?

I think we're loaded at about 1.3% to 1.4% of revenues for '21.

This concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks.

Thank you, Elissa. While our markets remain challenged by near term uncertainties driven in large part by the global pandemic, Powell is uniquely positioned to weather this storm. We have an incredibly talented team, a healthy backlog and a strong balance sheet. Our strategic focus on operational excellence over the last 3 years has further strengthened Powell as a trusted partner with our customers. And we remain focused on advancing our efforts in new and encouraging growth opportunities to support the continued success of the company well into the future.

With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking to you all next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.