Powell Industries Inc (POWL) 2004 Q1 法說會逐字稿

We're happy you could join us for the Powell Industries conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, February 25, of 2004. I would now like to turn the conference over to Karen Roan, the Vice President of DRG&E. Please go ahead, ma'am.

Good morning everyone. We appreciate you joining us for Powell Industries' call today to review fiscal 2004 first quarter results. We would also like to welcome our Internet participants listening to the call.

Before I turn the call over to management, I have the normal housekeeping details to go through. You could have received a fax or e-mail of the release this morning. Occasionally there are difficulties experienced during these broadcasts, so if you did not get your release, please call our offices at DRG&E 713-529-6600, and we will get one right out to you. Also if you want to be on the permanent e-mail distribution or fax list, please relate information to us.

There will be a replay of today's call. It will be available via webcast by going to the Company's web site at www.powellind.com, or a recorded replay will be available for the next seven days by calling 303-590-3000 and using passcode 570572.

Please note that information reported on this call speaks only as of today, February 25, 2004, and therefore you were advised that time-sensitive information may no longer be accurate at the time of any replay. 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 in the 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 strategy. 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.

Good morning to all of you. We thank you for joining us for our first quarter conference call.

Our first quarter saw a continuation of the very difficult market and operating conditions which our industry has experienced since the 2001 severe downturn in power plant construction. The anticipated expansion and capital equipment expenditures for electrical equipment as not yet hit the marketplace. Business conditions in our market segments utility, petrochemical, infrastructure, heavy industry are still difficult and have resulted in reduced bookings, revenues and profit margins for the quarter.

While opportunities for new projects are improving, price levels have certainly not improved, though we are a preferred supplier in many instances due to our portfolio of new advanced product offerings, modular designs, quality service. It is a buyer's market with price levels not seen since the early '90s.

It does however appear that the general economy is slowly improving. Based on historical capital spending cycles, it would appear our industry should begin to see improvement toward the fourth quarter of this calendar year.

The passage of an energy bill will have a broad and positive impact on our core business. Our initial optimism was for passage in the first calendar quarter. It is now uncertain any energy legislation will be passed in this year.

We continue to focus on lean remanufacturing, streamlining our processes and procedures, reducing waste and continuing to take the necessary staffing action to keep the business healthy. To that end we have announced the shutdown of our ESCO facility in Greenville, Texas, and transfer of the products to our North Canton, Ohio facility. This was a painful, but necessary move, and good people will be hurt by that decision. However, it adds critical mass to North Canton and will improve our overall performance. Further consolidation is also being evaluated.

Workforce reductions and consolidation costs in the first quarter were approximately $250,000, and are expected to be an additional 300 to $400,000 in both second and the third quarter. We have not diminished our focus on the future and the development of new improved products and services. I'll discuss this aspect of the business after Don Madison's review of our financial results.

Our first quarter continued to be a challenge. Revenue for the first fiscal quarter was $53.2 million compared to last year's results of $71.6 million. The first quarter revenue decline was due to continued weakness in most of our electrical products markets.

Gross margin for the quarter was 18 percent compared to last year's first quarter of 19.9 percent. Gross margin this quarter continued to be adversely impacted by lower production volumes and competitive pricing pressures.

Our SG&A expenses for the quarter were $8.5 million compared to $9.4 million in the same period a year ago, a reduction of $0.9 million. SG&A as a percentage of sales was 16 percent in the first quarter versus 13.1 percent in last year's first quarter, primarily due to lower sales volumes.

Earnings before interest and income taxes, or EBIT, for the first quarter were $1 million versus $4.8 million a year ago. During the quarter net interest income increased by $159,000 to $165,000. Our income tax provision was $433,000 in the first quarter. Our effective tax rate was 36.7 percent compared to 37.2 percent in the same period the previous year. Net income was $747,000 versus $5.2 million in the first quarter of 2003.

2.5.

I'm sorry, $2.5 million in the first quarter of 2003. Earnings per diluted share were 7 cents compared to 24 cents a year ago. Our backlog for the first quarter of 2004 was $137 million compared to $157 million in the fourth quarter of 2003, and 168 million in last year's first quarter. The orders for the quarter were $33.1 million versus $36.3 million in the fourth quarter and $50.7 million in last year's first quarter.

We generated cash flow from operations of $1.8 million and invested approximately $1.5 million in capital improvements during the first quarter, resulting in free cash flow from operations of approximately $300,000.

Now turning to our business segments. Electrical Power Products segment reported revenue of $46.2 million compared to $65.6 million the same period last year. As mentioned earlier, most of our markets in this segment have weakened this year compared to last year. Income from continuing operations before income taxes for Electrical Power Products was $.9 million compared to $4.6 million last year.

The Process Control Systems segment reported improved revenues of $7.1 million versus $6 million in last year's first quarter. Income from continuing operations before income taxes for Process Control Systems was $249,000 versus $215,000 a year ago.

Now looking ahead to our second quarter and the balance of the year, we expect second quarter earnings to range between 4 cents and 9 cents per diluted share. Additional workforce reduction and business consolidation costs estimated at 300 to $400,000 are included in this estimate. For fiscal 2004 we expect full year revenue to range between $205 million and $220 million. Full year earnings are expected to be between 35 cents and 50 cents per diluted share, and free cash flow to range between 5 and $10 million. What that I will turn it back to Tom.

These forward financial projections are no doubt disappointing, but reality in the current market environment. Although the current business climate is difficult, we are profitable, and our financial position is strong with over $40 million in cash and marketable securities. I would say in these market conditions we should not be consumed with our short-term quarter to quarter results, but look at our long-term potential, which I will address.

While we continue to address short-term operational issues, to maintain our quarter to quarter profitability we increasingly focused on the products that will be meaningful on a five to ten year time horizon. As the inevitable momentum builds to invest in our industrial and electric power infrastructure, there has been a tremendous initiative in government and industry to map the technology breakthroughs needed to revolutionize the national power grid. While industry and government technocrats look to the future, there is is intense present demand to improve performance and safety of all electrical power products.

Having said that, we continue to search for viable acquisition candidates to advance our technology, our products and the scope of our business. And we will continue with organic growth through the development of new products and services. Our research and development expenses were over 3.5 million last year, and we continue at that run rate again this year. We can even increase that amount if opportunities and payback are beneficial to long-term growth and profitability.

Looking to the future our customers, utilities and heavy industry, are focused on enhanced safety, life extension of existing equipment, modularization, remote operation and control of via intelligent data systems, and advanced power electronics technology. We work closely with our customers and are actively involved in the development and market introductions of advanced products to meet these emerging needs, and I will elaborate here, on enhanced safety.

We have expanded our family of our position of products now to include 27 kV, 38 kVA, 40,000 F-rated switch gear. All of our arc resistant products have been third-party tested, certified and UL approved. And we are testing additional switchgear ratings to extend what is already the most comprehensive coverage of arc resistant switchgear requirements in the nation. Powell is a recognized leader in the development of arc resistant switchgear, and we're working to extend that expertise into products other than switchgear.

On life extension of existing equipment, with the largest portfolio of vacuum interrupter replacement circuit breakers in North America, we have very successful in life extension projects to replace breakers that are nearing the limit of their mechanical life, as well as breakers that have inadequate ratings because the power system has continued to grow and change. These increased demands on existing systems require upgrading bus and insulation systems for the full spectrum of our existing electrical power products.

We are very active in field modifications incorporating faster and more reliable protective relay systems and communications. Many of these opportunities have been initiated by our services and system preventive maintenance with electrical and mechanical testing and infrared scanning.

On modularization, the trend toward modulized products and services is growing with customers' emphasis on lower install costs and less owner responsibility in engineering the integration of multiple products. We pioneered this concept in the mid '60s with our fully integrated power control room products. This capability has continuously grown to the point where we're recognized as the nation's largest manufacturer of electrical modules for both onshore and offshore applications.

Our mobile capacitor banks have been very successful with major utilities, especially in the Northeast power quadrant. Those opportunities are growing. And now we have advanced our scope into mobile utility substations with an alliance -- by an alliance with a major transformer manufacturer.

Remote operation and control via intelligent data systems. Our Transdyn operation is one of the largest system integrators in North America, with the latest technology in advanced communication, monitoring and control system. This expertise has seen a major new market development recently in the field of national security.

Powell Power Electronics has been highly successful with their line of DC protective relays, an advanced power electronic systems for the transit industry. And Powell Electic is, of course, recognized as a leader in the emerging industrial market for intelligent relay integration projects. We have completed several major projects and have demonstrated our advanced capability in this field.

Advanced power electronics technology. Our unique Thyristor Controlled rectifiers have been successfully powering the Dallas area rapid transit light rail system for several years. This PCR technology is a new offering to the U.S. transit market. These Thyristor Controlled rectifiers are being trial tested by a major Northeast (indiscernible) transit agencies as to the correct time. These transit agencies have a huge installed base of aging diode rectifiers that cannot meet load demands for new heavier trains. TCRs not only offer energy savings, but they also manage the flow of power to the trains to deliver greater power with fewer substations.

Our solid-state current leveling research is financially supported by some of the biggest utilities in North America. This project is reaching a prototype test milestone this quarter. This technology has been selected by major utilities as one of their most critical needs to address system stability problems that were experienced in the recent Northeast blackout.

Before questions, just let me conclude with the fact that we are making every effort today to improve our performance. But our eye is clearly focused on the future as well. We have some of the very best people in the industry. We have great products. Certainly we're poised for an upswing in our markets. With that, we will be happy to open the call up for any questions.

(OPERATOR INSTRUCTIONS). George Gaspar with R.W. Baird.

I would like to explore a little bit more the special charge of the first quarter and your predicted charge of 300 to 400,000. I'm assuming -- is that why you have got such a broad variance in your guidance for the second quarter, for example? And can you tell us what is involved in this move? Is the total charge essentially going to flow through operations? There's no special charges beyond what you're talking about here? And this charge going forward, 300,000 for possibly I believe you mentioned the third quarter. Does this all got to do with escrow or is there something else in here?

George, this is Don Madison. Let me try to answer at least part of that, and then maybe Tom would like to elaborate further. The outlook that we have has all of our costs associated with this consolidation effort and reported as operating expenses. What we're doing is we're merging our product lines that are currently manufactured in Greenville, Texas and going to continue producing those products up in North Canton.

Over the next two quarters we expect this specific project to impact operating expenses approximately by 500 to $750,000. We're still very early on in the project as far as calculating the exact costs and the impact of the start up, and that is part of the reason for the range. There have been other reductions across the company at several of our facilities in the first quarter, and additional reductions are anticipated in the second quarter above the impact at Greenville.

The second question would relate to the slide in the backlog. Can you identify more particularly, is it a slide in backlog associated with power control rooms for the utilities side of the market, the power systems side of the market? Or is it in other areas of your activity. In conjunction with that can you tell us a little bit about the progress of your activity in offshore modules?

I would say that the slippage is across all of our industries from petrochemical industry, mining, independent power producers, utilities. It is across aboard. And infrastructure projects even for Transdyn subsidiary have suffered somewhat. The backlog in our offshore modules has diminished. But I will say that there are some fighting activity now that is being discussed and we have ongoing negotiations for fairly sizable opportunities that I hope we can conclude here in the near future. But we are seeing more encouragement for products at offshore.

While you're on that subject, I might mention that we have completed those two expansions down there. The facility for manufacturing, which gets us out of some of this weather. We're suffering from that weather today. And also that paint facility. And that is already paying us dividends, otherwise most of the people would be home today. So we're pleased at those additions.

John Franzreb.

Sidoti & Co. I look at the gross margins and, Tom, you said about everything is down across the board. I wonder if you could elaborate a little bit about the competitive climate? If you are seeing competition taking down pricing maybe more aggressively in certain segments and markets versus others?

I see again it is down across the board. It is just a matter of too much manufacturing capacity and not enough projects. The major manufacturers are extremely aggressive right now. Some of the other independence as our self, we have all become more aggressive with this reduced activity. Frankly, we see some of our European global suppliers in air tight products really doing some -- making some pretty desperate moves. As a matter fact, I would accuse them of dumping some of their European products. That would probably upset them, but I really don't care. They are pretty nasty right now. That is something we will look into as you move forward. But it is across the board in almost every industry we touch and with every competitor we deal with.

Thanks, Tom. And a not related question. Could you update us on the Port Authority project, and how much of your year ahead profit forecast includes contributions from that business?

Don, do you have those numbers?

Basically in our first quarter we generated revenues from the Lincoln and Holland tunnels of approximately $2.8 million. For the year I expect that, without any significant change in our schedules, that over 50 percent of our revenues in our Process Control segment will be derived from this particular project.

The project is going -- I'm happy to say -- is going very well. We have an excellent team up there in that New Jersey area. And from conversations I have had, certainly the customer is very pleased with our performance.

Richard Leader (ph).

Burnham Securities. Tom, looking back to the -- especially the events of the Northeast blackout, one would have just looked at that event and thought there were a ground swell of sentiment both within private sector and the public sector to make sure that that type of thing would not happen again. Have you seen anything at all to speak of as far as any events or any business, any signs that people are out to try to solve that problem? Are we're probably going to be dealing with more blackouts this summer in your opinion?

I would think they can solve the problems that quickly. So I wouldn't project we're going to have more blackouts. I think they are very active. The Department of Energy is involved. There have been any number of major forums in Washington D.C. with all of the major utilities talking about this issue and talking about longer-range technology, including superconducting tables in the more dense areas of New York, New Jersey and so forth.

And it is one of the things that we're involved in currently is with our solid-state technology. There is a lot more focus on DC to D.C. links, etc., etc. There is a great deal of activity, but still the government has got to pass an energy bill so everyone understands the rules of the road. They're not going to go out and lay out all this money and then the government changes the rules. There is a great deal of activity and research going on. Things are happening.

Just no dollars being spent?

Not yet.

Tom, one other question. You talked a little bit on how you're going to continue your research and development spending at or above your recent past of $3.5 million a year. And then also looking at acquisition opportunities, which I imagine would be both entire companies or product lines. As you look across the board of your current products, what would you like, or what do you see -- are there any missing things, are there gaps that you are trying to fill in either through developing some things yourself? Are there important things that you're out there trying to acquire in the marketplace, which would round out your product offering?

There is not a lot -- there are a couple of items out there, but it is sort of like letting the fox into the hen house here when I start talking about these things. But we are looking at some opportunities, but there is not a great deal -- there is not a great deal of void in our current scope of business. But there are some things that are of interest. Also, I believe you're going to see some rationalization of products by some of the major manufacturers. And there certainly could be some products there that would fit nicely into our existing facilities. That is about the extent of that.

George Gaspar.

Tom, basically and also Don, if we look at this charge that you're going to pass through here yet in the second quarter, which would basically potentially relate to at least 3 cents. So then you're giving us the guidance of 4 to 9, so basically from an operational point of view your downside number, exclusive of this, would be in the 7 to 8 cents range. It would appear that you're pretty much -- could we consider that you are really in the bottoming out quarter here? And that going forward beyond 2Q that you will have some momentum here even with a moderate improvement in operations?

Your math is right, George. I believe your statement is correct. We are seeing some very sharp commodity price increases for steel, copper, aluminum, stainless and many of the commodity that we use here at the company. And that is ratcheting it up rather quickly. It could have a slight effect on projects that are already in our backlog that we certainly are addressing now. But your math is right. I think that is pretty close.

And if I could have a follow-up on this ongoing business of trying to collect on past projects that you have already reserved for. What is the status? Was there anything in the fourth quarter from collections there? Can you update us on the status of how much money that still may equate to? And is there any progress on any of these reserves coming forward for collection?

I don't really know, George, that I want to comment on the amount of money, but I will say that we are -- we're working on these issues, and we are feeling better about our position. And I believe there is an opportunity to resolve one or two of those issues. We only have about four, but I think the opportunity to resolve one or two of them will take place this year. But we're dealing with invincible governments. It is not easy. I would just rather not say the amount of money.

John Franzreb.

The charge you took to close facility, where does it fall in the P&L?

John, that will be normal operating expenses. Primarily it will hit our gross margin.

So it is going to be in top. Now it was 250K for the quarter, and is it 300 next quarter and 400 third quarter? Is that how I heard it?

No, basically what we intended to say is it was approximately $250,000 of costs incurred in the first quarter. But we anticipate both the third and the -- excuse me -- the second and the third quarters to have incremental costs of between 300 and $400,000.

That is a gross number spread out over two quarters?

No. Each quarter could have a 300 to $4000 incremental expense.

On average 350 per quarter over the next two quarters?

Yes, sir.

What do you expect to be a net benefit of consolidating the operations say a year from now? How much in cost savings do you expect to realize?

John, our preliminary estimates is that the consolidation effort will have approximately less than a one year payback. So that we anticipate recovering these costs on an ongoing basis within 12 months.

If I dissect the backlog, how much of the backlog is Transdyn and how much is in electrical products?

We've got to dig through here. I don't keep all of that in the back of my head.

The backlog as of the end of the first quarter totaled 137, of which Process Control was approximately $56 million.

Say that again, Don?

56 million was Process Control, the balance Electrical Power Products.

As you look into February can you just discuss what the current trend is? Are we still looking at an eroding order rate, or are we seeing a floor established?

I hate to talk month-to-month, but we are actually seeing an increase in inquiries and an increase in our bookings thus far for this month. And we're rather optimistic about some opportunities in March.

But it hasn't translated into orders, Tom?

Some of it is translating into orders. I'm not going to jinx what is going on right now.

Mr. Gaspar.

Tom, you made reference to some raw material cost increases that you are experiencing. What about other costs that may be hitting your G&A line, such as Sarbanes-Oxley things like that? What is your experience on this side of the equation?

I've got to be careful how I say this, George, Karen is over here fixing to hit me with something. Certainly I think that these regulations may be the right thing to do. But I believe that you could see additional charges going forward for audit, 404 compliance costs, legal, and D&O officers insurance. You might expect that to double. It will be significant. Again, it might be the right thing to do, but I believe the smaller companies like ourselves are going to bear a disproportionate amount of these costs. And I sure hope somebody takes a deeper look at this. And Karen is about to hit me again, so I'm not going to say more to that.

A little bit more color on the R&D side, if you wouldn't mind. On the Thyristor Controlled rectifier area, and what is in test. What kind of market opportunity exists there? In terms of some of the things that you were talking about of increased power requirement to the rail, maybe going for less substation use -- just trying to economize on the part of the utilities. What are we talking about here in terms of market opportunity, percentage of what you would do on an annualized basis? And what may this provide for you for future impetus?

The market could easily be $100 million a year plus over the next several years. Opportunity is still there for new systems. And certainly the replacement of product on existing systems that are getting fairly dense in Chicago, New York, New Jersey. There is a number of opportunities there. New rules -- regulations come out to make our transit cars safer, and it is adding 20 to 30 percent more weight to these trains. They are also adding additional cars. So we have to deliver more power. And we also have to focus on energy conservation. And I think the opportunity there is very real for us. But for me to ballpark what percentages we would do, that would really be a poke in the dark.

One area I am not sure you really touched on specifically but -- and I know that it has been pretty shallow for quite awhile, the light rail opportunity. Is there anything on deck here that you're looking at that you can bring in-house on backlog in any projects around the country or elsewhere -- international?

Not sure much international at this point. But domestically, yes, there are some major opportunities.

Anything that we could be looking out over the next say three to six months here?

Yes.

Can you --?

I'm not going to identify which area. We feel pretty good about several opportunities, but those things are subject to change. Funding right now is an issue. Much of the funding that is available is going to shore up around facilities to strengthen the support columns and buildings. Again with this terrorist threat, we're doing an awful lot of cement and rebar these days. So some of these projects may flip. We don't know.

If I could just state one more on the activity that you have going in the Lincoln and Holland tunnels. Can you give us an idea within the Process Control revenue stream for the first quarter, how much was dedicated to that project? And then what percentage of your backlog in Process Control currently is represented by the contracts that you have have on Lincoln Holland tunnels?

Don, go ahead.

George, this is Don. Basically in the first quarter we reported revenues of approximately $2.8 million on the Lincoln and Holland tunnels. Up to $56 million that is in the backlog probably -- I don't have the exact number, but it is probably a little over 50 percent of our backlog is with this one project.

Is that deliverable by the end of the current year, or what is the deliverable date of that particular backlog?

A percentage of it will flow over into 2005.

Our last question is a follow-up from Mr. Franzreb.

You might have given this number out, but what was the cash at the end of the period and the net long-term debt?

As of the end of the first quarter, we had $43 million of cash and marketable securities. And our debt, including the current maturities of our long-term, was just over $7 million.

And what was the current portion of that?

The combined total is just over 7 million.

Tom, what are your thoughts about using some of that cash maybe to repurchase stock?

I would have to think about that some more.

aller: What is your current authorization? How about that?

At this point the utilization of our cash is something that comes up at each of our quarterly Board meetings. And we discuss the various options for its best use. At this point in time there has not been any approval for stock repurchase. The focus has been on growing business through acquisitions.

The acquisitions we have been talking about for the past two plus periods, I can't imagine the environments improve much. Are you changing your priorities in what to do with the cash? Do you still see acquisitions as the number one thing? And if so, what do you think will be a reasonable time line to see you pull the trigger on something?

That is still our number one priority, John. The time line is very difficult. There are not a lot of opportunities. A lot of it has to deal with the decision being made by another company to either divest a division or a product line. That is where the most probable opportunity will exist, and therefore putting a timetable on it is very difficult.

There may be some strategic opportunities geographically that we're looking at. I will just leave it at that.

I would imagine that means international?

Very possibly.

Mr. Powell, there are no further questions at this time. Please continue.

Thank you for joining us today. We look forward to talking with you again next quarter. Have a nice day guys. Good day.

Ladies and gentlemen, this concludes the Powell Industries quarter one 2004 earnings conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 followed by the passcode 570572. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by the passcode 570572.

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