Powell Industries Inc (POWL) 2020 Q4 法說會逐字稿

Good morning, and welcome to the Powell Industries Fiscal 2020 Fourth Quarter Results Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2020 fourth quarter and full year 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 December 16. The information on how to access the replay was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, December 9, 2020, 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 2020 fourth quarter and full year results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.

Since our last update, our enhanced safety measures have remained in place, and we have continued to prioritize the health of our employees, customers and suppliers above all else. As an essential business, we remain fully operational. We continue to follow all recommended safe work practices, such as ensuring that our team has access to the personal protective equipment they need on a daily basis, safe distancing of workstations, staggered work schedules, and, where and when possible, work-from-home options for roles that support manufacturing operations. I continue to be impressed by our team's response during this crisis and their commitment to Powell and our customers.

Throughout the fourth quarter, industrial end markets remained clouded and under pressure as a result of the pandemic, which impacted our revenue and new orders for the quarter accordingly. However, across all of Powell, our operations executed well on current projects and were able to contain costs effectively. Fourth quarter revenues were $115 million, down 23% when compared to the prior year, and lower by roughly 3% sequentially.

The decline was driven by the lower revenue from both our oil and gas and petrochemical customers, which were down 50% and 35%, respectively, compared to fiscal 2019. Those declines were partially offset by sustained activity in our utility and traction market, which each grew over 30% compared to last year.

Fourth quarter gross margin, as a percentage of revenue, was 18.9%, which is a decline of just 30 basis points compared to 1 year ago and an increase of 80 basis points compared to last quarter. Sequential increase resulted from restructuring activities that we took in May as well as strong productivity in our domestic operation.

We continue to restrict travel and other discretionary expenses in this environment, partially due to local, state and federal stipulation. Going forward, we will continue to evaluate our cost structure to ensure we are aligned with the current environment, while ensuring we remain properly staffed for the eventual return of project -- customer project activity.

We reported net income of $3 million in the quarter, down from $6.5 million in the prior year, primarily due to a decline in revenues and gross profit resulting from a decrease in new orders and adverse market conditions. We continue to effectively manage our working capital position. Aligned with our focus on our cost structure, we generated $18 million of free cash flow in the quarter. New bookings on a gross basis for the fourth quarter were $75 million. Net orders for the fourth quarter were $57 million as the quarter was offset by $18 million of adjustment to previously booked orders. Within that $18 million, $13 million was related to our previously awarded project in our backlog that was rescoped to an engineering-only project at the request of our customer and their engineering partner.

We ended the quarter with backlog totaling $477 million, which includes the previously announced large industrial order that was booked in the second quarter to support the design, manufacture, integration and testing of a Powell custom integrated electrical distribution solution. Powell designed, built and delivered multiple power control rooms in support of the project. This contract will convert to revenue over a 3-year period.

During the quarter, we continued to experience lower bookings rate, consistent with the third quarter as the impact of pandemic in our core markets. However, we did experience improved quoting activity at the start of the fourth quarter across most of our operations. One of the key value differentiations of Powell's model is our extensive engineering capability. Consistent with prior economic cycles, we are starting to see an increase in engineering-only awards. These awards keep our engineering teams utilized in the near term, while enabling our clients to continue to progress their projects until such time when full funding is approved. Visibility remains a challenge for many of our customers as they grapple with a significant deterioration in the near-term outlook relative to the beginning of 2020.

As we've discussed, we have seen several mid- to large projects shift their schedules into 2021 at the earliest, while a handful of customers continue to evaluate their timetable. As I briefly mentioned, a bright spot in the quarter was the activity within our utility and traction market. Additionally, short-cycle service, parts and OEM work have continued to show steady improvement. These projects are typically smaller, but they are important work that utilize our assets and our cost structure.

Powell has been through numerous downturns in customer activity that we have successfully navigated in the past, most recently during our fiscal 2015 through 2017. Of course, the drivers this time are different, the steps we are taking in response are similar. More than ever, it is critical during times like this that we continue to deliver the premier service our customers have come to expect from Powell during our 73-year history as a leader in electrical distribution solutions.

We are also taking the necessary steps to manage our cost structure and preserve the strength of our balance sheet. We ended the fiscal year with $179 million of cash and short-term investments, and essentially 0 debt. This offers us incredible optionality as we navigate this environment.

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-to-chemical process industries. We also see opportunities in the renewable markets of hydrogen, biofuels and biodiesel. Several projects are in the planning stages that would drive future demand for both the process plants and the supporting pipeline infrastructure. Additionally, we anticipate that oil-to-chemical projects will become more economically viable as oil prices support a return for these projects. Lastly, any future tightening of regulations that require a lower level of sulfur, will drive higher demand for electrical distribution, as refiners are required to upgrade facilities to meet improved emission standards.

Like all cycles, our industrial market and customer activity will improve, and we are ensuring that we make progress against the initiatives that will drive Powell's future growth. One of these initiatives is Powell's ongoing commitment to research and development and technological innovation. Our roots of innovating in the face of new market challenges date back to the company's founding. We have both the expertise to organically develop new solutions in-house as well as the flexibility to evaluate and take advantage of inorganic opportunities. It has been a core component of Powell's past and will be a critical piece of Powell's future.

An example of this is the encouraging progress and emerging opportunities within our growing electrical automation business. We've long been a provider of solutions to help safely manage and control the distribution of electrical energy. The adoption of event-based maintenance strategies for electrical distribution equipment, combined with the continuing cost challenges of managing a growing fleet of electrical assets for our customers, is driving increasing acceptance of digital technologies to solve tomorrow's challenges. We are helping to reduce unplanned outages and maximize uptime for our customers' facility by combining Powell's existing capabilities in the application of automation with our new and developing line of electrical asset sensors.

Our suite of monitoring technology currently includes all of the functions of the breaker, the heart of the electrical distribution system. We have recently developed additional sensors to monitor leading indicators of potential issues, including heat or thermal effects, signals that indicate the breakdown of electrical insulation, and environmental conditions such as humidity and dust, that could affect the safe operation of the electrical distribution system. These solutions will help our customers reduce their costs and help protect their capital investment.

This is a new market opportunity that is still in its development stage, but we are seeing promising traction in this higher-margin business.

Before I turn the call over to Mike, I'll outline our key focus areas as we move into 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 customers have with Powell. Next is the continuous evaluation of our current cost structure, supply chain and resource planning to optimize operations across geographies, markets and customers. It is also critical that we continue to pursue future growth opportunities and markets for Powell. We certainly possess the human capital, balance sheet strength, technological expertise to remain 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. Revenues for the fourth fiscal quarter of 2020 decreased 23% to $115 million compared to last year's fourth quarter of $149 million, and were down $3 million sequentially as we encountered continued softness across our core industrial end markets.

Net orders for the fourth fiscal quarter were $57 million, with $75 million of new orders booked in the period, offset by $18 million of order cancellations and scope adjustments to backlog.

The $18 million consisted of $13 million of a converted or rescoped project and roughly $5 million of cancellations. These net reported results reflect a 65% decrease versus the prior year and resulted in a book-to-bill ratio of 0.5x for the quarter.

Reported backlog at the end of our fourth quarter was $477 million, $58 million higher versus the same period in the prior year. Compared to the fourth quarter of fiscal 2019, domestic revenues of $81 million decreased by $34 million or 29% versus the same period 1 year ago, while international revenues were flat versus the prior year.

From an end market perspective versus the prior fiscal year, revenues from our industrial sector decreased by 45%, while the utility sector was higher by 31% and traction revenue increased by 32%.

The year-over-year volume reduction across the industrial sector was led by a 50% decline in oil and gas volume, while petrochemical revenue was down 35% versus the same period a year ago.

We reported $22 million of gross profit in the fiscal fourth quarter of 2020, which was lower by $7 million or 24% versus the prior year on 23% less volume. Gross profit as a percentage of revenue has decreased by 30 basis points to 18.9% of revenues in the fourth fiscal quarter compared to 1 year ago. This was driven in large part by unfavorable year-over-year project mix in our international locations, partially offset by favorable productivity across most of our domestic locations.

Selling, general and administrative expenses decreased by $3.4 million or 17% versus the prior year, attributable to restructuring benefits and overall cost management. SG&A expenses were $16.3 million in the fiscal fourth quarter, or 14.2% of revenue compared to 13.3% of revenues a year ago on the lower revenue comparison.

On a net reported basis, fiscal fourth quarter net income was $3 million or $0.25 per diluted share. We generated $18 million of free cash flow in the fiscal fourth quarter. This was driven by our strong working capital performance in the period as we see the benefits of project closeouts as well as favorable milestone billings and collections. CapEx spending during the quarter was $852,000.

Now recapping our total year fiscal 2020. Revenues of $519 million increased $1 million compared to the prior year. Orders were $577 million, 15% lower versus fiscal 2019. Gross profit, as a percentage of revenues, increased by 140 basis points to 18.2% of revenues on favorable volume leverage and productivity across most of our North American operations. Selling, general and administrative expenses were lower by $2.3 million versus the prior year. This was partially offset by $1.4 million of restructuring costs in fiscal 2020, in addition to a nonrepeatable insurance settlement benefiting fiscal '19 by $950,000.

Overall, net SG&A expenses, as a percentage of revenues, were flat year-over-year at 13.4%.

We reported net income of $16.7 million or $1.42 per diluted share compared to $9.9 million or $0.85 per diluted share in fiscal 2019. Total fiscal year 2020 free cash flow totaled $67 million versus $65 million in the prior year.

At the end of fiscal 2020, we had cash and short-term investments of $179 million, $54 million higher than our fiscal 2019 year-end position. Long-term debt, including current maturities, was $800,000.

Looking forward to fiscal 2021, we continue to be adversely affected by the uncertainty across our industrial end markets and anticipate that these cyclical conditions may persist throughout fiscal 2021. That said, as we navigate these near-term economic variables, we are well positioned to manage through the industrial end market dynamics as we continue to focus on executing the backlog, while also maintaining our strong liquidity position.

We are also seeing stronger activity in our utility and traction markets, which were higher by 31% and 32%, respectively, in the fourth quarter. While project orders in these markets are smaller in scope, they are important projects that help to keep our asset base utilized and leveraged until our industrial end markets recover.

As we've demonstrated in the past, we are committed to maximizing margins across the portfolio, and we'll continue these efforts into fiscal 2021 and beyond. Additionally, our balance sheet is strong, which provides the business with the element of optionality as we assess opportunities to diversify and grow into the future.

As a reminder, we typically encounter a seasonality impact at the start of our fiscal year. And as such, we do anticipate that the first quarter will be softer sequentially from an earnings perspective due to fewer days worked resulting from holidays and paid time off compared to the prior quarter. At this point, we'll be happy to answer your questions.

(Operator Instructions)

Our first question today comes from John Franzreb with Sidoti & Co.

I actually want to start with the -- I consider at least the rare occurrence of canceled orders. Could you give us a little bit of background on why that happened and what marketplace it was in?

The market, John, on that one is a gas-to-chemical project, and it's a repeat customer, a longtime customer of Powell. It is a little unique in the rescoping of it -- of the $13 million, I assume that's a core question because there were some just straight-out cancellations on -- that Mike mentioned in the detail, but -- yes, gas-to-chemical. And from what I can see, balance sheet, the call they made to shore up their balance sheet and defer spending to a later time. So they called us up, and we converted to the engineering-only. We anticipate at some point that will come back. They just wanted to pull back on the committed cash.

Okay. Actually, I was actually more interested in the canceled projects rather than the rescoped, right, because that's what I consider relatively rare. Is there any commonality in them?

Yes. The $5 million or so balance on the cancels were more in the oil space. It's straight refining brick-and-mortar type jobs.

Okay. Any sense that that business has bottomed? Or are you still concerned about the trajectory of that -- of the market?

The -- if you look at the Q3, Q4, it was kind of the same run rate. I think we might see 1 or 2 more is bottoming, but I don't know if we've seen the end of that yet.

Okay. Recently, a comparable company, competitor company put some assets up for sale. I wonder if you've looked at those assets. Do you think they're attractive? It's not something you're interested in? Because you did mention, which is something kind of rare, I think, from you also is that you are looking at inorganic growth opportunities. So can you just kind of expand upon that?

So I know the question has been asked in previous calls and what we're doing with the cash. And I shared very openly that with the Board and the management team our conversations have been very focused on this subject and how we're going to direct the company and work the strategies we're in for the future. We've been working on that now for the better part of a year. Those conversations continue, as I've mentioned before, to become more focused around a couple of key strategies. We are watching the marketplace with our competitors in many senses. And so we're aware of that and evaluating how that might be best for Powell and shareholders in the future so...

So does that mean you're considering inorganic growth opportunities or not?

We are. We're starting to try to build the framework and guidelines by which we're going to stay disciplined to add to our strategy here to push the company forward into where we see the market heading for what we're -- what's core Powell.

Got it. Got it. One last question. I'll get back into queue. We're nearly done with the first quarter. Besides the seasonality, which you reminded us all about, how is it kind of shaping up relative to the fourth quarter on any kind of comparable basis that you could help us with?

Coming off of Q4, we certainly -- in my prepared remarks, I mentioned the upturn in the quoting activity, right? That was a big difference when everybody was trying to figure out what was going on in Q3 as everything was kind of scattered all over the place. We're still seeing some effect of people just not in their offices. The remote workplace continues to have sort of a slowdown effect, whether it's utility traction or core oil and gas, petrochem. The activity definitely picked up.

The run rate is still sort of running. But from a mix standpoint, the engineering-only awards have picked up. And while those aren't large dollars, those are sort of the reservation, so to speak, of the future. So my sense of optimism for if and when those get funded, which, of course, there's no guarantee they will, we're making some good progress at future business. But from an actual run rate, no great change heading into the first couple of months of the quarter other than the mix is looking -- it's more positive in the sense of just looking forward from a want to fund things. And when it does, I feel good we'll be in the right position to put those in the backlog.

Our next question will come from Jon Braatz with Kansas City Capital.

Mike, a question on the working capital needs, maybe as we head into this -- in 2021, obviously, business is going to be soft, but do you see any need to build working capital?

And the second question would be, were your cash balances boosted at all by tax deferrals, payroll tax deferrals related to the COVID legislation?

Yes. So I'll take the second one first. The answer to that is no. We didn't have any impact due to the COVID legislation that went through.

From a working capital impact, looking forward into fiscal 2021, and first, I digress to 2020, great year for working capital, cash overall for the company, really driven by a couple of things. The working capital has benefited by the unwinding of a lot of these projects that have finished up in the second half of 2020 as well as some of the milestone billings for that large project.

Looking forward into 2021, we will use some of that cash for working capital for this sizable project that we're executing in 2021 and 2022. So I would expect cash to come down a little bit as we work our way through mid-2021.

Okay. Okay. And looking at the new business that you see coming in the door, how does that look on the margin front? Are you seeing any -- in this weak environment, any renewed -- any margin pressure?

Coming -- Jon, it's Brett. Coming into Q1, we are. We didn't see it so much in Q4. I think we were asked the question, but if not, in Q1, we're starting to see some price pressure. And again, it's in those traditional markets where we typically see pressure, which is more utility on the generation side and some of these markets that the distribution solution isn't as difficult. They're a little bit more open to competition, if you will, and we're starting to see some there. Yes.

Okay. One last question. And this is probably a long shot, but I was reading the other day about offshore drilling activity and offshore oil production. And there were some comments in there about how maybe with these higher oil prices and new technology that offshore oil and gas production may begin a little bit more in earnest than we've seen recently. And they're talking about maybe Gulf of Mexico and Brazil and so on. Brett, are you seeing any activity in sort of your legacy business, the oil and gas platform business -- or production business?

We do have one job that we took last year, where the offshore market, traditionally for Powell, really changed several years ago. We did see a little bit from a legacy job, a legacy customer last year do one of these smaller CapEx expansions and sort of field extensions. I do watch the FPSO market, Jon, it's not a market -- we have competed in it. We struggled a little bit to really effectively compete well. That market is actually doing a little better for the offshore side right now and in those markets you mentioned.

So yes, we're watching it. We are watching even those legacy customers and how they're thinking about these extensions and what would they do, either top sides or new technologies, to extend these fields or take an existing platform, rework it and even the whole power structure. The new -- a lot of new thought and power from shore type applications, what will that do to on-deck distribution design. So definitely sticking for us with that.

Our next question will come from John Deysher with Pinnacle.

I was just curious, you mentioned margin pressure going into the current quarter. Are you walking away from any business because of price?

No, not yet. If I go back to -- in my prepared comments, John, I talked about the '15 to '17 parallel. There was a point in that cycle, driven by, again, as you recall, the drop in the oil price, everything that happened that led to that down cycle, where we did reach a limit. We're not there yet. I didn't see really much price pressure in Q4. We just started seeing it kind of at the tail end -- well, beginning of Q1, we started to see a little bit. And again, in some select markets, not across the board.

Okay. Because I would guess some of your competitors don't have the rock-solid balance sheet that you do. And I'm just a little concerned that -- do those guys gain market share when you reach the price at which you won't compete?

No, we're not there yet. And we have a lot of checks about the risk profile of the project in terms and the whole scope of the job, what we're building, how we're going to get the site, what are the on-site services, which is an area we're looking to expand upon, and how can we manage the risk with the engineering partner or the end customer to have a more open discussion before the job is awarded, about where Powell can help meet their needs on the job, which we know there's price pressure on first purchase price. But how can we mix around the scope to put Powell in the best light to do what we do best.

So those conversations are substantive and are happening now, and we're cognizant of the risk profile, but engaging the customer on that conversation, so we can help them meet their need on the budget side, but yet do what's best for Powell and not lose the job, while lower margin, make sure the risk advantage as well.

All right. Okay. Good. That's good to hear. And on the strategic plan that you indicated, you've been working on for the better part of a year. Is there a timeline there in terms of wrapping that up and figuring out exactly which direction you want to move?

Not yet. We're working on with the Board and the management team, and we'll get to the point of updating our Investor Relations deck. Can't quite yet, today, give a time frame when that would be published and to give the direction of where we aspire to go. But I think we're coalescing around a couple of strategic options. And so we're near there. And hopefully, very soon, we'll be able to sort of lay that out and share with all the shareholders, where we see the best future of Powell with putting the money to work.

Okay. Good. And finally for me, has the mix of the backlog shifted at all over the last year or so? I mean as -- is it more non-petrochemical, non-oil and gas as a percentage? Or is it the same? Or how has the mix of the backlog shifted?

Yes. John, this is Mike. The way I kind of look at the mix over the last year, and as we go forward, what we are seeing is lower -- clearly lower industrial backlog as we bleed the oil and gas, petrochem backlog off. We are seeing more traction in utility work, however, as we mentioned in the prepared comments. So we are seeing a little mix shift, both from a product standpoint, product application standpoint as well as geographically.

We've got a very strong backlog in our Canadian facility as well as our U.K. facility, but they carry different margins as well. So it does have a little bit of a mix impact.

And industrial oil and gas, that's still the lion's share of the backlog at this point?

At this point, yes. Correct.

Okay. Good. And you mentioned traction. I'm not familiar with that. What is traction?

John, it's Brett. That's mostly in North America, light rail and markets, so you think about Washington Metro, Bay Area, rapid transit, Chicago Transit, Toronto Transit. So it's the subway systems. We do the rectifiers and the DC switchgear for powering the rail.

The next question will come from John Franzreb with Sidoti & Co.

Just a little bit on the cost structure. Have you brought back everybody that's been furloughed? Are you at the -- will you anticipate the go-forward workforce load? And also, I guess, all the restructuring actions that you announced over the summer, are they completed? Are there any more contemplated or are you satisfied with the current configuration of the firm?

John, it's Brett. I'll start, and Mike wants to add some color here. So nothing more since the May adjustment, nothing significant. Did we bring people back? Some of this engineering-only work, yes, we're going out to -- it is challenging us a little bit. So it is sort of a little bit of a turn there into Q1. We're looking at those resources and trying to decide, can we get some people back to handle this load, how long does it go? So we are in that thought process right now. That's really the only own function. The rest of it sort of status quo.

Looking forward, it's quarter-by-quarter right now until we get better clarity. You sense, in the market, there's this one desire with these engineering-only awards, for instance. If they get funded, it could be very interesting. If they don't, there's this -- when do you -- you need to do something else, if it drags on a different way. So it is a little quarter-to-quarter until we get clarity, and we're trying to be very thoughtful about the cost structure to not handicap us long term because, as you know, in the model, it takes a long time to spin up travel knowledge if we let it out the door.

So we really want to keep our people.

Mike, anything to add?

I mean I think what we did in May and June really benefited the second half of the year. And to Brett's point, it's quarter-to-quarter pulsing the orders cadence, the commercial activity out there, understanding -- just looking around the corner, and we're doing that every 3 weeks. So staying very close to it.

Okay. And Brett, the incoming order book is maybe the lowest I've seen in decades. How does that bounce around in the next coming quarters? Should we expect maybe a sharp recovery? Or is it just -- or there's just not enough visibility for you to tell?

Well, the visibility is very clouded. As I mentioned earlier, John, in your earlier question, the pace in the Q1, as we started, isn't significantly different. The mix is a little different in that we're seeing some awards that aren't the whole job. It's the, "Hey, Powell, help us get through these early phases." Let's see what's going on in the market, what's going on in the pandemic and the effect in the economy, the macro certainly has play here across the world. So it's a little bit more positive in the sense of, let's get some work going because we think we want to get this job until they get the full funding on the return through their -- to the end users.

So -- but the absolute number isn't significantly different. So I don't -- John, I don't know. But if I look forward, there's potential to certainly have a couple of quarters that start to jump up nicely. But right now, quarter-over-quarter, the run rate is still very, very carefully -- to use a word cautious coming in. And I don't think there'll be any big change in that in the near term, aka next quarter or 2, but the potential is there that we could pop up a quarter.

There being no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Brett Cope, CEO, for any closing remarks.

Thank you, Grant. The pandemic is certainly challenging our customers in how we operate each day. However, Powell is uniquely positioned to weather this storm. We have an incredibly talented team, a healthy backlog, a strong balance sheet and great relationships with our customers and suppliers. We are firing on all cylinders across our operation, and we are not standing and live by while we wait for our industrial markets to recover. We are focused on advancing our efforts in new and encouraging growth avenues that will better diversify our backlog and project mix going forward. With that, thank you for your participation on today's call. We appreciate your continued interest in Powell. We look forward to speaking with you all next quarter.

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