Powell Industries Inc (POWL) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Powell Industries Q3 2004 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, September 1, 2004. I would like to now turn the conference over to Mr. Ken Dennard, Managing Partner of DRG&E. Please go ahead, sir.

Thank you and good morning, everyone. We appreciate you joining us for our Powell Industries conference call today to discuss and review third-quarter results. We would also like to welcome our Internet participants that are listening to the call as it is being simulcast live over the Web. Of course, 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 did not get your release call our offices at DRG&E; that number is 713-529-6600, and we will get that right out to you. Also, if you would like to be on the permanent distribution list for fax or email, relay that information to us.

As you know, there will be a replay of today's call that will be available via webcast by going to the Company's website at www.powellind.com; or there is a telephonic instant replay that will be available for the next 7 days by calling 303-590-3000 using the pass code 11006587. Also that information is in the press release. Please note that information reported on this call speaks only as of today, September 1, 2004. Therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

Also, this call will include and include certain statements, including statements relating to the Company's expectations of its future operating results, that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in the forward-looking statements.

These risks and uncertainties include, but are not limited to, to the 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, 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. I would like to turn the call over to Tom.

Thank you, Ken, and good morning to all of you. We thank you for joining us for this third-quarter conference call. Some of you may have recently read a press release announcing that Mark Reid joined us in mid-August as Executive Vice President of Powell Industries. Mark has over 20 years experience in the electrical industry and brings more depth to our management team. His primary responsibilities will include strategic planning, corporate development. While management is concentrating on operational issues, Sarbanes-Oxley, day-to-day booking of new business, and consolidation of operations at ESCO and Unibus, we need additional focus on longer-term objectives and market penetration, alliances, acquisitions, and other strategic initiatives. Mark will also fit prominently into our succession planning process. We are pleased to have Mark as an addition to this organization.

We're happy to report that the upturn in our markets, which I reported to you in our last conference call, has not diminished. Inquiries are still healthy and far improved over our last half of 19 '03 and the first quarter of this year. Bookings of 42 million were pretty much on par with the second quarter, and $6 million more than the third quarter of '03.

We have received several commitments on nice sized projects in the alternative energy field. But those projects have been shelved or are awaiting legislative action. We have other projects in hand for design and engineering only; again there is a wait and see approach to legislative action on the energy bill.

Revenues of 53 million in the quarter has reduced our backlog of business but improved our ability for more profitable, fast turnaround opportunities. Earnings improved to 7 cents a share, after consolidation cost of 7 cents a share.

We continue to work on lean initiatives, new products, and our consolidation efforts. We have completed the closing of our Greenville, Texas, operations and the transfer of those products to our facility in North Canton, Ohio, and we are on track to complete the closing and transfer of Unibus products to our Northlake facility this quarter. I might add the old Franklin Park facility near Chicago was sold in August.

Our cash position continues to improve. We ended the quarter with 56 million in cash and marketable securities, versus 52 million at the end of the second quarter. With that, I will turn it over to Don Madison for a review of our financial results. Don.

Thank you, Tom. The revenue for the third fiscal quarter was $52.8 million, compared to last year's third-quarter results of $60.4 million. Gross margin for the quarter was 17.6 percent, unchanged from last year's third quarter, despite inflationary pressures primarily from higher commodity prices. During the third quarter, material costs were up approximately 2.6 percent or $1.1 million, primarily due to higher prices for copper, aluminum, and steel compared to the average price paid during fiscal 2003.

As Tom noted, our plans to consolidate operations are proceeding on schedule. Gross margin was adversely impacted by onetime costs associated with these efforts of $300,000 for severance, training, and equipment relocation costs. Including SG&A expenses, we incurred $1.2 million associated with plant closings during the quarter. SG&A expenses for the quarter were $8.8 million, compared to $8.5 million in the same period a year ago. SG&A as a percentage of sales was 16.8 percent in the third quarter, versus 14.1 percent in last year's third quarter, primarily due to lower sales volumes and onetime costs associated with plant closings.

Earnings before interest and income taxes or EBIT for the third quarter were $0.5 million, versus $2.1 million a year ago. For the quarter, net interest income increased by $161,000 to $190,000. During the quarter, we determine that our 2003 federal income tax liability was overstated by approximately $300,000, primarily due to a change in estimate associated with our extraterritorial income exclusion on income earned outside the United States. As a result, our income tax provision was a benefit of $79,000 in the quarter, which reduced our 9-month effective tax rate to 23.5 percent.

Net income was $737,000, versus $1.3 million for the third quarter of 2003. Earnings per diluted share were 7 cents compared to 13 cents a year ago. Our backlog for the third quarter of 2004 was $120 million, compared to $178 million in last year's third quarter. The orders in the quarter were $42.1 million versus $35.8 million in last year's third quarter.

We generated cash flow from operations of $5.8 million and invested approximately $1.8 million in capital improvements during the third quarter, resulting in free cash flow of approximate $4 million. Year-to-date, we have generated free cash flow of approximately $13 million. As of July 31, 2004, we had cash and marketable securities of $56.4 million on hand.

Now turning to our business segments, the Electrical Power Products segment reported revenues of $43.3 million, compared to $53.1 million for the same period last year. A decline in revenues from utility customers had the most significant impact on our third-quarter revenue compared to the prior year. Revenues from utility customers were $16.8 million, a decrease of $7.5 million from a year ago. Revenues from industrial customers were $21.6 million compared to $21.1 million a year ago, and municipal and transit projects generated revenues of $4.9 million compared to $7.7 million a year ago.

Income from continuing operations before income taxes for Electrical Power Products was $185,000 compared to $1.8 million last year. Third-quarter income was adversely impacted by onetime cost of $1.2 million associated with our efforts to consolidate operations, and $1.1 million for higher material costs primarily from inflationary pressures on commodity prices as noted earlier.

Our Process Control Systems segment reported revenues of $9.5 million versus $7.3 million in last year's third quarter. Income from continuing operations before income taxes for Process Control Systems was $473,000 versus $386,000 a year ago.

Now looking ahead to our fourth quarter, we expect fourth-quarter earnings to range between 1 cent and 6 cents per diluted share, which includes pretax expenses of $1.5 million to complete the consolidation of our Unibus add Delta-Unibus productlines. For fiscal 2004, we expect full-year revenue to range between 205 million and $215 million. Full-year earnings are expected to be between 18 cents and 23 cents per diluted share, which includes pretax expenses of $3 million associated with consolidation of operations. Full-year free cash flow is expected to range between $10 million and $15 million. With that, I will turn it back to Tom.

Thank you, Don. Good job. Let me make a few quick comments and then we will turn this over to questions. As I stated earlier, in general we're enthused with the increase in opportunities that we're seeing. If August was any indication, we should have better bookings in the fourth quarter this year. Of course, passage of HR 4503, the Energy Policy Act, currently stalled in the Senate, will go a long way to improve the outlook for the coming year.

Going forward we will realize the operational efficiencies implemented in 2004. Our consolidations of manufacturing operations are on track to complete to be completed by calendar year-end. It should increase efficiency and profitability of these businesses. Capital improvements at our largest operation, Powell Electrical Manufacturing, are nearing completion by year's end. These actions will help our competitive position in our Electrical Power Products markets.

Our Transdyn subsidiary continues to win kudos for their performance on several large and very complex projects. Exceptional performance should lead to additional follow-on work.

Finally, Sarbanes-Oxley compliance requirements are burdensome and they are distracting. But we are progressing well with these requirements. We continue to focus on the future with the development of new and improved products and services, with more efficient operations; and we remain prepared for a continuing upward trend in our markets. At this point let's turn it over to questions.

(OPERATOR INSTRUCTIONS) George Gaspar from Robert W. Baird.

Good morning to everyone in Houston. I have got a lot of questions, but I will ask a couple and then pass it and come back.

That is not a change, George.

Firstly, can you just give us a detailed breakdown on this 3 million consolidated expense for restructuring, whatever? Can you break that down as to how much is for the Cleveland operation consolidating into Northlake; and what the cost was in terms of ESCO going over to Ohio?

Yes, George, I will try to answer your questions in that area. Basically, if you recall, our original estimate that we had placed on the closing of our ESCO -- our Greenville facility and transferring the ESCO productline up to North Canton ranged from about 500,000 to $750,000. We completed that, less the sale of the asset remaining, at the end of the last quarter; and the actual cost incurred was just over $900,000.

So basically we exceeded our high-end range of about 150 to $200,000 when everything was said and done. Now, some of that will probably be recovered with the sale of the asset, which is yet to come.

When you're looking at the estimate that we had previously given on the consolidation of our Elyria facility outside of Cleveland into our Northlake facility in Chicago, we had given a range of $1.3 million to $1.8 million. That was our internal estimate before we had gotten all of the quotations. Now that we have got some harder numbers from vendors as far as the relocation of equipment and getting that set up in Northlake, it appears our estimate might have been a little bit shy by, again, about $200,000. So at this point time, I would expect that range to be more like between a 1.5 and $2 million.

So when you look at a little over 900,000 on the high-end, the actual for ESCO where we are at today, assuming no gain on the sale of assets, and then when you're looking at the high end of the range on closing Elyria for $2 million, that comes up with our $3 million, our current estimate for the current year. At this point in time we're not projecting any material gain on assets in the current fiscal year at either location.

Okay. All right, thank you. On the backlog situation, obviously we're a little surprised to see it down. Because I mean in our last quarter the conversation was that the bidding process had never been higher on historical. So, obviously there is a slowdown in getting bids converted to actual orders. Maybe what you're telling us on August is an indication of a change.

Within that backlog, I would like to know, post the end of the backlog, what has come in or what can we count from the disclosures on the process control side that you have indicated? Can you give us a number as to what the Process Control backlog might be now, versus what it was included in the backlog for the quarter?

You mean as of today?

Even as of today versus the end of the quarter, July.

At this point in time, I am not aware of any material bookings that have taken place since the end of the quarter. There are several orders out there that we are pursuing, and hopefully we will get some of them closed during the quarter. But nothing that I think that warrants talking about at this point in time for the first 3 weeks.

Then do I understand that on this situation, that the backlog for the end of the quarter included your post August 1 disclosure of your order that came out of Virginia?

The Virginia order that we put the press release out on back a few weeks ago was actually booked. I believe we talked about it in our previous conference call. It was included our second-quarter results, of around $5 (ph) million.

Okay. I just wanted to clarify and make sure that--.

That we basically, getting the press release out, we had to go through the customer and get a customer concurrence with the way that we had constructed it. And that was the reason for the delay in the press release.

Okay, just one additional on the backlog and I will pass it. Within the backlog for Process Control, and particularly the New York tunnel job, how much of the original contract -- which I believe was 41 million but maybe your part of that was 37 or so, you can correct me.

That is correct.

What is left on that at this point? Going at post the quarter's end, how much is left in backlog?

You're correct with the numbers. Our piece of the total contract was just over $37 million, and the as of the end of the third quarter we had around $23.5 million of that contract remaining in our backlog.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS) Richard Leader, Burnham Companies.

Good morning, everybody, and welcome to Mark. Tom, you have talked several times in recent quarters about the importance of an Energy Bill. This may be too difficult a question to put your finger on exactly, but is there any way to quantify, in your opinion, how the inquiries and proposals that you are receiving are sort of hinging on an Energy Bill? How much is based on federal funding or other issues which might be completed? Is it half the number or is it 25 percent, or what?

Let me answer it this way. There is about 2,000 megawatts -- I will just talk about one segment, which is the wind power projects that have been delayed. There's about 2,000 megawatts of power that has been stalled, which is awaiting for renewal of this 1.8 cent per kilowatt-hour production tax credit. But that is substantial. Each 100 megawatts of power could potentially take as much as $1 million in electrical power products. And 1.8 cent of course is a pretty good amount.

Now, my understanding is they are trying to peel that out of the overall energy package, and get something done when they reconvene this month -- I think later this month, September. So, it could be a substantial amount of work for us. There's also geothermal issues and solar power, all awaiting on this energy tax credit to be re-established. I believe that it will be, it is just I guess politics as usual in Washington.

Do you think it will make any difference who is in the White House, or it will get done before the -- ?

I would like to make a comment on that, but I think I will leave that one for you, Richard. Thank you.

Let me ask you one other thing, Tom. Today, the ISM manufacturing survey showed that prices now for manufacturers are up 30 straight months. You commented that the fact that your steel, aluminum, copper were up about 2.6 percent. I was not sure whether that was on a quarterly or annual basis. Can you touch on just what the Company does in terms of containing costs, or hedging, or being able to pass them through? Or are you vulnerable for contracts which might be locked in to prices which would escalate after that point? Then I will pass it on.

In some cases, we have escalation clauses in there, particularly for the offshore modules; because they contain such a high percentage of steel and beams and so forth. But I must tell you that escalation clauses these days are not very well accepted by the customers. And the competitive pressures are still very, very strong, very difficult out there in the marketplace.

We do everything we can to recover those added commodity costs of working with our customers, but it is difficult at this time. I don't really believe that prices have increased in the electric power products arena, as I guess I would say too many competitors for the amount of business that is available.

Does that fully answer your question, sir?

Yes, thank you.

George Gaspar.

I missed a very early part of the call; sorry about that. Congratulations, Mark, on joining the Company. I would like to have Tom, Don, maybe comment on this free cash flow indication that you're talking about. You are ranging it 10 to 15. But you also indicated and we calculated earlier that it was in the 13 million range for 9 months.

My first part of this is you mentioned that there was some property sales. Northlake -- maybe I got the name wrong -- in Chicago, having been concluded in August, which obviously will fall into 4Q.

Franklin Park.

Excuse me. What kind of cash do you think you could generate in 4Q from sales of property and so on?

At this point, Tom, we have concluded the sale of our Franklin Park facility. We basically recovered our investment in the property; and we will actually have positive cash impact of a little over roughly $1.5 million as a result of that sale.

1.5 million on effective cash input for the quarter?

That is correct. (multiple speakers) not projecting that we will close on any other properties. As you are aware of, we do have two other properties we recently put on the market. There has been some initial activity, but nothing that would give us the expectations that it would close in the next 90 days.

Okay, so if we try to analyze what you have indicated for guidance on your free cash flow, if you are at 13 million and you can generate -- forgetting about operations -- just 1.5 million here in cash, coming from the property settlement, puts you up to 14.5. I would have to conclude that the free cash flow contribution from operations in this quarter is going to be very skinny. And the question is, why would that be? Do you have something else going on that is going to chew cash? Is it R&D? Or is some other kind of expenditure?

We're expected to probably have 1.5 to $2 million of CapEx expending (ph) in the fourth quarter. So that will somewhat offset the onetime gain on the sale of the facility in Franklin Park. So, that will partially offset it.

We're looking at probably some incremental gains in balance sheet reduction. But we are looking for a relatively flat earnings prospect for the fourth quarter, when you consider restructuring cost. Restructuring costs will have a higher cash impact in the fourth quarter probably than in the third quarter because of actual disbursement of severance (inaudible).

Okay. Then, as you are moving ahead, I know that you guys have not given any guidance on '05. I would like to ask you about what your early thought is. You are now basically a couple months away from the close of your fiscal year. If you can't give us any guidance on '05 -- and you're welcome to do that -- how would you position yourself for the first quarter ending January? Because that has got to be pretty close in the scope of operations at this point in time.

I'm not brave enough to answer that. Don?

There's a lot of things that are going to happen here in the fourth quarter. As Tom alluded to earlier, what is going to happen with this alternate energy aspect of -- if we can get some of that freed up, we do feel like there is some pent-up demand will help us very short-term.

So, it is hard for us to sit here and tell you at this point in time with so many things up in the air as to what will happen even early next year. Next year is going to be -- we got a lot of work to do, and see what happens in Congress, to really nail down our expectations for 2005.

Okay. All right. I'm going to ask, I can just take (inaudible) of asking one more and then I will pass it and come back. In the overview, as you're looking out, what is going right and what is negative from here? If you looked at your productline, within the EPP segment, let's say -- could you comment about in more detail, broader view, of how you see the offshore area, equipment area?

And how you view maybe some of the internal opportunities, either in power generation, refining equipment area? Or the petrochemical? Or is there anything coming out where there is some opportunity that you might have that you haven't had before? And that maybe has something to do with your R&D-ing; you're welcome to comment on that.

Boy, you're tough, George. As we look at the offshore production platforms and LNG terminals, we are seeing more activity in the Gulf and domestically. It has slowed to a trickle here in the last 6 to 9 months, but it is showing some signs of life, and we are shortly working on a number of those projects that we hope to have some success on.

But, the bulk of the projects in that particular segment are international; and that really increases the competitive pressures, and also for in-kingdom or in-country content. So it makes it a little bit tougher on us. But, I believe we are going to see some success here in the latter part of the fourth quarter, and the first quarter of the coming year. Again, more activity.

Utilities and IPPs, that has really come back stronger than I would have initially anticipated. I know of a number of projects we are working on. In the alternative energy field, I know these folks want to get some of these projects up and running by March-April, before summer gets here. And they are just dragging their feet until they can hopefully push this tax abatement through. So, that could be reason for some very quick turnaround work; and we are optimistic on that front. It plays particularly well to some of our strengths in our modular packaging business and 27 and 38 KB and higher voltage products. And we have had a good measure of success in that arena.

Most other areas, George, with refining chemical and so forth, it is improved over the last 6 months. Most of it is driven by EPA requirements. We've got a number of projects in hand and a number of projects that we are bidding for refineries, for chemical, and for utilities.

Transit is active. We've bid a number of projects there. Unfortunately, a highly, highly competitive business; at times we have not been as successful is I would like to be, even though we certainly feel that we technologically have some better products than some of the other offerings. So we hope to have some success there. (inaudible) Your turn.

John Franzreb from Sidoti & Co.

You kind of answered my question, Tom, just now talking about the end markets. If I read you correctly, one of the weaknesses seems to be -- at least in the competitive landscape -- those offshore businesses, the amount of internal content. Is that putting you at a competitive disadvantage where all the business is?

To some extent, unless it is controlled by domestic suppliers who prefer ANSI products over IEC products. There are those that are holding strong, preferring ANSI products. So it's a mixed bag.

One of the things I am not sure if I heard right, Don, is that you are including asset sales in your free cash flow projections; or not? I thought free cash flow was from operations less CapEx.

Technically you are correct. The free cash flow is operations less CapEx; so it would not be in there. I (inaudible) previously. But that will affect our cash balance.

Sure. Regarding the cash balance, Tom, any new thoughts about what to do with the cash? And how much do we have as part of current assets at the end of the quarter, Don?

We have several targeted acquisitions, but I cannot say much more than that on how successful we will be. That is certainly one usage for that cash. Maybe some strategic acquisitions internationally; we will wait and see.

Would you say you more favor an international or a geographic type acquisition versus a productline extension?

Let's say we are looking at both.

Okay. What was the cash balance at the end of the quarter?

Basically, the cash and cash equivalents was $51.3 million; and then we had marketable securities of approximately $1 million as of the end of the quarter. In total 56.4.

Don, what kind of tax rate should we be using now going forward? Are you finally trued up on all the federal overpayments?

Basically what we did is we completed the filing of our 2003 return; and that is what impacted the current quarter and also will keep our effective tax rate low through the balance of the year. Looking at 2005, I would expect at this point in time our effective tax rate to be similar to what we projected for the current year of around 37 percent.

So 37 percent in '05; and what would be the '04 number be about? The fourth quarter '04?

'04 won't change materially from where we were in the third quarter of around 23.5 percent. We are in the process of going back and auditing our 2002 returns, and potentially -- if there's anything that comes out of that -- would also impact our fourth quarter.

Okay. Thank you very much.

George Gaspar.

Tom, I just want to delve a little bit more on this alternative energy area. Could you edify again the number of megawatts that are on the planning table? Again, how (multiple speakers) ?

I am talking about projects that have been delayed that we are aware of; and it's like 2,000 megawatts. Domestically.

Okay. Your opportunity covering that would be how much? What you envision an opportunity to generate on business with 2,000 megawatts of alternative power?

Roughly speaking, 2,000 megawatts -- if you secured all of it -- might be in the neighborhood of 20 million or more. Obviously there are competitors out there. But I think the (technical difficulty)

And not necessarily all of it will occur.

Yes. I would certainly hope to close at least 50 percent of that work.

Based on our history.

Okay. But you have got to be doing something right, as opposed to your competitors to generate 50 percent of that. And that leads me to a question on looking at potential operating margin outlook for each segment. Can you give us a thought about 4Q on operating margins, in giving some consideration to your rising expense structure. Materials, cost structure, and so on.

And I guess to detail that, the question would be in terms of the change of mix from the third quarter to the fourth quarter, is there a possibility that within the backlog that you now have, that is going to move through here in 4Q, that you have a better margin? You have better margin control on it, and you can move that margin up from what you experienced in the third quarter?

George, what we are going to see in the fourth quarter are a number of projects that were taken in the second quarter at very competitive levels; and a lot of that will be moving through in the fourth quarter. So I think that the fourth quarter will still remain difficult.

So would you say that, from a competitive level point of view, that there really may not be very much change between what you experienced in the third quarter and what you may be experiencing here?

That would be my typical conservative answer. Yes.

All right. Then in the R&D area, can you just highlight anything special that you might be working on? How are your beta tests going? Where are you on some of this?

Some of the beta tests have gone very well. But some of this is state-of-the-art technology, and it's still going to take a period of time before you roll out the product and then get acceptance. As you know, new products, the customers are not always anxious to buy Unit Number 1. But we certainly have some very strong commitments, if they follow through with that. But again, more testing needs to be done on some of these units.

Don't know that I have much more to say. Just received some patents here this last week out of Canada on some of the product. In fact some of the products are patented internationally.

Okay. Do you have any comment within the backlog prospects, bookings, potential bookings, in the international arena? Particularly in Middle East. Anything more that you are looking at out of Iraq or in other areas of the Persian Gulf growth that we're looking at?

Natural gas is coming on in Saudi pretty good; and there's a lot of petrochemical development, power generation development; and of course LNG in Qatar. Is any of that giving you an opportunity to book something?

We're certainly bidding some work internationally in that part of the world. We seem currently to be having more activity in Mexico and Latin America than in the East. But I would still say currently with competitive pressures and so forth, probably international would be less than 20 percent of our bookings. The bulk will be domestically.

John Franzreb.

Tom, I just want to circle back to your earlier enthusiasm regarding the outlook based on order and bidding activity in August. If you could put your finger on either one customer base or end market that gives you that confidence in your outlook, what would that be and why?

We are certainly seeing activity in the utilities and independent power producer market. We are seeing more activity there than we have seen in quite some time. We have some very good repeat customers that we have worked with, and I think we are going to certainly have some success and have had some success there.

But also there is some really good opportunities going forward in the offshore production area and with LNG platform business. So both of those, and the number of inquiries coming in give us encouragement in that area. That is the two that I am most encouraged over.

Great. In utilities, is it still the transmission side of that market that is driving that?

It is generation and transmission distribution. Again, a bunch is EPA mandated stuff at the generating plant itself.

Really? Thank you very much, Tom.

Management, at this time there are no further questions. Do you have any further comments?

If there are no further comments, I appreciate you joining us today. We look forward to talking with you again in the next quarter. Have a nice day, folks. Thank you.

Ladies and gentlemen, this concludes the Powell Industries Q3 2004 earnings conference call. If you would like to listen to a replay of today's teleconference please dial 303-590-3000 and enter the access number of 1106587 followed by the pound sign. (OPERATOR INSTRUCTIONS) Again we appreciate your participation for today's teleconference. You may now disconnect.