Powell Industries Inc (POWL) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Powell Industries first quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Wednesday February, 26, 2003. I would now like to turn the conference over to Ms. Karen Roan, Vice President of DRG&E. Please go ahead, ma'am.

Thank you. Good morning everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2003 first quarter results. We would also like to welcome our Internet participants listening to the call broadcast live over the Internet. Before I turn the call over to management I have the normal housekeeping details to run through. You should have received a fax or e-mail of the earnings release this morning.

Occasionally there are technical difficulties with these broadcasts so if you did not get yours, please call our offices at DRG&E at 713-529-6600 and we'll get one right out to you. Also, if you want to be on the permanent e-mail distribution or fax list, relay that information to us. There will be a replay of today's call. It will be available via web cast by going to www.drg-e.com or recordable replay by calling 303-590-3000 and using pass code of 520783. As you know this conference call includes certain statements including statements relating to the company's expectations of its future operating results that may be deemed to be 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 the forward-looking statements. These risks and uncertainties include, without limitation, difficulties which could arise in obtaining materials or components in sufficient quantities as needed for the company's manufacturing and assembly operations. Unforeseen political or economic problems in countries to which the company exports its products in relation to the company's principal competitors. And any significant decrease in the company's backlog of orders, any material employee relations problems or any material litigation or claims made against the company.

As well as general market conditions, competition and pricing. For further information please refer to the company's filings with the Securities and Exchange Commission. Now, with me this morning are Tom Powell, the company's President and Chief Executive Officer and Don Madison, the company's Chief Financial Officer. Now I will turn it over to Tom.

Thank you, Karen and good morning to all of you. We thank you for joining us for our second conference call. And as I had stated at the last conference call, we would have preferred a better economic climate as a back drop for today's discussion. In our December the 5th call, we reported strong growth in earnings and revenues in our fiscal year 2002. And we emphasized that additional growth would be a challenge given the weakened demand in our industrial sector.

Now, after 36 quarters of generally improved performance, we have experienced a decline both in revenue and earnings for the quarter. Bookings were flat with the fourth quarter of 2002. Our first quarter basically saw two developments that combined to cause us to miss our performance projections. The first development was an unanticipated series of cancellations and request for delayed shipments by several key customers, some of which impacted projects in production and cause us to stop work in process. This not only upset production flow, but it also created vacated production schedule slots. These production schedule slots could not all be backfilled with other projects because timing was so immediate.

These factors caused revenues to fall short of plan by nearly 6%. The disruption in production and the decrease in revenues had a combined adverse effect and reduced our earnings by almost 20% below our plan. The second development, was a deterioration in the rate of new order bookings. We have managed bookings growth in a declining market for the past several years. In our first quarter, not only have we experienced reduced demand, but the market has changed. Customers are not only delaying major purchase decisions, but the competitive price levels have come under added pressure. These factors combined to cause our new order bookings to fall below our expectations.

We have reacted to these market forces with increased sales efforts and selective price reductions. And we continue to take actions to adjust our work force, our overhead and capital spending to better align our expenses with our reduced business volume. And at this point I will turn the call over to Don Madison for a detailed review of the financial results and our outlook for the year. Then I'll come back to discuss our markets and our view going forward. Thank you.

Thank you, Tom. As Tom told you, our first quarter was a challenging one. Revenues for our first fiscal quarter were $71.6m, compared to prior year results of $76.5m, a 6.4% decline. This drop was primarily due to weakness in electrical products for the power generation market. Last year's first quarter benefited strongly from these products and drove revenues to a record level at that time. Gross margin for the quarter was 19.9% compared to 20.4% a year ago. Gross margin was adversely impacted by incremental production costs associated with disruptions caused by changes to customer delivery requirements.

Earnings from operations before interest and income taxes or EBIT, for the quarter was $4.8m versus $6.2m last year. A 22% decline. During the quarter we realized a $311,000 net improvement in interest. Interest expense on our debt was $86,000, a reduction of $273,000 over the first quarter of 2002. And interest income increased by $38,000 to $92,000. Net earnings for the quarter were $2.5m compared to $3.7m for the first quarter of 2002. Net earnings from continuing operations were$3m, excluding the effect of a change in accounting principles recognized with the adoption of statement of financial accounting standards number 142, goodwill and other intangible assets. We had $918,000 of goodwill on the balance sheet as of October 31, 2002.

After recognizing an impairment of $795,000, we now have goodwill of $123,000. Earnings per diluted share were 28 cents, excluding the effects of a change in accounting principles, including the effect of this change earnings per diluted share were 24 cents compared to 35 cents one year ago. As of January 31st, our backlog totaled $168.5m, compared to $189.4m as of year-end. 11% decline. This compares to $213.3m at the end of last year's first quarter. New orders in the quarter were $50.7m , versus $49.3m in the fourth quarter and $80.9m a year ago. We ended the quarter with $12.1m in cash. As mentioned earlier, the rescheduling of project deliveries in our backlog caused inventories and work in process to increase above normal levels, which contributed to a use of $84,000 in cash from operating activities.

And we invested $1.8m in capital improvements. Resulting in a use of free cash flow of $1.9m for the quarter. Days sales outstanding increased by approximately six days to 89 days over our fourth quarter. This is an area where we continue to manage very closely. We have reevaluated our business segment reporting, and going forward we'll report on two business segments, Electrical Power Products and process control systems. Our electrical power product segment was previously afforded as two separate segments, switch gear and bus stock. Because these segments share basic characteristics including common raw materials, engineering techniques, manufacturing processes, and operate in the same competitive environment with substantially similar general economic and industrial conditions, we determined that the reporting of the business activities of switch gear and bus stock (ph) as one segment will accurately reflect our business operations.

Electrical power product segment which consists of equipment and systems for the distribution and control of electrical energy recorded revenues of $65.6m in the quarter compared to $71.1m for the same period last year. A 7.8% decline. Earnings from continuing operations before income taxes for Electrical Power Products was $4.6m dollars, compared to $5.6m in last year's first quarter, a decrease of 18%. Process control system revenues for the quarter were $6m, compared to $5.4m in last year's first quarter, an increase of 12%.

Earnings from continuing operations before income taxes for process control systems was $200,000, the same as a year ago. Now looking ahead to the second quarter and the rest of 2003. We expect our second quarter earnings from continuing operations to range between 21 cents and 26 cents per diluted share. And full year earnings to range between $1.05 and $1.15 diluted share excluding the cumulative effect of the change in accounting principles. Full year 2003 revenue is expected to range between $250m and $265m. We expect strong free cash flow ranging between $25m and $30m for the full year. With that, I'll turn it back to Tom to further discuss our operations and our strategy.

Thank you, Don, and good job. Although the current business environment has been document and is difficult, our long-term business objectives of growth and improved performance remain unchanged. Our commitment to quality, to product excellence, to innovative solutions and service is stronger than ever. We will continue to invest in research and development for new and advanced products. Our challenge is to improve the process so that we can bring new products to the market more quickly. We will continue to expand our geographic presence, both domestically and internationally. And we will continue to invest in our processes and facilities, but at a somewhat reduced rate. We will also continue to invest in our main manufacturing initiatives for added efficiencies.

Now we have responded to market conditions with targeted price reductions and reductions in our manufacturing cost structure. The actions we're taking are calculated to restore bookings to levels that profitably support our business going forward. I would like to give you some comments on what we're seeing in our markets but must emphasize to you that visibility in our markets over the next few months is, frankly, not very clear. The most positive news right now is coming from deep water offshore oil and gas production market.

Both domestically and internationally. Our fabrication assembly facility at Powell Offshore has been completed and the facility was quickly filled with new work in process. Needless to say, the bad weather we've been experiencing and are experiencing today, this indoor facility is a real boost in our efforts to improve productivity. Construction of a metal (ph) preparation and finish facility at Powell Offshore should begin in March with a completion date in September. These frustrating delays on this project have all been related to EPA permitting process.

International market activities are improving to excellent. Foreign gas activities, chemical and refining, transmission and distribution and mass transit projects are all moving at a positive direction. The power generation markets, while significantly down from the high volumes experienced over the past two years, continue to be a source of new business. And with the rising price of natural gas, we're seeing a renewed interest in investment in coal fired generating plants both new facilities and upgrade to existing facilities.

We're also seeing an increase in demand in our electrical apparatus and service opportunities. Our parts and service business is strengthening and we're focusing on sales of replacement components for customers who are not willing to budget for the complete change out of obsolete equipment. In summary, we're not without optimism for the balance of this year. We have very talented people. We have excellent products and facilities. We are very well respected in our industry. And we certainly have a strong balance sheet. These factors enable our company to be well positioned to operate at the current reduced rate and the ability to adjust quickly to an upturn in the business. And we look forward to that. With that, these brief remarks, we'll open it up for your questions, please. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question and answer session. If you have a question press the star followed by the 1 on your push button phone if you would like to decline from the polling process press the star followed by the 2. You'll hear a three tone prompt acknowledging your selection. If you're using speaker equipment you will need to lift the handset before pressing the numbers. Please ask one question and one follow-up question and re-queue for additional questions. One moment please for the first question. First question comes from George Gaspar with Robert W. Baird & Company.

My question comes from the backlog and the margins going forward as the backlog matures into sales. First of all, what's the delivery outlook on the existing backlog and how do you see that moving along? And can you give us some idea of what the, how the backlog is built by product line area, if possible? And then ongoing, how your margins are going to look going forward in the second quarter pretax margins on both segments versus what you experienced in the first quarter.

George, let me try to answer part of your question. I don't really care to do the competitive forces in the market. Answer specifically how we're doing by product, but I can tell you that pretty much the makeup of our current backlog somewhere in the neighborhood of 30% to 35% is utility and co-generation. Right now we're around 47% is refining oil and gas. I've not split those two out. But 47% for that combined entity. Traction power is a little less than 5%. Chemical is 12%. And the balance 6 or so. Just miscellaneous. That's how it breaks out.

Okay. The question I have on follow-up on that, on the view of looking at the second quarter, you have to assume, obviously, that your revenue streams are going to decline here fairly significantly in Electrical Power Products. But on a relative basis, if you were looking at a comparison to the 7% pretax margin on electrical power and the 3.6% margin on process control, do you view those as base levels of pretax margin and that you can improve off of that first quarter or do you see that deterioration from that first quarter range?

George, let me answer, try to add a little bit of insight there. Overall, from a company perspective, looking forward, we do see our second quarter as probably our softest quarter given our current timing of backlog with the, with the discussions we had previously regarding certain orders being put on hold. And I do anticipate that we will see a revenue downturn predominantly in electrical products in the second quarter.

That's probably going to be in the neighborhood of, in the $5m-$10m range. Looking at profitability going forward, the 2003 as we look at it in comparison to our success in 2002, I would suspect that we're going to see a margin slippage of probably in the neighborhood of 1%-2%.

Thank you. The next question is from John Franzreb, please state your company name followed by your question.

Sidoti & Company. Good morning guys, I have two questions. First, could you run down your assumptions on how you got those free cash flow projections, what are your capital expenditure plans and how much is based on working capital improvement, considering you have free cash flow negative in the quarter.

The current quarter had a major impact on free cash flow from increases in our work in process and inventories. That inventories during the quarter rose nearly $5m. That is a temporary situation that will reverse itself over the next three to four months. As those orders that were delayed actually become shippable. Regarding the overall capital spending program, previously we were talking of something in the neighborhood of $8m to $12m. At this point in time we're reevaluating our priorities from a project standpoint as well as expenses associated with those projects.

And I think at this point in time you're more likely to see capital investments in the current fiscal year in the range of$5m-$8m. The balance of the $20m to $25m will come out of working capital improvements along with the impact from earnings.

Okay, could you elaborate a little bit more on the statements in the press release about the business volumes and the oil and gas market remain strong, could you talk a little about why that's doing so well? Could you give us some more color about that side of the business?

We're seeing a great deal of activity, not just in the Gulf of Mexico, but off the West coast of Nigeria, off the coast of some of the Latin American areas and certainly in the Mid East, China. We had a very strong, strong place in that market, excellent facilities, excellent people and very impressive when we bring customers in to see that. We just got the best -- we're doing a great job of responding to the needs of the customer. We're successful in that area, with most all the major exploration groups. I can't tell you beyond that.

Thanks, Don.

Thank you. The next question is from Richard Leader, please state your company name followed by your question.

Burnham Securities. Good morning. I don't want to beat a dead horse here. But let's go back and talk about Powell Offshore a little bit more, only in the sense that's a real bright spot in the picture right now. But yet you're slowly expanding facilities to get to the point of taking on more business. I think you said by September will you be at your maximum level there of capacity?

Well, that would depend on additional bookings. But I doubt that. We have essentially completed all of that expansion. We've added to the bulkhead. And of course the fabrication assembly building. It's only the paint facility that we have remaining. I think we will begin to expedite the shipment from some of those products now that we have that indoor fabrication facility. And no, I don't believe by September we will be at capacity.

So the state of the industry, oil and gas offshore, is promising to say the least. I mean, if you're doing well now, many analysts and industry observers expect a significant pick up in the end markets that you serve there, Tom. Are you able in your -- could you take on significant more business and in what percentage from your current levels of business would you be prepared to take on capacity for new orders?

Richard, it would depend upon delivery schedules. Obviously at this point it would have to be for the latter part of 2003 and 2004. We have several very large projects down there that are in the 60% to 70% completion stage that will probably be finished here in the next three months. And we still have additional space. So I believe again depending upon the requirements of the customer, that we can take on the high volume of new work and we're looking at some of those opportunities currently.

Now some of your competitors in that space are the same competitors broadly for the business as a whole. Some of which are foreign competitors. Does the weakness in the dollar make you in that business or any of your businesses more competitive relative to foreign competitors now?

Well, certainly we're seeing a number of projects that are being, [inaudible] that are being built in Korea. That certainly makes it more difficult for us. But we have several orders in Korea and for projects going. They're currently. But it's more difficult to deal with that group or to certainly deal with them profitably. But we also have a joint venture, 50/50 joint venture in Singapore to manufacture these large transportable modules and have done work for Cal Techs and Exxon and several other groups. I don't have all the names in front of me. That's really sort of a start-up entity. But they do some excellent work. But it's only going into its third year. So for that part of the world we would probably end up using that facility more than the offshore site.

And Don, maybe, could you also touch on the, with the DSOs up a tad and the fact that you had some unanticipated cancellations from some customers who have been scaling back their businesses, can you just touch on the monitoring of your bad debt expense and how you are looking at that issue for the company going forward?

Yes. We are watching the receivables. When the economy gets soft, that's an area we would spend time on where we wouldn't normally. There are some delays, there are minor issues that are beginning to stretch out. And it's increased our days slightly. But the biggest reason for the days to creep during this particular quarter was the softness in the current quarter of revenues. So statistically it went up six days. And absolute dollars we saw just over a million dollar increase. That was basically slight creepish in the 30 to 90-day bracket, with the progress we've had thus far with the three, four weeks of this quarter, that is back down to what I would consider a normal range.

Good. Thanks.

The next question is from Linda Donnelly (ph). Stays your question and company name.

I'm with the Franklin Managers Group at Wachovia Securities, could you give us a range what you anticipate for depreciation this year.

Yes. Give me.

You've got him fumbling for paper now.

Whenever you ask me a question --For the current year, for the first quarter we ended up with $1.3m of depreciation and amortization. That will creep slightly as we go through the balance of the year. And we will end the year just probably $5m just over.

All right. What do you anticipate your R&D spending to be this year versus last.

R & D spending at this point in time, we're not expecting major changes from last year's run rate. Last year we ended up incurring I believe the number was a little over $3m. This year I would suspect, based on the plans we have in place today, there won't be a material change in that, but it will probably creep down slightly.

Thank you.

Thank you. The next question is from George Gaspar, please go ahead with your question.

I'd like to continue on this margin question that Don you were talking about. Could you repeat again what you said at the end, the difference in pretax margin that you would be looking at. Were you referring to year to year or were you referring to a decline quarter to quarter.

Year to year.

But you're saying it's in the 2% range?

I'd say 1%-2% range.

On a net basis a 1%-2%.

Year to year.

Year to year reduction in pretax margin.

That is correct.

Okay. Well, I would think that if that's the case your annual estimate of earnings is low.

Well, George, why don't you let me look at that again and we can discuss it. But at this point in time I'm not sure where our disconnect is.

All right. And I have a question on the R&D side. Can you tell us anything about R&D specifically, any progress that's being made or any beta tests that you might be approaching or looking at to bring new product to the market?

Again, it's one of those subjects. I don't like to discuss it in detail. We have several -- we've just completed a series of tests at the KEMA(ph) labs for a higher rated series of switch gear products. We're very pleased with the results of those tests which should help us right away in securing some new business.

My understanding is that we are the first, domestically, to have passed this series of tests on this particular product line. Unfortunately, those tests end up running almost $100,000 by the time you build the equipment, pay for the lab and the travel time and self destruct the equipment. That's part of the test. But we're very pleased with those results. And we have several other products scheduled to go to test within the next three months. Those will also be expensive tests. But we're fairly confident that we will do well in that arena.

Some of these new products, I believe, will turn into orders rather quickly. Some that are, some that's going to take a while, certain conservative industries, before you will generate much sales. We have offers to put several new products on line for tests with customers. And then hopefully opportunities will escalate from there. But I don't want to go into the specifics of those particular areas at this time.

And a question on Esco(ph), what's the situation going there? Was there a loss in the quarter, on an operating basis and has it been merged or are you moving it or what are you planning to do there?

George, that's still understated. First off, they were still profitable for the quarter. We anticipate profitability this quarter. We have exited the industrial transformer portion of that business. We are still building the distribution SF 6 distribution switches, oil switches and vacuum switches and profitably so. And we're still building the down hole pump transformers. And that's it. But we're still looking at our options there for that facility and that group.

Thank you.

Thank you. The next question is from John Franzreb. Please go ahead with your question.

Hi. Could you quantify the dollar value of the orders that have been cancelled and maybe give us a sense how much in sense of orders have been delayed.

The cancellations we've actually received is in the neighborhood of $3m-$4m. And just as a side note, the way that we report our orders, new orders are net of cancellations. So that is included in the $50.7m. Regarding the delay, we had about $6m, that was pushed out of the first quarter. Most of that is scheduled for the second quarter. Some of it has slipped about four months. Regarding the hold, there's no material change from where we talked in our release three or four weeks ago.

We have still approximately a $14m that's been put on hold. A significant portion of that was previously scheduled for the second quarter and at this point in time we do not have firm shipment dates on that piece of the business.

Is that $14m in the backlog?

Yes, it is.

And Tom, you talked about selective price reductions. Could you elaborate more on the competitive landscape and what products are facing the stiffest competition?

Holly Mack REL, the competitive level it changes based on product and geographical arena where the product is. I don't know it would help for me to comment much on.

What product lines did you have the selective price reductions and has –

All product lines. All product lines, if you get in a situation, particularly large bid, and you know who your competitive bidders are, you know what their strengths and weaknesses are and you play to that market arena.

On the most aggressive competitors domestic or foreign?

Probably domestic.

Okay. And I guess my last question is about the cost savings initiatives. How much do you anticipate in cost savings and how do you expect to get there?

Let me talk about that a minute. We're constantly looking at all lines of our spending program. I don't have a specific number that I can quote you that we are at today because that is something that we have to continue to reevaluate based on what we are seeing in the marketplace and are trying to react to both our personnel and our spending as fluidly as we can to make sure that we maintain the outlook we've given when you look at work force we've made adjustments there. We reduced our contract personnel. And we've gone back and looked at our project spending and the only area that we really have not addressed or touched at this point in time is the R & D area.

So what you're saying since you don't have a defined restructuring program in place what you're doing is sort of an attrition process here?

No, I did not say that. We do not have a -- I don't have a number I could quote you or want to quote you that summarizes all programs. We do have quantified programs individually, including a manpower planning program.

Okay. Thanks, Tom.

Thank you. The next question is from George Gaspar. Please go ahead with your question.

Hello. Can you hear me?

Barely. Go ahead.

I apologize. I can't break off the noise here. My question is on cash position currently versus the end of the quarter. Can you give us a number as to what it is now?

As of earlier this week, we had a cash position of roughly, improved position in the month of roughly $10m. But again that fluctuates on a day-by-day basis. But relative to the end of the quarter of $12m. On Monday we were around $21-$ 22m.

Okay. So basically in terms of modeling, going forward on a quarterly basis, it would be pretty apropos to be modeling a net income figure for interest income versus any costs for the remainder of the year?

From a net standpoint, I would agree.

Thank you.

Thank you. Gentlemen, there are no further questions at this time. Please continue.

Well, thank you for joining us today, and Tom, would you like to say something else?

I want to go out there and kick some HINEY. I'm ready to go get to work.

Thank you.

Thank you. Ladies and gentlemen this concludes the Powell Industries first quarter earnings conference call. If you would like to listen to a replay of today's conference call dial 303-590-3000 and enter access code 520783. Once again if you would like to listen to a replay of today's conference call please dial 303-590-3000 and enter access code 520783. You may now disconnect and thank you for using AT&T teleconferencing. (Call ended at 1143 a.m.)--- 0