Powell Industries Inc (POWL) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Powell Industries first quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, March 9, 2005. I would now like to turn this conference over to Ms. Karen Roan, Senior Vice President of DRG&E. Please go ahead, ma'am.

Good morning everyone. We appreciate you joining us for Powell Industries' conference call today to review first quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet. Before I turn the call ever to management, I have the normal housekeeping details to cover.

You should have received a fax or e-mail of the earnings release. Occasionally there are technical difficulties experienced during these broadcasts, so if you didn't get your release, please call our offices at DRG&E at 713-529-6600, and we will get one right out to you. Also if you want to be on the permanent e-mail distribution list or fax list relay that information to our office.

There will be a replay of today's call. It will be available by webcast by going to the Company's Website at www.powellind.com, or a recorded replay will be available for the next 7 days by calling 303-590-3000 and using the pass code 11024938.

Please note that information reported on this call speaks only as of today, March 9, 2005. And therefore you are advised that time sensitive information may no longer be accurate as of the time of the replay.

As you know, this conference and 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 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, Don Madison, the Company's Chief Financial Officer, and Mark Reid, Executive Vice President. I will now turn the call ever to Tom.

And thank all of you for joining us this morning to review our first quarter 2005. We don't spin the good news, and I'm not going to spin the bed news here. The first quarter was disappointing. And we missed our original earnings projection of 1 to 6 cents per share, which included expenses for the consolidation activities we have been working through. We have reported a loss of 13 cents per share for the quarter. This number includes expenses of approximately $100,000 associated with the completion of our consolidation process that we began last June. The work to be done now is to reach the operation efficiencies originally projected from our consolidation efforts.

The area where we have fallen short is on the electrical products side of the business. There were many factors, frustrations and distractions that contributed to our disappointing performance in the first quarter. Those were the general economic conditions in the electrical products industry which has led to a very competitive environment in our primary product areas due to too much available manufacturing capacity in the industry. Overly aggressive pricing on some products, some of which was strategic in nature, some project delays due to customer scope changes, as well as customer site readiness that was impacted by weather, both of these negatively impacted our revenue and our earnings.

There have been consolidation challenges, basic material cost bites which impacted us negatively on our older booked orders, and increased sales effort costs and freight charges. We also experienced some disruptions due to delayed plant improvement projects, which resulted in some product reworked, and thus lead to cost overruns on those particular products. And we have had higher than normal acquisition related expenses.

Now I'm not going to get into specific details on each of the above items, other than to say these issues have been identified and are being addressed. Marginally priced orders in our backlog will continue to adversely affect and impact our results for the next 3, possibly 6 months.

Sarbanes-Oxley 404 compliance is progressing, but we're spending dollars at a fairly higher rate, and it is a distraction and stressful to the personnel in the organization. We are working on this and making progress, but being in total compliance at the end of the year will be a challenge.

On the bright side, I want to emphasize that Process Control Systems business continues to perform well. Transdyn business is improving with a number of positive opportunities forthcoming. As you know, many of their projects are large and extremely complex. And they continue to win praise for their exceptional performance, which should lead to additional follow-on work.

Overall inquiries remain high, and we had another strong quarter of bookings of just over 60 million. This along with the increased opportunities we are seeing gives us confidence that the market continues to recover, although still at competitive price levels. The good news is that we expect these increased orders to positively impact us in the second half of '05.

As we announced in our February 22nd call, we signed 2 multiyear alliances, 1 with a large global energy company and 1 with a large energy provider, both of which are under confidentiality agreements, so we can not mention their names at this point. But both will benefit Powell over the next several years. I think these opportunities are testament to our customers' confidence in the professional services and products that Powell provides.

At this point I will turn the call over to Don Madison for a detailed review of our financial results. And we will come back for some additional comments.

Revenues for the first quarter of fiscal 2005 was $47.7 million compared to last year's first quarter revenue of $53.2 million. Gross margin for the quarter was 14.6 percent compared to last year's first quarter of 18 percent. Higher basic material prices have continued to adversely impact our gross margins. Material cost increased approximately $700,000 over the first quarter of 2004, primarily due to higher prices for copper, aluminum and steel.

Our consolidation efforts were substantially completed during the first quarter with the closing of our Watsonville facility. This adversely impacted our gross margin for the first quarter, a onetime cost of approximately $100,000. Target difficulties and inefficiencies associated with recently transferred distribution switch product lines also reduced gross profits by nearly $600,000. Additionally, lower production volumes and competitive pricing pressures adversely impacted margins.

Our SG&A expenses for the quarter were $9.5 million compared to $8.5 million in the same period a year ago. Commissions to manufacture sales representatives, as well as for direct sales expenses, increased by approximately $700,000 in the first quarter of 2005 compared to the first quarter of 2004. Accounting and auditing expenses increased by approximately $300,000.

Earnings before interest and income taxes, or EBIT, for the first quarter was a loss of $2.6 million compared to income of $1 million a year ago. For the quarter, net interest income increased by $35,000 to $200,000. Our income tax provision was a benefit of $924,000.

For the quarter, we recorded a net loss of $1.4 million compared to net income of $747,000 for the first quarter of 2004. We recorded a loss of 13 cents per share compared to earnings per diluted share of a 7 cents a year ago.

Our backlog for the first quarter of 2005 was $146 million. This compares to $134 million in the previous quarter, and $137 million in the first quarter of 2004. The orders for the quarter totaled 61 -- excuse me, $60.1 million compared to our previous quarter's results of 61.2 -- excuse me, 61.5. In the first quarter of 2004 new orders were $33.1 million.

We ended the quarter with $49.8 million in cash and marketable securities compared to $63.2 million at the end of fiscal 2004. This reduction in cash was used primarily to fund growth in inventories and accounts receivable. Working capital at the end of the first quarter was $98 million compared to $99 million at the end of fiscal 2004.

Turning to our business segment. The Electrical Power Products segment recorded revenues of $39.8 million compared to $46.2 million for the same period last year. Income before income taxes for Electrical Power Products was a loss of $2.6 million compared to income of $931,000 in last year's first quarter.

The Process Control Systems segment reported improved revenues of $7.9 million versus $7.1 million in last year's first quarter. Income before income taxes for Process Control Systems was $255,000 compared to $249,000 a year ago.

Now looking ahead to our second quarter and the balance the year. We expect second-quarter earnings to range between 1 and 4 cents per diluted share. Full year earnings are expected to be between 15 and 30 cents per diluted share. For fiscal 2005 we expect full year revenue to range between $215 million and $225 million. With that I will turn it back to Tom.

Let me make a few more comments, and then we will take your questions. February was another good month. Booked orders should put us on track for another strong bookings quarter, similar to the last 1 -- 2 quarters. We have raised our prices now that our bookings and backlog have strengthened. We will continue to monitor our success at improving our price levels. The challenges ahead of us now include an emphasis on sustaining the bookings volume, but at higher price levels, of course as well as controlling our cost. We will need to increase our production staffing to meet this increased backlog level, and certainly with an accelerated focus on our productivity.

Now that our consolidation efforts are essentially complete, we anticipate our learning curve related to the production of these products to be optimized by midyear, which should improve the efficiency and profitability of our Electrical Products segment, as well as our competitive position in these markets.

As I stated earlier, in general we are pleased that the business inquiry levels remains healthy. New opportunities are increasingly broad-based. We are seeing more activity in oil and gas development and offshore, and the utility and the IPP arena, and emission controls, and transit, and government infrastructure projects. Additionally, international opportunities are perking up.

I think it is also noteworthy that engineering and construction firms are beginning to increase their staffs to support their increased business activity. At this point we would be happy to try to answer your questions.

(OPERATOR INSTRUCTIONS). John Franzreb.

Sidoti & Co. My first question I guess is a little bit about the consolidation. You said it is largely done. Could you kind of give us a sense of what kind of capacity utilization you are running on a firmwide basis? And related, what about the staffing you mentioned? What is the time line on that?

Staffing, we have been hiring now for the last 60 to 90 days. We staffed up with about 70 people. Most of those are production folks, but certainly we have had to add a couple of engineers. I would say right now from a physical standpoint, we're probably at 60 percent capacity. From a staffing level standpoint, obviously I need to add some people with this latest influx of business. So it depends on how you look at it. We've certainly got the physical space, now it is just a matter of ramping up and get these young people trained.

And secondly, regarding the backlog, it is -- directionally it is going in the right way. You alluded to the fact that you had some marginally priced orders in that backlog. Based on your guidance, I think it is safe to assume that new orders are being written at a much more favorable pricing. Can you kind of balance that all out with this other statement that the competition remains an issue in the current environment? Can you kind of rationalize all of that for us, Tom?

We have selectively been raising prices now since the fall of this past year. There have some been some instances where we have long-standing loyal customers that in their job requirement has to go out and get competitive bids. They prefer us to do the work, but it puts them in the uncomfortable position of having to ask us to take a look at our business and see if we can help them in some fashion. So we have made some strategic decisions to keep that business. And those projects would be rather tight from a margin standpoint. What was the second question?

I just wanted to get a sense of the new orders. How they are being written as opposed to the old orders? And if that gives you the confidence in having that profit recovery you are forecasting going forward?

Yes, we're certainly monitoring all of those. I see a number of those quotations myself. And we have certainly passed some opportunities that we were given to reduce our numbers to meet competitive levels. So overall we have strengthened our position and moving toward more profitable business.

Richard Leader.

Burnham Securities. If I missed this, pardon me. But on the current assets. how much cash are we carrying on the balance sheet now?

At this point in time we have just over $46 million in cash. Actually as of today, it is actually up to about 48, 49 million.

Has that been about stable over the last 3 months or so?

No, we basically did see about a $13 million erosion. Most of that occurred in November and December. A lot of that went into -- we have a about -- if you go back and look at our historical receivables, we dropped. We had a very good fourth quarter. That has bounced back up a little bit in the first quarter to what I would consider more historical rates. And then with the shuffling around of some of the work that got pushed out into the second quarter, we clearly had some inventory buildup in the facility here in Houston.

But overall as we ramp up the business and business volume I anticipate that we will continue to need some cash for supporting our working capital requirements. And that is basically what happened in the first quarter. Most all of the money that moved out of our cash account went into working capital.

Obviously you're building a warchest for potential acquisitions. Tom, can you talk a little bit of what you have looked at or whether the problem is a lack of something that fits? Or are they -- interested targets too expensive in your opinion now, or strategically how is that whole process going?

We have looked at a number of smaller opportunities in the electrical power arena. We're still looking at those. We have looked at 1 larger opportunity that I think would fit us very well in the electrical power arena. But there have been some difficulties in that conversation process, getting the proper numbers to look at. I really shouldn't say more than that at this time. But if it happened, it would be a significant acquisition. And I really shouldn't say much more than that at this point.

Would there be some benefits in terms of just economies of scale to also be focusing on in Process Control acquisitions or is the focus entirely in the electrical power side?

It is principally in the electrical power side at this point.

Finally, on some basic industries that seem to be prospering currently, I wonder if you have heard or seen any growth prospects coming from chemical companies, or any other basic industries other than the ones you mentioned, Tom?

No, chemical is pretty flat at the moment. I'm going to question whether we will ever build any more chemical plants in this country due to legal encumbrances and environmental issues, so that is certainly a concern to us. As you know, we've got some very -- some excellent customers locally on the Gulf Coast that we work with. They are doing very little if anything at the current time.

We are seeing of course activity with the refineries. A lot of refineries are ramping up. We are working on some LNG projects, again, utilities and so forth. A little bit of mining. And it is a fairly broad-based with the exception of chemical.

And the utilities are actually doing something as far as new plant construction are concerned?

Modernization of plants, streamlining the processes, the emission controls within the plants.

But nothing like the new --.

You know, and powering up. As we are pushing more higher loads through the existing electrical transmission lines and so forth, we have to do mobile cap banks and any number of issues to improve that existing system. So it is pretty broad-based the opportunities.

Robert Longnecker.

Barrington Capital. I was wondering if you guys could talk a little bit about the multiyear alliances? And I understand you can only say so much. But in terms of pricing in those contracts and other escalators, raw materials exposure in the kind of multiyear lower margins contracts, just any sort of color you can give there?

One of the alliance is with a major global player, probably a one of the largest. And we have a contract to do all of their modules, packaging our own electrical equipment, as well as some other preferred electrical equipment that they want to have in there.

It's -- this contract could run -- it is multiyear. I'm not even supposed to say how many years. My guesstimate is in the first 3 years it would probably in the neighborhood of 40 to 60 million. A number of these projects are going internationally. And it is competitively priced, but certainly there is some profitability in there. And there is the opportunity to go back in and do some adjustments if basic commodity prices get too much more out of kilter.

I will admit -- I will say that steel have softened as of late. Not really declined much, but it is softening. I haven't seen much movement in copper, however, I think they are pretty much going to stay where they are. And we certainly adjusted our costs to reflect that.

The other alliance is with a major group doing greenfield generation. And we have a commitment of some 5 or 6 projects for this year and potentially for next year. And those are at a profitable level.

Let's say copper kind of continues to go up. You guys aren't stuck holding the bag, you can get back in and make adjustments in the contract?

On copper?

Yes.

We had some escalation clauses that had been accepted. By and large they are being rejected out of hand. And none of the other major competitors are having any success with that either, I'm told.

Excuse me, Don asked me question. What was that?

I think he was referring back to the alliances.

Yes, exactly.

There is a provision in there to cancel these contracts within 30 days if we don't -- or there is a provision to go in there with 30 days notice and request negotiations due to material price increases. They also have the right to cancel in 30 days.

Right. Of course unfortunately. Are those numbers in the backlog in the new order? Are their numbers relating to those 2 alliances?

There may be 1 -- let's see -- there may be 4 projects in the backlog. And there are others that are forthcoming here in the next May, June, I believe is the time frame. They will be coming throughout the next 3, 4 years.

And just kind of a final question and I'll get back in queue. It is not a big difference, but any comments on new orders dropping quarter over quarter from 61.5 to 60.1?

No, -- I don't know we -- (indiscernible) we could have boosted that, but we turned down some opportunities at prices that we just don't feel that we're comfortable with.

I think that's a good idea. I will get back in queue. Thank you.

Brad Evans.

Heartland Advisers. I hope you both are well. I just had a couple of questions, won in particular on the pricing front. Who is the irrational actor in the pricing environment today?

Since some of those guys are probably listening to this call, I probably wouldn't announce it but --.

Are they based in Europe?

It is domestic and Europe. We're all in the same soup here. We are all -- we haven't filled up manufacturing capacity, so everybody is eager. But no, it is domestic as well as European. And they are all suffering at the same level. I have conversations with these folks from time to time. They are all in about the same condition from a profit and loss standpoint.

Okay I guess -- has the weakening dollar helped you at all in terms of bidding international projects?

Pardon me?

Has the weakening dollar helped you in bidding or winning international projects, international orders?

It may have helped us in a couple of commodity -- in a couple of areas, product areas going into the Mideast.

I was curious as well just with respect to if Don had the receivables inventory and payables number for -- at the end of the quarter?

I have rough numbers here. Preliminary numbers are looking like -- let's see. Receivables are going to be around 50 million, payables around 14, 15 million, and inventory are going to be close in at around 18 million. Overall current assets are going to be around 144 million, and current liabilities around 46.

I'm sorry, you said inventory is 18, that seems awfully low.

Well, you have to remember that we have -- it is 18 compared to 15 at the end the quarter. A significant portion of our work is percentage completion.

Okay. And I just had a further question on the pricing front actually. As it pertains to the profit and loss statement, when do think you'll achieve cost recovery relative to the cost increases you are facing, you know, the aluminum, steel and copper prices?

That is difficult to response to. If you go back and just kind of look at history, most of the escalation that we saw in commodities occurred in the first half of last year. Since the third quarter the commodities have continued to rise, but at a much slower rate. Looking at our quotation process and looking at what I expect to see, is that orders that were originally tendered and awarded late in the year will not have as much depression -- or as we are going to see as those that were booked early last year.

But how it actually flows through the backlog we're still working on, and making sure that we can estimate it the best that we can. But it is rather a manual process when you're going back and looking at them and trying to determine what the commodities were at a time of the quote versus our current price levels on commodities.

Do you hold out hope that you can get back to a 21, 22, 23 percent gross margin again at some point?

I don't think that that will -- in the current environment, I don't think that will happen in '05. There are some projections that the electrical -- the climate for electrical equipment is going to jump 3 to 6 percent in '05 over '04. And also the same in '06 over '05. I think going forward in '06 that certainly is a possibility. But in '05 I would say that is remote.

Could you just give us a sense as to a range of revenue guidance for the current quarter? Just so we can understand kind of --?

We basically have refrained from giving short-term guidance on revenues. But when you're looking at our expectations for the current quarter, we are ramping up to support a fairly sizable growth in our shipments -- or revenue recognition in the second quarter relative to our first quarter. If you look at the full year numbers, there will be some continued growth in revenue output per quarter. So you can kind of look at that and kind of get a feel for what we're looking at on a quarter by quarter basis.

Okay. And we should -- it is fair to assume that the consolidation cost 100,000, and the 600,000 of start up costs should go away? Is that -- those should not recur?

Where you're looking at the actual consolidation costs, we have completely closed all of the facilities and transferred all the product lines. There may be a few lingering expenses that come in of a nominal value. Again we're talking less than $100,000.

When you're talking about the start up costs, what we're really talking about there is the inefficiencies and ramping up to reach the productivities with the new personnel and the new locations to accomplish the benefits that we were looking for in the consolidation plan. That will probably continue for the next 3 to maybe even as far out as 6 months, but should be at reducing rate. That is factored into our guidance.

And then for working assumptions the 9.5 million for SG&A on a quarterly basis, is that as good of a guess as you have at this point?

Again, yes, that is a reasonable number to look at going forward. But you need to realize that a significant variable in that is commission cost, and that it will fluctuate with order growth. So if order growth were to change from where we are at today, that will impact our SG&A as well.

Rick Gotan (ph).

(inaudible) Management. I too have questions on the margin and the margin potential recovery. You say another 1 or 2 quarters of margin depression due to the backlog that you see -- that is visible. So as you look at the fourth quarter, what kind of relief do we get on the gross margin versus what we have just put up this quarter based on the pricing in the backlog I guess improving from where it is now?

That is a difficult question to really answer, partly because our fourth quarter backlog is not even necessarily completely booked. We're still booking business going into that period of time. Clearly we're looking to see improvements in the quality of our backlog, and that will benefit us in the margin line. Clearly we're expecting to generate operational efficiencies, both from increased production volumes, reducing -- increasing our base to absorb our overhead, as well as improving the operational efficiencies with the transferred product lines. But to give you a specific hard number at this point time I think would be fairly difficult.

Is there I guess a commitment -- I'm not even sure I'm hearing a strong commitment on management's philosophy on the pricing of new business. If a longtime customer comes to you it almost sounds like you're still willing to do low to no margin business for that customer, if they ask you to sharpen your pencils. Is there any philosophical change in walking away from lousy margin business or --?

We have walked away from some in the last several months that we just simply couldn't afford to take. And we have certainly had some success at raising prices on others. This is also -- gross margin our objective would it to be at 18 percent in the fourth quarter. That is the objective. I don't know that we're there yet.

It is also -- there is also product mix issues. We just booked an order the other day for plus or minus 5 million. It goes on our offshore channel facility. And those are generally at lower margins, but the earnings are a little better down there because the overhead is not the same. So it is kind of fluid, but the objective for the whole organization is get up toward 18 percent where we can. I'm not taking any more orders under 16 percent, I'll tell you. That's enough said.

And on the raw material side, it sounds like that you've got -- you had some protection on some things. But is new business being written today without protection there?

Yes, new business is being written without protection. Escalation clauses are still not being accepted. Some have been, but mostly they are just rejected out of hand.

Okay. That is all I have.

That's the nature of the business, I'm sorry to say.

Has it always been in all the down cycles?

It has always been. Maybe back in 2001 or 2 you had a better opportunity at escalation. But it is not happening in the industry today.

(OPERATOR INSTRUCTIONS). John Franzreb.

Most of my follow-ups have been answered, but if you could just quickly update us on the capital spending budget and what you expect the D&A is going to be this year?

Capital spending expectations have not changed from where we were at the end of the year. Most of work that we're doing this year is completion work that was started last year. Overall I'm expecting 5 to $6 million in CapEx. In the first quarter we had spent roughly $1.5 million.

And G&A?

Basically their first quarter was $1.1 million. Overall I would expect the year to end up some where around 4.5 million in total.

Robert Longnecker.

Can you guys just zero in a little bit more on the SG&A? Because I thought I remember from the last call that you were saying your run rate was going to be more like 9 million a quarter.

At that point in time, yes, we were looking it to be somewhat less than it is today. The big change that what we have seen from where we were late last year to what we are seeing today is the mix of orders. We have a direct sales force that focuses on the Gulf Coast area, and we use manufacturer's reps -- representatives outside of the Gulf Coast. The mix of business that we've seen recently has definitely been skewed toward to territories outside of where we cover with direct sales. And that is the big difference in change.

So that is just leading to higher commissions basically?

Yes.

Higher commissions, higher travel, higher selling expense in general, yes.

So you think -- is 9.5 just a better guess for the run rate at this point?

Based on where we are seeing the business activity, I think that is a reasonable estimate for the next the couple of 3 quarters.

And in terms of your guidance for the year, are there any charges in that guidance?

Charges?

Any sort of special charges or anything like that or was that a clean number?

That's a clean number.

And assuming you guys -- your backlog continues to develop the way it does. And I think you were talking about 18 percent margin is your year end target --.

That's the objective for the quarter, yes. The fourth quarter.

Okay. What kind of capacity utilization are you talking about at that point?

Maybe 70 percent.

Tom Spiro.

Tom Spiro, Spiro Capital. Tom, you spend some time giving us a sense of the outlook on the electrical product side. I was kind of curious on the process side how the increase may be shaping up and what the landscape looks like?

I'm reluctant to say. They are very optimistic about the bookings potential for the next 3 quarters. And we have several verbal commitments right now on some large projects that hopefully we will book here in the next 30 days. So things are actually looking up out there.

We have done very well on the Port Authority, the Lincoln Holland Tunnel. We just turned over the Holland Tunnel system to the operators, and that is doing very well. And we hope to have the Lincoln Tunnel part finished here by June. We're very happy with what they have down and the Port Authority is very happy with us. So there are just a number of opportunities going forward for that group.

Do these opportunities all hinge on the passage of another federal highway bill in the next month or 2?

It certainly helps. But no, several of them are already committed. But we can get that done, and it looks like that may slip a little bit, I think that that is hoping -- that is to be passed like May 31. But that may slip out a little bit. It certainly would help if we get that done. I think -- what was it, 248 billion was the proposal? I left it on my desk, but I believe that is the number. There's going to be some movement there. And it is going to the create more opportunities, not only for us there, but also in a transit -- the rail arena for our Mark Canton (ph) and our electrical group.

Over on the electrical power side, how are the prospects in the wind power area, and more broadly in alternative energy? Anything exciting happening?

We're doing quite well there. Our products fit that very well. You know they gather this power at 690 volts, and then they step it up through a transformer to 27 or 38 KV. Our products fit that very well. And it is in remote areas, so in most cases they need modular buildings to house that equipment. And it has also given us opportunities for some capacitor banks as well. So we're doing pretty well there. and we just booked a couple of orders here in eastern Canada just recently.

Thanks a lot and good luck.

Jeffrey Kerr.

The Kerr Financial Group. My question is basically if you could speak more on the (technical difficulty) a global energy provider and it has given me the statistics(technical difficulty) trying to develop through direct sales (technical difficulty)?

Jeff, I'm having a real hard time. I don't know -- either our phone systems are going out or -- are you calling from a mobile phone?

No.

I'm having some difficulty.

I will call back directly.

I didn't get the question. Anybody there?

(OPERATOR INSTRUCTIONS). Brad Evans.

Yes, just a follow-up here. This discussion on margins really leaves me scratching my head because -- I mean if we take -- you said 48 million this quarter in revenue and the 14.6 percent gross margin in theory -- if we assume that the $700,000 of -- start up costs and consolidation costs go away at some point, that is 150 basis points. So on a normalized basis on 48 million going forward you should be doing roughly 16 percent, 16.1 percent to be precise on a gross margin basis.

And if you further assume that the price increases you are taking at the very least over a period of time help you to achieve cost recovery, that is another 150 basis points. So that gets you to 17.6. So this is maybe a dangerous analysis -- I may be in a vacuum -- but on a $48 million run rate in the future, you should be doing almost an 18 percent gross margin. So your guidance has you ramping revenue to over 60 million a quarter in the back half if you are able to meet your guidance. So I'm struggling to understand where does the fixed cost absorption piece come in here?

Part of the issue is the number quoted was our objective. The guidance that we've given has factored in that we are probably going to not necessarily achieve it in each and every quarter between now and then.

Where is my analysis going awry here then? Because it seems like you should -- I mean you should get some fixed cost absorption, correct? So that -- you should have some positive operating leverage, yes?

That's correct.

And the consolidation and certain expenses do go away over time, yes?

Yes.

And we hope to achieve cost recovery on the raw material cost we are exposed to, correct?

We will improve our position relative to the cost increases. To say that we're going to overcome them in the current year, it is probably not going to happen.

It should be improving in the third quarter and more so in the fourth quarter.

I mean by my math, I mean it looks like -- again, the guidance is what it is. And obviously, hopefully you guys can achieve it. But my numbers show here that you would be -- fourth quarter revenues will be up 30 percent year-over-year. I just have a hard time understanding how we're going to limp to finish line here with margins -- with that type of volume growth.

I realize again you're facing cost pressures on the raw material side, but those seem to be abating a bit, or at least stabilizing. And I realize it comes out of backlog that has been booked here in the past, but it just seems like that the 18 percent operating margins or gross margins is conservative hopefully.

We are approaching this conservatively. I would rather err on the side of that than any other way. So I think your analysis to some extent it may be correct.

At this time I show no further questions. I would like to turn the conference back over for any concluding comments.

Thank you. Folks, we appreciate you joining us today. We look forward to talking to you -- with you again in the next quarter. Certainly we hope to have better news in the coming quarter. We're all working very hard to make those things happen. Thank you. Good day.

Ladies and gentlemen, this concludes the Powell Industries first quarter 2005 earnings conference. If you would like to listen to the replay of today's call, you may dial 303-590-3000. And you will need to enter the access code of 11024938 followed by the pound sign. Once again, thank you for participating in today's conference. At this time you may now disconnect.