Powell Industries Inc (POWL) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Powell Industries second 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 star followed by the zero. As a reminder, this conference is being recorded today, Thursday, May 29, 2003. I would like to turn the call over to Mr. Ken Dinnard, managing partner of DRG&E. Go ahead

Thank you. We appreciate you joining us for Powell conference call today to review fiscal 2003 second quarter results. We would like to welcome our internet clients. I'm going to run over the house keeping details. You should have received a fax or email this morning, but, occasionally, there are technical difficulties experienced during these broadcasts. If you didn’t get your release, please call the offices at 713- 529- 6600. They will get that right out to you. Also, if you like to be on any of the distribution lists, please relay that information to folks in our office. There will be a replay of today's call that will be available via web cast by going to www.DRG-E.com. Or there is a telephonic recorded replay that will be available for the next seven days by calling 303-590-3000 and the pass code is 539481. Follow the instructions the computer gives you. That information is also in today's press release. As you know, this conference call includes certain statements, including statements related 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 in that actual results may differ materially from those projected in the 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 further information, 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. I'll turn the call over to Tom.

Thank you, Ken. Good morning to all of you. We thank you for joining us for our second quarter conference call. On May the 9th, just three short weeks ago, we held a conference call. In that call, we announced a major contract award at our [Transdyn] subsidiary for the port authority of New York and New Jersey to design and build transportation systems for the hole land and Lincoln tunnels between New York and New Jersey. Transdyn 90% of this portion is worth about $30 million. That amount is included in our order and backlog numbers for the second quarter. We're proud to have received this prestigious contract awards and anticipate will realize about a million dollars in the current fiscal year and 20 million in fiscal 2004, the balance in the year 2005. Also in that conference call we announced further deteriorations and intense competition in the electric products markets and we reduced our expectations for this year. Business conditions have not really changed in this past three weeks. Business cycles are not abnormal for our industry. Historically in the electrical industry we've seen long periods of good growth followed by short periods of rapid decline and poor markets. Our industry experienced good growth from 1992 through the year 2000, and for Powell Industries, and for Powell Industries that continued through late 2002 before we saw any drop-off. While market conditions currently remain difficult, I would like to point out that there is an underlining strength in our electrical markets in that historically the general market experiences an annual growth rate in electrical consumption of 3-3.5% a year. This necessitates new investments in electrical protective apparatus by the electric utilities, independent power producer as well as verity of industrial municipal customers, chemical, refining, mining, et cetera.

We will continue to participate in this market, and we will certainly get our fair share of this business, and, more importantly, we are very well positioned to regain our momentum with any upturn in general business conditions. As to the question of when this market will return, that's a little more difficult to say. However, at this point, there is some optimism we are at the bottom of this trough or business cycle. As inquiry levels appear to have stabilized, and we're seeing encouraging signs in the international arena. However, we continue to adjust our costs to improve our position in this weak market while we maintain our focus on lean manufacturing initiatives, on new product development and the penetration of new markets. At this point, I will turn the call over to Don Madison for a detailed review of our financial results and our outlook for this year. Don

Thank you, Tom. As we discussed earlier this month, our second quarter was a challenging one. Revenues for our second fiscal quarter were $64.2 million, compared to prior year results of $80.3 million. A 20% decline. This drop was due to weakness in most of our electrical product markets. Last year's second quarter benefited from strength in the power generation market which drove revenues to a record level at that time. Gross margin for the quarter was 18.9%, compared to 21.5% a year ago. Gross margin was adversely impacted by incremental product costs associated with instructions caused by customer initiated delays and a shift in product mix. Additionally, as a result of the depressed electrical product markets, competitive pricing has also begun to negatively impact gross margin. Sales, general administrative expenses have been reduced by $1 million to $8.9 million from this time last year. However, expenses as a ratio to sales were 13.9%, up from 12.4% at this time last year due to reduced sales volume. Earnings from operations before interest and income tax or EBIT for the quarter was $3.2 million versus $7 million last year. During the quarter, we incurred net interest expense of $50,000 compared to $232,000 during the second quarter of 2002, a reduction of $182,000. Net earnings from continues operations for the quarter were $2 million, compared to $4.5 million the second quarter of 2002.

Earnings per diluted share were 19 cents compared to 42 cents one year ago. On the positive note, our backlog levels increased both sequentially and year-over-year. As of April 30 our backlog rose to $203 million compared to $169 million on January 31, 2003, a 20% increase and compares to $189 million at year end last year. Excuse me. Second quarter of last year. A 7% increase. Quarter was $99 million versus $51 million for the first quarter and $88 million in the second quarter a year ago. Included in new orders and backlog is $37 million from the [Holland] and Lincoln tunnels award Tom discussed earlier. We generated cash flow from operations of $18.8 million and invested over $900,000 in capital improvements in the second quarter resulting in free cash flow from operations of $17.9 million. As of quarter end, day sales outstanding averaged 71 days compared to 89 days at the end of the first quarter. We ended the quarter with $29.7 million in cash and our long-term debt remained at $7.2 million, the same as in the first quarter. Now looking at our business segments results. Electrical Power Products revenues of $58.2 million in the second quarter compared to $75.1 million for the same period last year, a 22.5% decline. As discussed earlier, this drop in revenue was due to weaknesses in most of our markets and compounded last year's strength in the power generation market. Earnings from continues operations before income taxes for Electrical Power Products was $3 million compared to $7.3 million last year second quarter. The process controls business systems recorded revenues of $6 million compared to $5.2 million in last year's second quarter, an increase of 15%. Earnings from continues operations before income taxes for process controlled systems were $229,000 versus a loss of $232,000 a year ago.

Now looking ahead to the third quarter and the rest of 2003. We expect our third quarter earnings from continues operations to range between 13 cents and 18 cents per diluted share and full year 2003 earnings from continues operations to range between 60 cents and 75 cents per diluted share. Full year 2003 revenues expected to range between $240 million and $250 million. Free cash flow is expected to range between $20 million and $25 million. With that, I'll turn it back to Tom.

Thank you, Don. While I would like to be more specific about markets and opportunities, it would probably, at this point, be more prudent not to do so in this competitive environment. Let me close very quickly with a few comments. Folks, we are not without optimism about our market. The good news is it appears we're at the bottom of the trough in this cycle. Our inquiry levels have stabilized, our international markets are improving, and we continue to be successful in some of our lean manufacturing initiatives, certainly with some of our new product developments, and penetration of new markets with new customers. That's sort of it in a nutshell. At this point, I would like to open it up for questions.

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 one on your push button phone. If you would like to decline from the polling process, press star followed by the two. You will hear a three-tone prompt acknowledging your selection. Please ask one question and one follow up and re-queue for additional questions. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from George Gaspar. Please state your company name followed by your question.

George Gaspar, Robert W. Baird. First question would be guidance, further guidance, if I might ask for, in your indication here that you're sticking with 60 to 75 cents. If we look at the second quarter, you came in at the high end of the guidance, and your guidance for the third quarter of 13 to 18 cents is beyond what we would have anticipated, and if that guidance holds even at the mid--range, it would suggest you're either looking for a very tough fourth quarter or you're just being cautious on guidance because it looks like -- unless you're looking for a tough fourth quarter, the downside of your guidance looks low. Can you comment on that?

George, I'm glad we appear to be conservative in our guidance. Closer toward the fourth quarter I think we will have some lower margin business going through the backlog business that we have secured at the lower margins. Certainly that will affect the fourth quarter. I don't know how else to answer that. Don, do you have another look at this?

Good morning, George

Good morning.

I guess the only thing I would add to that, basically, I concur with your thoughts. I think we have put out a conservative outlook with the range we've given. We are looking for a tough fourth quarter. We do have some business in the backlog that is below the margin level that we have historically delivered, but, also, it was compounded that we're living with a short backlog in portions of our business. At that point in time it's very hard to predict exactly what we're going to be able to take in the market from the price level. We have product lines that are living with the now four to six week backlog, and it's hard to predict where the fourth quarter is going to end from that perspective.

Are you still experiencing, in terms of this manufacturing through put, are you still experiencing delays in delivery from customers -- I mean, there appears to be a trend here from last couple quarters.

There -- excuse me, George. Go ahead.

Things seem to be slipping in terms of delivery dates. What are you continuing to experience on that?

from a delivery cycle stand point, it is a constant issue we're dealing with from our manufacturing organization week in and week out. For the most part, delivery rescheduling is coming in the 30-day window. We are experiencing sums going out as far as 60 to 90 days. We were talking with manufacturing earlier this week. We know what we're building for this current period, but firming up final deliveries and schedule for the projects of our customers is a big issue is to getting it in to factory to begin with.

George, these are customer -initiated delays as opposed to a year ago when they were trying to accelerate the delivery schedules. The customers are now pushing them for various reasons.

Okay. One question on -- if you could reiterate, again, your cash position, your CAPEX for the quarter, and I think I picked up free cash flow.

Basically, we ended up with free cash flow of $17.9 million. That consisted of a little over $18.8 million in cash flow from operations offset by $962,000 of capital expenditures during the quarter.

Okay.

The cash position at the end of the quarter was just under $30 million, 29.7.

29.7. And -- that's a pretty handsome number considering where you were in the previous quarter.

All of the reschedules of the delays and we got caught with excessive work in process during the first quarter. I think we talked about in the first quarter call that we expected a significant recovery in the second quarter. I think, for the most part, that has materialized. The items that got hung up on the floor in the first quarter, for the most part, has shifted and it continues to be monitored. We were able to improve our day sales out standing on receivables in the second quarter as well.

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

Sidoti & Company. Good morning, gentlemen.

Good morning, John.

When I strip out the $37 million from Transdyn in the backlog, I'm looking at a backlog deceleration rate of 1.5%. That's a lot narrower on a sequential basis than the previous other quarters. Tom, does that suggest to you that maybe, you know, the order outlook has stabilized this lower level?

I believe that's what we're seeing, yes, sir, John .

So you would be comfortable with the current kind of backlog rate going forward and maybe we could see a pickup in what kind of time frame in your mind?

I'm not uncomfortable. I, obviously, would like to see it better. To predict an upturn in the near future is beyond me at this point.

Okay. And kind of to piggyback on the cash position, without much in cash, what are your thoughts regarding repurchasing stock in the market? Do you view your stock as a reasonable investment with that excess cash you have?

There has been some internal discussion, and I think in our June 13 board meeting there will be some discussion about the possibility of buying stock back. There will even possibly be some discussion on dividends now that we've had some movement in the tax program. There will be discussion.

Okay. Thanks. I'll get back into queue.

Ladies and gentlemen, if there are any additional questions, please press star, followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our next question comes from Richer Loader (ph). Please state your company name followed by your question.

Burns Securities. Good morning, gentlemen.

Hello, Richard.

All things considered, if this is the bottom of the cycle, you guys have done an admirable job with the financial figures you've given today.

Thank you, sir.

Tom, you know, looking back on the history of this business -- certainly you had a wonderful decade from '92 to 2002. Can you compare this down cycle to anything you've ever seen in the past and what was it like during those down cycles and is there any evidence that these things correct quickly or sometimes have you seen them drag out? What's been the history of your company and the down cycles?

Let me start with the up cycle. Normally they were in the neighborhood of four to six years up and two years down. This cycle is abnormal in the fact it ran from '92, for us, all the way to 2002. So a down cycle to me, which is normally two years, I think I would anticipate something closer to the neighborhood of three years. Of course, under every rock you can find a projection about when it's going to return. It's difficult to say. There is pent up need for environmental programs, clean fuels. There's any number of program that is are lingering out there, and we are seeing an improvement in the number of budgetary estimates. That's one of the first things you'll see before they come out for firm quotes. So there is a little bit of encouragement. I think, still, we're not going to see that much until the middle of 2004. That's my conservative look at it.

Could you give us a look at some of the major industry sectors that your customers are and where you've seen the order inquiry stabilize or pick up. In the international arena or other potential markets, can you talk about the new geography’s or new industries you expect to be going after?

Well, obviously, we're going after the existing industry. We see activity in clean fuels, as I said. We're still seeing activity in some distributed generation opportunities throughout the domestic U.S. and on some of the offshore areas. Actually seeing opportunities in several areas of the world, starting with Canada, West Cost. The list goes to Africa, China, Saudi Arabia . What was that? One of these silly phones. We're seeing opportunities improve. We've actually stepped in and gotten involved in some project that is we normally don't get involved in. We've taken a $6 million order recently for a major university for upgrading of their electrical system and a very intensive system control remotely being able to watch, monitor, and control that system. I won't say which university, by the way.

Was it domestic?

Yes, sir. So a number of different opportunities, particularly in distributor generation.

Remind me about one thing. I know a lot of your business in the energy sector has been for electrical work on the offshore platforms.

Yes.

Does your electrical operations go on to onshore rigs as well? Like land drilling rigs?

Not really.

Okay. Thanks a lot.

Our next question comes from Jairy Hepperin (ph). Please state your company name followed by your question

I'm with Lord Abought & Company. Good morning, gentlemen Tom.

Good morning.

My question first question was concerning the offshore division. If you went over this, I apologize. I did get on the call about five minutes late. If you could give me some information regarding how business is going there and how you see it going forward, incoming orders, et cetera.

Incoming orders remain about the same as they were during all of last year. So they're still healthy. I don't think they're accelerating at this point I also believe some of these firms have a number of issues on their plate. They need to get caught up with some of their construction before other contracts are left. So I would say --

Those firms being the construction firms, the fabrication yards?

Yes, sir.

Okay.

I think they have plenty to do. They need to get a little bit ahead of themselves before new contracts will be left. As far as our performance at the channel, we've done -- we're doing quite well on a number of those projects. We've mobilized about another 25 people down there, and it's going well. We're also in the midst of building a new paint facility, which will help us in our efficiencies. The survey work -- we finally got our permitting process done. The survey work is being done today. They will mobilize next week, start pushing dirt around. Hopefully, we will have that project completed sometime in mid--October of this year. That would certainly help us. I wish it was already up, but it seems like it's been 12 months trying to get a permit.

Well, that seems to be the way anything that is environment regulated these days goes.

Yes, sir.

Do you expect to see business pick up there given your view of what's going on in the energy sector today?

We're seeing a lot of opportunity off of the west coast of Africa and other parts of the world. Unfortunately, a lot of the steel holes and so forth are being built in Korea, in that area of the world, because of the labor rates , and they lean very strongly toward furnishing that electrical apparatus themselves rather than depending- -- buying that from the U.S. So we do quote the work. We have secured some work in that area, but it is a little bit more difficult.

Okay. That's a good segue to my second area of conversation, if you would. Currency. Certainly a lot of talk of the weakening dollar here. I know that on a worldwide basis you were certainly fighting an uphill battle for many years there. Could you tell us what's happening in the near term and what you would see for the medium longer term, effects of the weakening dollar for you.

We have seen in a couple of select areas, versus some other international competitors now with the weakened dollar, we have seen almost a 20% swing in our ability to be more competitive. I don't know how else to say it better than that.

You could tell me it is a 20% swing and you're winning all the business

We're not winning all. It certainly has put us in a better position in the last several months.

And that would be your relative price versus their relative price?

Yes.

And are you very often competing against foreign competitor, not other U.S. competitors in international business?

Usually there are foreign competitors, that is correct. I mean, in the international market. If it is a domestic consumer shipping something into an international arena, that would usually be limited to domestic producers such as ourselves.

Our next question comes from Terry Routerman (ph). Please state your company name followed by your question.

Kennedy Capital. I'm sorry. My company has been answered. You can go on to the next

That makes it easy.

Our next question is Larry Linton (ph). Please state your company name followed by your question.

Second Line Capital. In terms of the free cash flow in this quarter and -- I don't remember what occurred last quarter. The balance sheet we're looking at now, is that pretty much the balance sheet we'll see at the end of the year, roughly, $23 million of net cash?

At this point, -- good morning, Larry. This is Don Madison. We're forecasting for the full year we'll reach $20 million in free cash flow. So at this point I would anticipate that we are going to be [Inaudible] where we are today with a possible $5 million upside to that.

Reminding -- okay. We're in the first fiscal quarter.

Basically, we're at the second fiscal quarter. We're at 17.9 in the, basically, $18 million in the second quarter. In the first quarter we consumed -- we had a negative free cash flow of $2 million. The year-to-date we're at 16. We feel conservatively we'll reach 20. So another $4 million with a possible upside to 9.

Great. Thanks. In terms of the book value, is that solid or should we expect, possibly, some restructuring charges either in terms of personnel or in terms of other asset that is might result in some charges in the next couple quarters?

There is nothing of a material nature that we have planned and included in outlook at this point in time. At this point in time we think we have resized and stabilized our work stabilization to match the volumes we're seeing today.

Is that a shift from the last conference call? I thought in the last conference call you were talking about discussing some personnel adjustments and you weren't prepared in the last call.

That is correct. Those personnel adjustments were taking place during the first week or two of the month of May. We wanted to get that behind us. At this point in time, we are down, roughly, 15% from the beginning of the year and nearly 25% from this time last year in employment when you take into consideration the temporary contract workers we also employ.

Okay, great. Thank you.

Our next question comes from George Gaspar (ph). Please go ahead with your question

Yes. Thank you. A follow up. DD&A is going to be about $5 million for the year; is that correct?

Yes, sir. There is not a material change on the outlook of depreciation.

On CAPEX, your guidance for the year at this point, can you narrow down what you're looking at?

At this point in time our guidance is $5-8 million. We are at, roughly, $3 million year-to-date. The investment in the paint facility that we're looking at completing between now and the end of the year will be approximately $2 million, which gets you to the $5 million mark. Then we're also a looking at some maintenance and, possibly, some efficiencies as we can evaluate the paybacks in a reasonable period.

A question on collections against reserves that you have established on contracts more in the process control area. Can you give us an update if you're making any progress on collecting against those reserves and what the outlook might be? Do you have a total number you can give to us as to what is in that reserve?

George, I don't have the total number. As we talked before, every order ends up with some change order negotiation at the end of the process. Most are moderate. Some can become material. At this point in time, of those that are more material that we are working through, we've had no negative developments that's occurred in the last 90 days. I also can't say we've had any material movement that would show a significant bottom line impact in the current fiscal year either.

Okay. And so you can't give me a number as to what that total is?

No, sir.

One last one on the offshore group. Can you give us a dimension of the potential labor savings you're incurring now that you have a shelter ed facility for assembly. I know you haven't had an elongated period of working in that facility, but considering you're out of the weather, what efficiencies can you discuss with us that are occurring there?

George, we've not taken a hard measurement on that at this point. We haven't had bad [inclimate] weather as far as rain. We already had some 90-degree days. Obviously, you will get some improvement getting those folks out of the sun. We've got overhead cranes in there to help move some of those heavier beams and material around. So I would say a labor savings at this point somewhere in the neighborhood of 10-15%. Obviously if it was raining -- and we need rain -- if it was raining, obviously, you would save a lot more than that, 25-30%, plus the safety factor, which can be expensive. So overall, this is the right investment for the amount of work we have. We need it. The paint facility will help even more than that. Obviously, you can't paint or prepare when it's humid, wet. You have to cover everything with [Inaudible] canvases to keep that stuff from blowing into the wind and interfering with other facilities in the neighborhood. Anyway, that piece will help even further.

Okay.

Just to follow up on that question, you need to realize, also, while there's labor efficiencies gained, moving the equipment indoors, there is an opportunity for us to better neat the customer requirements and get more product through the yard in a less period of time.

Good point. Okay. Thank you.

Our next question comes from John Franzreb. Please go ahead with your question.

Most of my questions have been ticked off. I was wondering if you can comment on the competitive landscape. Is pricing still extremely aggressive, or has there been a stabilization in the marketplace?

It's spotty as people try to attempt to maintain some basic level of business flow on a monthly basis. It is spotty. I don't know how else to say that. At these levels, I mean, it becomes a little bit irrational to do anything, to make it worse.

So do you get a sense that you've seen a trough maybe on how aggressive the price your products or not?

I think that's right.

Okay.

I'm knocking on wood here.

Okay. Thank you, Tom.

Yes, John. Is that about it, folks?

Ladies and gentlemen, if there are additional questions, please press star followed by the one. If you are using speaker equipment, use the -- lift the handset. Our next question comes from Larry Linton (ph). Please go ahead with your question

We're looking at the third quarter somewhat weaker than the second quarter and the fourth quarter gets weaker than the third. Roughly, you're talking about hoping for a mid-- 2004 improvement. At least schematically as you look into '04, do you think it pans out as a mirror image of '03 may be from an earnings stand point? Q1 might be a trough with Q4. Then you start to come out and by the fourth quarter you get back to the Q1 rate or something?

Larry, I would say it is difficult -- the profile I would agree with . The timing is something very difficult to gauge. We'll see an up tick affects our bottom line.

But is anything happening from a cost stand point that allows tow do better in depressed revenue levels in '04 than '03?

We have been able to reduce our overheads. We've reduced our spending from several different levels as well as we talked earlier from a competitive stand point in international markets the dollar situation has been affecting us. Yes, I think we are going to operate at a more efficient level at the same volume going forward, but it's going to be relatively small incrementally.

Okay. Thank you.

Our next question comes from George Gaspar. Please go ahead with your question.

Yeah. Just a question on your cash situation. Do you feel that you still have an opportunity to build the cash position in the second half beyond what you ended up with in the second quarter?

Yes, George. At this point in time, I would anticipate that we continue to build our cash position. While we do have the debt repayment in the second half. When you consider that from a cash position stand point, it will be even to an upside of $45 million.

Net of debt repayment?

Net of debt reduction. We have $5 million of debt repayment that will come due in the second half of the year.

Okay. Thank you.

We'll wrap it up for us [Inaudible]. Tom, if you'll give some final comments and we'll get back to work

I'm dangerous on these final comments, as you reminded me. I want to thank all of you for joining us today. We look forward to talking to you again at the next quarter. Have a nice day.

Thank you, folks.

Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the Powell Industries second quarter earnings conference. If you would like to listen to a replay to this conference, please dial 303-590-3000 followed by access number 539481. Once again, if you would like to listen to a replay of today's conference, dial 303-590-3000 followed by access number 539481. We thank you for participating. You may now disconnect.