Powell Industries Inc (POWL) 2004 Q2 法說會逐字稿

Welcome to the Powell Industries second-quarter 2004 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, June 3rd of 2004. I would now like to turn the conference over to Mr. Ken Dennard, Managing Partner of DRG&E. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2004 second-quarter results. We'd also like to welcome our Internet participants listening to the call as it is being simulcast live over the Web.

Before I turn the call over to management I have the normal housekeeping details to run through. You could have received a fax and/or an email of the earnings release this morning. Occasionally there are technical difficulties experienced during these broadcasts; so if you didn't get your release please call our offices at DRG&E and that number is 713-529-6600 and we'll get that right out to you. Also, if you'd like to be on those distribution lists please relay information about that 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 telephonic replay will be available for the next seven days by calling 303-590-3000 using a pass of 580-254 and that information is in the press release.

Please note that information reported on this call speaks only as of today, June 3, 2004 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. Also as you know, this conference call includes certain statements, including statements relating to the Company's expectations of 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, 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 material; 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. Tom?

Good morning, thank you, Ken. Good morning to each of you. We thank you for joining us for our second-quarter conference call. We're happy to report that the long-awaited upturn in our market opportunities is apparently here. We're experiencing an increase in the number of inquiries and in the size and the complexity of projects for heavy industry. There's also increased chatter on upcoming projects and a higher number of budgetary estimates. These opportunities appear to be across all segments of our business.

We've received a nice order for 10 electrical power control modules designed for Iraq and the Ministry of Electrical Power. This project was received in mid April and shipped during the third week of May. Based on our quick turnaround and performance on this project we anticipate future opportunities in this region. We also received a $5 million order from the Maryland transportation authority to design and build integrated traffic control, surveillance and facility management systems for the Baltimore Harbor and Fort McHenry tunnels. This order is encouraging in that funds for new municipal infrastructure projects have been very limited for the past 12 to 18 months and we are now seeing signs of increased activity in this arena.

All in all new orders booked are up 12 million over the first-quarter and we expect our bookings trend to continue to improve. In all of these areas, while activity and inquiries are up, pricing has not yet improved. Market price levels remain highly competitive on all fronts. We anticipate that as business activity continues to improve market price levels will begin to improve as well.

While we're aggressively managing our cost we have not reduced our research and development spending. R&D spending was slightly higher this quarter because we did a large amount of new project testing. This testing was largely successful and will allow us to broaden our family of arc resistant products.

I'm pleased to report that our plans to close our Greenville, Texas facility and consolidate operations with our North Canton, Ohio division are proceeding on schedule. This consolidation will be completed in the second half of this year.

With the lower production volumes this year it's an ideal time to make some needed capital improvements in our largest facility located here in Houston to improve future productivity. We're putting in a new paint and finish line and are replacing some older technology machinery in the plant with major new laser cutting, fabricating and material handling equipment. These capital projects totaling about $5.1 million are scheduled to be complete by the end of the first-quarter of '05. Implementation, however, has caused some disruption and inefficiency as was anticipated.

We believe that near-term business activity will continue to increase and these facility improvements will improve our efficiency and cost competitiveness. With that I'll turn it over to Don for a review of our financial results.

Revenue for the second fiscal quarter was $51.5 million compared to last year's second-quarter results of $64.2 million. Gross margin for the quarter was 16.7 percent compared to last year's second-quarter of 18.9 percent. Higher basic material prices are adversely impacting our gross margin. During the second-quarter material costs were up approximately 3.5 percent or around $750,000 primarily due to the higher prices for copper, aluminum and steel.

Associated with our efforts to consolidate our Greenville, Texas and North Canton, Ohio operations we incurred approximately $335,000 of expense for severance, training, equipment and supplies during the second-quarter. As Tom noted, this work is proceeding on schedule. Additionally lower production volumes and competitive pricing pressures continue to adversely impact gross margin.

Our SG&A expenses for the quarter were $8.2 million compared to $8.9 million in the same period a year ago, a reduction of $700,000. SG&A as a percentage of sales was 15.9 percent in the second-quarter versus 13.9 percent in last year's second-quarter primarily due to lower sales volumes. Earnings before interest and income taxes, or EBIT, for the second-quarter was $400,000 versus $3.2 million a year ago. For the quarter net interest income increased by $134,000 to $141,000. Our income tax provision was $213,000 in the second-quarter; our effective tax rate was 37.2 percent compared to 37.4 percent in the same period of the previous year. Net income was $360,000 versus $2 million for the second-quarter of 2003. Earnings per diluted share were 3 cents compared to 19 cents a year ago.

Our backlog for the second-quarter of 2004 was 131,000 -- excuse me, $131 million compared to $137 million in the first-quarter of 2004 and $203 million in last year's second-quarter. Reorders in the quarter were $45.3 million versus $33.1 million in the first-quarter and $98.7 million in last year's second-quarter. We generated cash flow from operations of $10.3 million and invested approximately $1.6 million in capital improvements during the second-quarter resulting in free cash flow of approximately $8.7 million. Year-to-date we have generated free cash flow of $9 million.

Turning to our business segments. The electrical power products segment reported revenues of $44 million compared to $58.2 million for the same period last year. Most of our markets in this segment have weakened this year compared to last year. The income from continuing operations before income taxes and for electrical power products was $300,000 compared to $3 million last year. The process control systems segment reported improved revenues of $7.5 million versus $6 million in last year's second-quarter. Income from continuing operations before income taxes for process control systems was $303,000 versus $229,000 a year ago.

Now looking ahead to our third-quarter and the balance of the year. We expect third-quarter earnings to range between 4 cents and 9 cents per diluted share. For fiscal 2004 we expect full year revenue to range between $205 million and $220 million. Full year earnings are expected to be between 25 cents and 35 cents per diluted share. And free cash flow to range between $5 million and $10 million. With that I'll turn it back to Tom.

While we're disappointed in our earnings results for the quarter, as I stated earlier, opportunities and bookings have improved and we're optimistic we will see further strengthening in the third- and fourth-quarters. And we should see further improvements in 2005. The magnitude of improvement is dependent upon passage of legislation on energy and transportation currently stalled in Congress.

Looking at our markets going forward; exploration and production, there's increased activity in this arena particularly in FPSO's. However, most of the current projects will be fabricated at deep water facilities in Korea and Singapore. We will participate but competition in this area is global and intense.

Our opportunity is far better for additional oil production in the Gulf and the Caribbean for spars and for tension linked (ph) platforms and with a newly developing market for LNG offshore terminals. This activity is not as brisk as in 2001 and 2002 but shows definite signs of improving.

Utilities. Major power producers are moving forward with increased generation facilities and upgrades to their distribution systems as well as EPA mandated emission reduction processes. Independent power producers are becoming active again in a number of domestic areas and are successfully looking to international markets to sell their expertise. Alternative energy sources such as photo voltaic and wind farms are currently working on projects but may not move forward quickly with an energy bill still in limbo.

Chemicals. There's activity here to improve processes and efficiencies but the high price of feedstock is somewhat worrisome.

Refining. Good activity and opportunities, but again we need an energy bill to map out the rules and regulations.

Government municipal infrastructure projects. There is some improvement in traffic, water and wastewater and a substantial increase in the number of transit projects. Reauthorization of a new transportation act, which is currently stalled in Congress, will further improve the outlook for the transportation market. The Senate version contains over 256 billion earmarked for transportation.

Other basic industries such as steel, copper, aluminum, pulp and paper are all working on capital improvement driven by increased demand and improving prices. All in all our market opportunities are increasing. We'll continue to focus on the future, the development of new and improved products and services and on more efficient operations.

Our bookings are tracking up. The projects we're seeing have grown in both size and complexity and this should bring improved margins in '05. Our capital expenditures are on track. Our R&D continues to bring positive results. We have excellent people, products and are well positioned for an upswing in the market. With that we'll open it up for any questions. Thank you.

(OPERATOR INSTRUCTIONS) Richard Leader.

Burnham securities. Good morning, gentlemen. Tom, it's good to hear your optimism. It's a good change from some of the recent quarters. I'm excited to see the new order upturn. But will you resolve one question that jumps out at me? That is if I look back at the outlook, and this may not be correct, but I think I had the company looking at between 35 and 50 cents for the year previously and it's now 25 to 35 cents and your previous estimate for revenues was 2.20 and now you're at 2.05 to 2.20 -- lowering the range. So is the optimism for orders which will generate higher revenues further down the road than 2004 or can you tell me why you've brought down your outlook a little bit?

We were not as successful in the first-quarter -- in the fourth-quarter of last year, in the first-quarter booking as much business as we were attempting to book and thought that we would book and that's going to affect us -- did affect us in the second and will affect us in the third-quarter. Most of this work; generally it's a three to six-month turnaround so we don't really see a lot of turnaround in bottom-line earnings and in volume until the fourth-quarter and the first-quarter of next year.

And on your backlog right now, as you use the phrase "very competitively priced," is that to infer that you have -- that you're pleased with the current pricing of your order backlog or that the competitive pressures have put pressure on that margin?

Well, competitive pressures in the last two quarters have actually intensified. There are some signs currently that some folks may be working to improve that situation. But if you'll note, our gross margin declined from almost 19 percent down to 16.5 percent and that's based principally on the tighter margin jobs and the competitive pressures.

All right, thanks.

John Franzreb.

Sidoti & Company. Good morning, Tom and Don. First I was wondering what was the contribution in the backlog from the port authority job, if you'd kind of break that out for us?

You were speaking of the Lincoln and Holland tunnels?

Yes.

Basically in the current quarter approximately 35 percent of our revenues were generated from that project.

35 percent of revenues?

Yes.

But actually what I was looking for is how much is left in the backlog?

Left in the backlog we have approximately $28 million.

Okay. And when I looked at the erosion in the operating margin on the electrical side of the business, I was kind of surprised how quick of a dip it took in the quarter. Now you cited higher raw material cost and clearly a pricing environment is an issue. Can you give us a sense of -- as I look at less than a percentage point of operating margin in electrical and how much of the erosion compared to last quarter is raw material cost and how much of it is the pricing environment?

Looking at the material inflation factor that we are now seeing this current quarter the impact was about $750,000 on depricing (ph) our margins. If you look at our year-to-date number, that number is approaching around $1.2 million. So the second-quarter was much more dramatic and the first-quarter, but it is definitely having a material impact on our earnings.

Okay. I guess I'll requeue in. Thank you, guys.

(OPERATOR INSTRUCTIONS) Stacy Williams.

Robert W. Baird. Good morning, Tom. Good morning, Don. George is on the call listening so I just wanted to let you know that, but he is at home recovering from heart surgery and so far he's doing just great.

That's super. He's a fine gentleman.

I do have several questions but I will start with one that has three parts and then I'll hop off and allow others to get in. On the new orders if you could -- I mean, we were very impressed with the jump to 45 million. My first question is can you -- part of the question is can you add any color on the composition? You did mention the Iraq award and then also the Maryland award; but could you speak to any changes that you've seen in the new orders maybe international versus domestic? And then secondly, any comments on any additional specific projects outside of the two that you already mentioned? And then finally, any thoughts on the order rate and margins going forward? You seemed pretty optimistic in your comments on the call and then also in your comments in the release; but if you could follow up with any more color on that, that would be great.

Stacy, the addition of $12 million in bookings over the first-quarter was fairly broad based. Obviously the tunnel project in Maryland added right at 45 million and the rest was intermediate size jobs from transit to utility to oil and gas. There was not as much international in that particular quarter as we anticipated we might see going forward. Certainly there are opportunities in that arena. The second part of the question?

Anymore comments that you could provide on additional projects outside of the two that you already mentioned in the new orders in the quarter?

I prefer not to say where or how but it was fairly broad based and I would leave it at that in all industries. I would say the largest projects, aside from the ones mentioned, was probably in the $1 million to $2 million range each. There's not a lot of megaprojects that were bid in the last several quarters. There are some megaprojects that are coming up, however.

And I guess my follow would then be a follow-on to that comment. Are you seeing these on the power generation front or are these more offshore module type projects? And then what are your prospects for offshore modules going forward?

Actually the utilities side of the business has increased more dramatically than the offshore projects. There seems to have been a lull in the last several months on onshore projects; although there are a number of projects that are being discussed currently for offshore. Most of it was utility related and some refining I'll admit.

That's great. And I'll hop off and requeue for additional questions. Thank you.

John Franzreb.

One question is what was the net cash balance at the end of the quarter?

We ended up the quarter with $46 million in cash and cash equivalents and $5.5 million in marketable securities; so in total about $52 million. And John, while I've got you on the line I want to clarify a comment I made a moment ago. Now if we were talking about the Lincoln and Holland tunnels. I quoted 35 percent of revenues; I was speaking of 35 percent of segment revenues of the process control system.

Okay. Now you touched on increased capital spending, Tom. I think you said $5.5 million. Just clear it up for me -- do you mean that's how much you're doing in the painting and finishing project itself or is that the CAPEX budget for this year in total? I'm kind of hazy on that one.

John, the $5.5 million Tom was speaking to is our commitment that we've made for enhancements in the Houston facility here locally. Our overall CAPEX spending anticipated for the current year from a cash flow standpoint is estimated to be about $6 to $8 million. Some of the $5.5 million will roll over into the first-quarter of next year.

What did the CAPEX budget look like in fiscal '05?

At this point in time I would suspect it's going to be in line with what we are looking at today, but it's way too early to really start talking about 2005.

Okay. And I guess lastly, in the previous call you talked about the competitive environment and you've mentioned some larger European players trying to increase share in the states. I took that to mean Siemens and ABB (ph). What are your thoughts today? Are they still very aggressively pricing and is that an issue or have they become more rational?

How do I answer that? I would say they're not rational yet. No, sir.

Okay. Thank you very much.

Stacy Williams.

On the previous question that was asked on the deterioration or the erosion in the EPP margin; also involved in them, and I think, Don, you mentioned it, is the consolidation in ESCO, is that correct? So it's not just the material cost and the pricing environment but there was also some flow through from that consolidation.

Yes, if you're looking back to where we were at the beginning of the year, we've estimated that the cost of consolidating our businesses with between Greenville and North Canton to be around $500,000 to $750,000. That estimate is still one that we think is -- we think the numbers are going to end up at. When you're looking at the changes in the outlook going forward, they're heavily influenced by the margins we currently see in the backlog as well as the costs that we're now incurring for some of our basic materials.

So going forward you are continuing to expect some consolidating cost to flow through or not?

Through the second-quarter we've incurred $335,000.

That's helpful. And then a final question. It looks like your free cash flow, based on your guidance of 5 to 10 million for the year, looks like it's trending down given where you stand at the first six months of your fiscal year. Would you provide some color on this and it sounds like maybe the 5.5 million for capital improvements is likely a big reason; but if there's something outside of that can you discuss that as well? And then also if you can make a comment on R&D?

Let me speak to the cash flows. Currently year-to-date we're at just about $9 million in free cash flow. The balance of the year I'm not anticipating as much from operations as we previously might have looked at; but I am looking for continued improvement in some of our balance sheet items, although we did have a very strong second-quarter. Capital spending will increase from a quarter by quarter basis in the second half of the year over the first half. So that the balance of the year is going to be nominal from earnings and working capital reductions and will be partially offset with increased capital spending.

Okay. (indiscernible) just lastly if you could make a couple comments on R&D and what kind of progress you're seeing on some of your various developments?

Stacy, we've been working and lead the industry in arc resistant products. We've recently passed several more extensive tests in the arc resistant arena of -- it's about $100,000 every time you touch one of these pieces of equipment and we were very successful in that arena and that will lead to -- has already led to some new opportunities and new business in the last quarter and we've got some projects that we're working on right now due to that.

In the electronics area we've made progress and I think the people we're working with in that arena of customers that are helping to fund a part of that are very pleased with our progress to date. It's certainly not a finished product at this point. This is more long-term development. You asked a question earlier, let me point out while I've got an opportunity here that the higher cost of material steel and proper cost us about 7 cents a share before tax in this past quarter. We're working to get escalation clauses into a lot of these quotations. Needless to say, customers are fighting that pretty hard but the reality of it is we are beginning to have some success and if our competitors will follow suit that will help.

That's great. Thank you for your comments.

(OPERATOR INSTRUCTIONS) Jerry Heffernan (ph).

Lord Abbett. Tom, I'm listening to the call, and I apologize, I came on late and when I came when you were just finishing a comment, I believe you were referencing the month of May so I'd like to go back to that. I'm trying to balance some of the qualitative things that you have said with the quantitative information that's provided here. And I'm coming up with the answer, if you will, that something is going on in May and in periods more recent than the April end of this quarter that are influencing your qualitative statements to the positive much more so than the quantitative information provided here. Is that an accurate statement and if I could ask you to review any comments you made about the month of May in you -- the beginning of your conversation on the call here today?

Jerry, I'm a little confused exactly which comment you're referring to at this point. The only comment I can recall that we've made regarding May was that we did book a large -- or a nice sized order of about 10 power control rooms in April that we were able to turnaround very quickly and ship into May. And that gives us -- the performance on that particular contract gives us optimism that we'll be getting some follow-on work as a result of it.

Some of the optimism that we have talked about in the call looking forward is the increased activity we've had in inquiries as well as the result that has now come through in new business. This particular quarter after three quarters consecutively of being in around $33-$35 million of new business booked, this is our first quarter that we're back up into the mid-40s and we are positive that that trend will continue going forward. So those are a couple of the highlights that we've talked about from a qualitative standpoint giving optimism for the future.

Okay. The reference was made to seeing some larger and/or more technically oriented projects ahead. Have things come in in May -- requests for proposals, things of that sort that are -- or are these things that are just being read in the industry periodicals, etc.?

No, in April and in May we've been seeing increasingly more complex projects, larger projects which fit us very well and in some cases certainly give us an advantage over our competitors. These are real projects; they're not closing as close as -- as quickly as we would like. There has been some delays in making decisions. You generally quote these jobs with thirty-days validity but frankly they're going 60 and 90 days out before decisions are finally made on who the vendor will be.

Okay. So people are actually putting the paperwork in front of you.

Absolutely.

Are you making any changes to the proposals that you're returning in regards to the inflationary aspect of materials today? I understand in your last comment there that you put these things out with a good for thirty-day period, although the return may be longer -- certainly an indication that you are at the mercy of the current market conditions. Are you changing the way you are wording the bid to guard yourself from material price increases?

Yes, we've always tried to utilize escalation clauses on commodities when we get into inflationary periods. We've alluded to the fact that competitive pressure is making that more difficult, particularly on contracts that are to ship in the next three to six months. But we are getting more and more success of being able to include in the final negotiations the escalation clauses when the contracts are going to be shipped in the nine-month plus period. We start (ph) at the place we always start, but at the end of the day competition will set the price level.

But we are factoring in, of course, the higher price of these commodities. Unfortunately in the last quarter there was a very quick spike in those prices on the existing backlog that was taken at lower rates; it was not factored in at that time. But we're taking that into consideration now for sure.

Okay. While I'd say most people do not regard you as an international player as the international component of your revenues has never been real large; to the extent that you compete against international players you certainly are an international player. And the movement of the dollar over the last 12 months certainly should be benefiting you. Making reference to some international players and their lack of rational pricing -- making that statement today has got to mean that on their currency basis they're taking a very big hit on this. Do you see things the same way?

I think that that's correct.

Okay. To what extent does currency start helping you in some larger, more complex deals that -- where you may have -- product has actually shipped out of the states?

It's certainly helped us look more competitive and secure some of that work against some of these international players, particularly in our areas of expertise. I don't know how else to say that.

Okay. The larger, more complex projects that you are seeing in front of you recently, are these items that will be shipped domestically or internationally?

Both, but primarily domestically at this time.

Okay. Very good, thank you, gentlemen.

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

No further questions. Well, thank you for joining us today, folks. We look forward to talking to you again next quarter and hopefully with better results. Thank you, again.

Thank you. Ladies and gentlemen, this concludes the Powell Industries second-quarter 2004 conference call. If you would like to listen to a replay of today's conference you may dial 303-590-3000 followed by access number 580-254. Once again we thank you for your participation. Have a pleasant day and at this time you may disconnect.