Powell Industries Inc (POWL) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Powell Industries fourth quarter earnings call. All participants are in listen-only mode. Following today’s presentation instructions will be given for the question and answer session. If you need assistance press the star and then zero. This conference is being recorded today Thursday, December 5, 2002. I would like to turn the conference over Mr. Ken Dinnard, Managing Partner of DRG&E

Thank you and good morning, everyone. We appreciate you joining us for the conference call today to review fiscal fourth quarter and year end 2002 results. We would also like to welcome our Internet participants listening to the call that’s being simulcast live over the web. Before I turn the call over to management I have the normal housekeeping details to go through. You could have received a fax and/or e-mail of the earnings release this morning. Occasionally there are technical difficulties experienced during these broadcasts, so if you didn't get your release, call our offices at DRG & E, 713-529-6600 and we'll get that right out to you. Additionally if you want to be on an e-mail or fax list, relay that information to us at our office. There will be a replay of today's call available via webcast by going to www.easterlyir.com or a replay telephonically will be available by dialing 303-590-3,000 using the pass code of 508255. That feature will be available for the next seven days.

This conference call includes certain statements including statements related to the company's expectations of its future operating results that may be deemed 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 in that actual results may differ materially from those projected in forward-looking statements. These risks and uncertainties include without limitations difficulties which could arise in obtaining materials and components in sufficient quantities as needed for the companies manufacturing and assembly operations. Unforeseen political or economic problems with countries to which the company exports its products in relation to the company’s principal competitors. Any significant decrease in the company's backlog of orders and material employee relations problems or any material litigations or claims made against the company as well as general market conditions, competition and pricing. For further information, please refer to the risk factors in sections describing more risk in the company's filings with the security and exchange commission. With me is Tom Powell the company’s President and Chief Executive Officer and Don Madison, the company's Chief Financial Officer. I'll hand it over to Tom.

Thank you and good morning to all of you. We thank you for joining us this morning for Powell Industries first conference call. As this is our first conference call, I find myself a little apprehensive but I'm mighty proud to present the results of the year’s efforts by the hard working men and women of our company. We would have preferred a more cooperative economic backdrop for our initial earnings calls but as an industrial company supplying various cyclical markets we have in the past and we'll continue to optimize our opportunities regardless of economic cycles and market conditions. I'm happy to say that in spite of difficult and turbulent market conditions, we had a solid fourth quarter. And a very solid performance for the year.

Let me briefly hit the high points for the year. We had 13% growth in revenues. We had 32% growth in net earnings. We generated 18m in free cash flow. We reduced our debt by $11m. We improved operational efficiencies by 6%. Our inventory to sales ratio improved by 19%.

And also during the year we added to our manufacturing capabilities and manufacturing profile. We built a new plant for our Delta-Unibus operation in Northlake, IL, that’s in the Chicago area. We expanded the plant at our North Camden, Ohio switchgear facility. We lengthened our bulkhead and expanded our fabrication yard at our Jacinta port, Texas offshore operation and we're nearing completion of an indoor high bay fabrication facility at Jacinta port. We improved critical manufacturing processes throughout the company and we've enhanced our international presence with our joint venture in Singapore and taken a very active role in the merging of the IEC and US ANSI electrical standards and we now enter 2003 with a healthy backlog currently at $190m.

At this point I will turn it over to Don Madison, our Chief Financial Officer for a detailed review of our financial results and our outlook for the year. Don.

Thank you, Tom. As Tom stated, 2002 was a solid year of performance. I'll begin with a review of the quarterly results and then move on to the year end numbers. Revenues for fiscal fourth quarter were $75.3m compared to prior year results of $76.6m. Gross margin for the quarter was 24.4% of revenues compared to 20.4% of revenues a year ago. Up 400 basis points.

The quarter benefited from a favorable inventory adjustment of approximately $600,000 recognized at our new Northlake, Illinois, facility. The addition of new equipment and processes has improved our operating efficiencies and material utilization earlier than previously anticipated. Earnings from operations before interest and income tax or EBIT for the quarter were $8.4m versus $7.3m a year ago. Interest expense in the quarter was $38,000 compared to $127,000 in the same quarter last year. The decrease of $89,000 was associated with lower levels of debt as compared to the fourth quarter of last year.

Net earnings for the quarter were $5.1 million versus $4.3m a year ago. A 19% increase. Earnings for deluded share were 48 cents, up 20% from last year's 40 cents per diluted share. Net earnings were positively impacted by $400,000 or 4 cents per share from the year end inventory adjustment. We generated free cash flow defined as total cash generated from operations less all capital expenditures of $1.8m or 17 cents per diluted share for the quarter. Capital expenditures totaled $2.3m.

As of October 31, 2002, our backlog totaled $189.4m compared to $215.3m at July 31. New orders in the quarter were $49.3m versus $84.6m in the quarter a year ago and $67.9m in the third quarter. Electrical product segment which consists of switchgear and bus duct recorded revenues of $69.6m in the fourth quarter compared to $70m for the same period last year. Revenues in this segment of our business are beginning to soften due to the downturn in the power generation market.

Earnings from operations before income taxes for electrical products were $7.7m versus $7.1 in last year’s fourth quarter. Process control revenues for the fourth quarter were $5.8m compared to $6.6m in last year's fourth quarter. Earnings from operations before income tax for process control totaled $670,000 versus $151,000 a year ago. Earnings for the quarter were favorably impacted as a result of positive progress toward the completion of several key projects during the period.

Now for the full year. Revenues rose 13% to a record $306.4m versus $271.2m last year. Gross margin for the year came in at 22.1% compared to 20.9% last year. Earnings from operations before interest and income taxes or EBIT for the full year were $28.7m versus $21.8m last year. Annual net interest expense was down to $210,000 versus $359,000 last year due to reduced levels of debt, as I mentioned earlier. Net earnings for the full year were a record $17.9m versus $13.5m, up 33%. Full year earnings per diluted share were $1.67 versus $1.28 last year. Full year electrical product segment revenues were $284m compared to $245m in fiscal 2001, a 16% increase. Fiscal 2002 earnings from operations before income taxes for electrical products were $27.4m versus $20.7m in fiscal 2001. Higher production volume, improved operating efficiencies along with the quality of our backlog have all contributed to the improvement in earnings results. Process control revenues for fiscal 2002 were $22.8m compared to $26.4m last year. Earnings from operations before income taxes for process control improved 30% to $1m, up from $705,000 a year ago.

Now turning to cash flow and key balance sheet items. For the full year we generated strong free cash flow of $17.9m or $1.67 per diluted share. We generated $31.8m in cash from operating activities and invested $13.9m in capital improvements during fiscal 2002. We ended the year with $14.4m in cash compared to $6.5m at the end of fiscal 2001. During the year, we reduced total debt by $10.8m. Year end our long term debt was $7.2m versus $21.3m at the end of fiscal 2001. Our long-term debt to stockholders equity ratio is less than 6%.

As Tom mentioned earlier, we significantly improved our inventory management during the year. Inventories at the end of the year were $19.6m compared to $21.4m the same period last year a reduction of 8% on annual revenue growth of 13%. Our investment and accounts receivable were reduced by $7.1m to $69.5m. [inaudible] sales outstanding improved to 83 days from 90 days a year ago. This is an area we'll continue focusing on improving.

Looking ahead to fiscal 2003, we expect the first quarter of fiscal 2003 earnings to range between 32 cents and 37 cents per diluted share and full year 2003 earnings to range between $1.50 and $1.60 per diluted share. Free cash flow will range between 20 and 25m. With that, I will turn it back to Tom to further discuss our operations and strategies. Tom.

Thank you, Don, good job. Since this is our first conference call and some of you listening may be new to the company, our business strategy is simple. It's to grow and improve the company's performance day after day by providing quality electrical power products and customized solutions to heavy industry. For the third year in a row the electrical industry experienced a decline in revenues while Powell again successfully grew its business with revenues increasing 13%. That's on top of a 22% growth rate for the previous year. And let me emphasize, folks, this is organic growth. We're certainly not opposed to acquisitions but neither are we a roll-up company.

Can our growth continue? We certainly believe we'll outperform the market again this year but additional growth will be a challenge given the current weakened demand. And in this period of uncertainty we would be better served if we spoke conservatively to this forum as we have in the past.

Where do we go from here? Electrical industry projections range anywhere from an 18% decline to a 2 or 3% increase. Maybe an average consensus of 8% to 10% down for the industry. So how do we outperform the industry again? And we will. First, we're not convinced the pull back will last that long. Secondly, the utility IPP sector is still alive. Distributed generation is still needed. And finally, we have set a great foundation in the last few years for growth and performance as we go forward. One, we've expanded and modernized facilities. Two, we've improved our operational efficiencies. Three, we've broadened our product scope and four we've improved our international presence.

Let me take a minute to review our expanded manufacturing capabilities. And I'll do that in two phases. Phase one started in 1997 with a major expansion of a Powell electrical manufacturing facility here in Houston where we increased office and manufacturing area by over 200,000 square feet. We added NCD in North Canton, Ohio, to supply traction power substations to the northeast. In early 1997 Unibus moved to a larger, more efficient 65,000 square foot facility. And our Transdyn operation in California added a facility in Atlanta, Georgia, to better support our southeastern customers.

Phase two started in late 2001. A new, larger facility was built for Delta-Unibus due to limitations and physical constraints in the old facility. And we added state of the art process and handling equipment throughout. At Jacinta port,Texas we lengthened the bulkhead and expanded the fabrication yard by 30% and we're nearing completion on the high bay fabrication and assembly building. That is scheduled to be completed January 1, weather permitting. Our North Canton operation has been expanded by an additional 18,000 square feet to provide an assembly area for our power control modules and to meet environmental regulations. Our Transdyn operation added offices in Virginia Beach, Virginia, to better serve our customers in the mid-Atlantic region where we've seen increased levels of business activity during the past several years. These are all important steps at setting a strong foundation for the future.

Now, operationally we've made strides on cost containment and improved productivity by 6%. Our internal efficiencies continue to improve with an emphasis on quality, lean manufacturing techniques, supply chain management, intelligent engineering systems, automated fabrication processes, and continuing education for our personnel.

Additionally we've expanded our product scope. We've extended our medium voltage product line with a full range of 63KA, that’s 63,000 amps, interrupting switchgear. We've expanded our arc resistant switchgear product line. And we have the broadest range of product lines in the industry. All tested to the latest ANSI standards. We've successfully introduced our narrow design 5KB UL approved switchgear product line and it is doing quite well. We've added to our line of replacement medium voltage circuit breakers. I'm proud to say we have the largest portfolio in the industry today with over 100 designs all fully third-party tested. We have leading technology in the transit industry with our line of [bi-richer] control rectifiers and our advanced multi-functional relay systems. I might add that progress is continuing on other technologically innovative products. We recently completed a strategic thinking seminar with our Transdyn group and they continue to expand their horizons by making advances into the transit, the utility and the security sectors.

And finally with regards to our international business, we're very encouraged by a recent resurgence in our export business. To mention a few, we shipped the first part of a transit infrastructure project to China. That was for Shanghai Metro for pre-packaged traction power substations. Other major sales successes internationally include a pulp and paper project in Chile, an on-shore oil production project in Equador, a significant project for Saudi Arabia and several off-shore oil production projects in Indonesia, Vietnam, China, Venezuela and the west coast of Africa.

Now before any questions, let me simply tell you that we have great people. We have excellent facilities. We've improved our internal efficiencies. We've expanded our product scope. We've increased our international presence. And we're in a strong cash position. With that, we'll open it up for questions.

If you'll start the polling.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star followed by the 1 on your push button phone. If you would like to decline from the polling process press star followed by the 2. You'll hear a three-tone prompt acknowledging your selection. Lift the handset before pressing the numbers if you're on speaker phone. Please ask one question and one follow-up question and re-queue for additional questions. Our first question comes from George Gasper. State your name and your question.

Good morning, Robert W. Baird, Milwaukee. Thank you for a great overview. The question is on backlog break out. Can you give us some color? One, on the -- how the backlog is made up at the end of the October fourth quarter? And can you give us an idea of -- in terms of the new orders for the quarter, the 49.3m, can you break that down as to what segment those came through?

Let -- for the backlog question first, George. Let me answer to that first. In our current backlog as of the end of the year it broke down approximately 40% with orders for utilities, about 25% was for industrial customers, and about 35% was for municipal or transit agencies. Keep in mind that the backlog times do vary on different products. You see a larger percentage of the backlog for the process control in the area specifically. Regarding the fourth quarter -- excuse me the fourth quarter orders specifically I don't have that information in front of me. But I think it would be -- I just don't have it at this point in time, George.

Okay. All right. And a follow-up question on the operations overview in terms of the $1.50 and $1.60 range you're talking about. Can you give us a view on the -- how you intend to hold that number? Is there something special that you're looking at? Is there anything within the scope of your business that you're looking at that's better this year than the previous year that allows you to be as comfortable with that earnings range considering that the backlog is sliding?

When you're looking at our outlook, a lot of that is based on what we've been able to accomplish with operating efficiencies this past year as well as the quality of the backlog that we're going into the year with. Our backlog will sustain us at this point in time through the majority of the first half of the year and we're looking at incoming orders for the balance of the year. We've seen significant opportunities in the offshore, the oil and gas production area and pursuing opportunities in the transit area which will add to our backlog going forward.

Thank you, all right.

Our next question comes from John Franzreb. Please state your company name, followed by your question.

Sidoti & Co. Good job, guys, in a difficult environment. My first question regards the cash generation abilities of the firm. Tom, could you kind of prioritize what you want to do with your excess cash flow and give us a sense of what you're going to do with the money?

John, we've been searching now for two years for, you know, an acquisition that would make sense and add to our core business. As you can appreciate, currently there is not a lot out there that is not a big turn around undertaking and we are actively searching for companies and we want to make some acquisitions.

So acquisition is your first priority. Is it dividends on the horizon or just not something you want to address?

We do discuss that every year at the board meeting. And we will discuss that at the coming board meeting. I've been asked that question quite often lately. I think to sustain our internal growth we need to invest in our facilities, put some more money into research and development for new products, and investments in working capital are also needed to support that growth. But we will discuss it again shortly.

And just to follow on to George's question, regarding your outlook for next year, is there a meaningful switch in your revenue mix in 2003 compared to 2002 that we should look for or is everything going to be pretty much status quo as far as the revenue mix is concerned?

This is Don. When you're looking at 2002, we saw relatively unchanged mix by customers in utilities coming in at around 57% of our total volume. Industrials around 27% and municipal transit relatively unchanged at 17%. Going into 2003 I think we'll see some mix change away from utilities, particularly from the power generation sector and an increase in industrial moving towards the oil and gas production area. Heavily on the offshore side at least at this point in time.

Transit as well.

Process -- are you going to see a significant revenue bump in your 2003 estimate.

From a revenue standpoint, yes, we'll see some improvements there. We have a healthy backlog and that will be converting to revenues of probably -- I don't have the exact number but it will be healthier in 2003 versus 2002.

Okay. I'll get back in the queue. Thanks, guys.

Our next question comes from Richard Leader.

Burnham Securities. Good morning, everybody.

Good morning, Richard.

I'm glad it was somebody else that asked the dividend question. You told us in detail about phase one and phase two. It was real helpful. Can you elaborate on phase two going forward or is it complete and if it's not complete, what are your goals in phase two for 2003?

The only remaining thing that I see currently, obviously we need to complete the facility that we're working on at offshore right now. That should be completed by the first of January, as I said earlier. We need to -- and we're working on the permitting for a new indoor paint facility at the offshore operation. That's going to be about $2m. It's a little over 5,000 square feet. As you can understand, a lot of painting and metal prep is done outside right now. And bad weather doesn't help our productivity. We hope to have that paint facility by mid year. The permitting process these days is a difficult process, I would have liked to have had it in earlier. Don. Do you have anything to add to that?

Beyond that we’re going to be looking at process and equipment that would help us with our efficiencies in operational activities but we do not see any other significant internal investment in the next 12 months.

Okay. If I can combine two brief questions into one for a follow-up. Don, you mentioned something on the securities side that you guys might be involved in -- in more the national readiness that we're seeing the government do as far as the war on terror and all that. Is there any aspect of your firm that is involved in this security issues that the federal government is doing? Do you see any business or indications of potential business there? And would you also just touch on this change in the electrical standards and whether this is a plus for the company going forward.

Let's talk about the security issue first. Yes, we are seeing increased activity in that arena with the federal government and local and state governments in the northeast -- actually throughout. As you can appreciate, we're not really in a position to discuss a lot of the government facilities we work on. And we have several activities going now with federal government on security issues. We see that as an increasing opportunity for the company and particularly for the Transdyn operation. What was the second part?

Second one has to do with the change in -- you referred to a change or merger of electrical standards.

Yes, Yes, I'm sorry. The ANSI standards are the predominant American standards, electrical standards, American National Standards Institute. The IEC is the International Electro-technical Commission. That's the European standard which is used in about half -- a little over half the world. We are currently working on IEC products and are currently working on a potential opportunity for building IEC products internationally. So -- but in the meanwhile there is some pressure to bring these two standards together into one standard. As you can appreciate there is a lot of fighting going on between the two standard groups over that. But we have people that serve on that committee to help in that issue. So we'll be at the leading edge of it.

You think you have -- was that a competitive advantage for you? You be able to consolidate your number of products if they move to one standard, is that what you're saying?

I think it would be two standards. There would be a hybrid. I think there will be a hybrid situation and I believe it certainly enables us to -- gives us a bigger marketplace.

Okay. Great job, Tom. Thanks.

Thank you, Richard, take care.

Next question comes from Tim Perot.

Value Holdings, good morning. A couple of financial questions. What were cash and equivalents at the end of the year.

It was $14.4m.

Okay. And on that backlog question from earlier can you educate me a little bit on why the bus duct backlog would decrease so much while the switchgear would decrease hardly at all?

Basically there is two fundamental issues involved with the change in the backlog with the bus duct segment. First is probably the shortest lead time business we have. So therefore it will be more dynamic in its up and down movements. The second issue it is probably a higher percentage of utility business relative to industrial compared to our switchgear segment. And utility market has softened and we're seeing that in the backlog.

If I can sneak in a third question. On your free cash flow projection of $20 to $25m, what capital expenditure assumption are you making –

Basically in the outlook that we are looking at we’re assuming $8 to $12 in capital expenditures in 2003.

Ladies and gentlemen if there are any additional questions please press star followed by the 1 at this time. As a reminder if you're using speaker equipment you will need to lift the handset before pressing the numbers. Our next question comes from George Gasper. Please state your company name followed by your question.

I would like to pursue some other questions, Tom, that have come up on process control and this U.S. security situation. You have completed several projects under Port Uuthority in New York, New Jersey. George Washington bridge, I believe you’ve got something in the Tri-Borough Bridge and maybe Midtown tunnel. We've known for a couple of years that there is this project to do a change-out in Holland in Lincoln tunnels. I understand that the Port Authority has indicated that they have narrowed the process of the bidding for that project to an award at least some type of an indication of award that would bring Powell Industries into the picture with a company by the name of Parsons. Could you give us any highlights as to what the situation is involved? Where you're involved at this point or what is the timing and what's the procedure from here for any particular finalization of that possibility?

George, what you say is correct. We have been notified that the joint venture has been selected for the award. That is the joint venture of Transdyn and Parson. However, the events of, I guess, 9-11 and its following impact have seriously impacted the client's capital budgets. Funding still a moving target and at the present time it's uncertain when this particular project will proceed. You're referring to the Lincoln Holland tunnel.

Yes. Are there similar type opportunities in the New York area for you? Are you bidding anything else potentially at this point in time or elsewhere in terms of more particularly on this security situation?

Yes, we are, George. Not at liberty to say where or what. That wouldn't be prudent on my part. There are additional opportunities with government facilities and in the transit arena.

Okay. Follow on Delta-Unibus. Overall Unibus had a pretty dramatic increase in operating margin. Can you give us a little color as to what prompted that? I know that on occasion you've had some reserves that have built up. Or that is you've had some cost structure that has -- that has gone over the top and has been costed out and you've had some claims out to various companies that you've done business with. Is there any influence in that number for the Unibus division or any other divisions in the fourth quarter?

Let me address that one. Regarding the strong performance in the bus segment in the fourth quarter, that was from operational results. Basically we've moved -- a lot of it came from our ISO phase bus. We moved into that facility in the second quarter. We took a conservative approach toward the transition efforts that it would take in the utilization of our materials and the efficiency of our employees and things progressed much quicker than we anticipated. As a result, we had a good fourth quarter, better than we thought we would have going into the period. Regarding claims, there are no claims that benefited the bus segment. Basically most all of our claimed efforts would be in the contracts area which is predominantly in the process control. There was no material impact in the fourth quarter.

Okay. Is there -- do you anticipate some in the new fiscal year that you're in now that you have any kind of a number that you could possibly try to bring out against those claims?

There are obviously, the nature of the business being a customized solution and a contract basis there is always claims and counter claims that go through. And the finalization of change orders at the end of a project. In our outlook we do not have any material favorably or unfavorably as a result of these claims.

Our next question comes from John Franzreb. State your name and question.

Just so that I understand that Holland Lincoln tunnel project is that included in your 2003 forecasts or not?

No.

So if that award comes through it would be a net positive?

Yes.

Lay it on top of that.

Yes, sir.

Okay. Secondly the gross margin, if I'm back out that's $600,000 looking at gross margin 23.6. Is that sustainable?

Looking, John, forward into 2003, given the competitive situation and the weak economy, I think maintaining the volumes and the efficiency as a result of some of that, particularly in the bus segment and the price levels is going to be very challenging.

Okay. You touched on what I also wanted to talk about, the competitive landscape. Could you talk a little bit about that? Where is the price competition the stiffest?

Frankly it's across the board but I would say it's more in the bus duct arena than anywhere else. But the switchgear arena is difficult right now also. We just have more to offer and many times we're given a better opportunity to participate in these projects if we can meet the price levels.

Is the competitive more domestic or foreign?

Domestic.

Domestic. Don, just one last question. What was the revenue break down in the quarter by segment? I think I missed a number there.

Revenue break down in the quarter by segment?

Correct.

Revenues in the quarter for 2002 fourth quarter $58.8m for switchgear. $10.7m for bus duct. $5.8m for process control.

Great. Thank you very much.

Thank you, John.

We've got time for one more question.

Our final question comes from Tim, please go ahead with your question.

Tim Perot Just a head count question. Where did you end the year?

I missed what he said.

Headcount, personnel. 1,465.

Okay. So that is a reduction from 2001 pretty considerably.

That is correct.

Where did those come from?

They came from basically we have looked at our efficiency and the volumes and adjusted our personnel accordingly. We've taken reductions in the bus segment as well as in switchgear segment.

Do you think you're pretty well set now for 2003 where you want the headcount to be in order to meet your projections?

We're still -- we're still looking at that, Tim. That's an everyday thing.

Thank you. Good luck with the year.

Thank you.

If that's the end of the show, Tom, great first call. Wrap it up for us.

I thank you all for your interest in the company and we look forward to communicating with you again in the near future. Now let's all get back to work. Thank you.

Thank you, gentlemen. Ladies and gentlemen, this concludes today's fourth quarter earnings conference call for Powell Industry. If you want a replay 503-590-3,000.Once again if you would like to listen to a replay of today's conference dial 303-590-3000 followed by access number 508255. We thank you for participating and you may now disconnect.