Powell Industries Inc (POWL) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Powell Industries second-quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentations, instruction will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded Wednesday, June 7, 2006. I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead, Ms. Roan.

Thank you, Eric, and good morning, everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2006 second-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 over to management, I have the normal details to cover.

You could've received a fax or e-mail and the earnings release this morning. Occasionally there are technical difficulties experienced during these broadcasts so if you did not get your release, please call our offices at DRG&E at 713-529-6600 and we will get one to you. Also if you want to be on the permanent e-mail distribution list or fax list, please relay that information to us. There will be a replay of today's call and it will be available by webcast by going to the Company's website at www.PowellInd.com or a recorded replay will be available until June 14 and that information is in today's press release.

Please note that information reported on this call speaks only as of today, June 7, 2006 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. As you know, this conference call includes certain statements, including statements relating to the Company's expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties 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 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; Mark Reid, Executive Vice President; and Don Madison, Vice President and Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Karen. Thanks to all of you for joining us this morning to review our second-quarter results for '06. Certainly we are encouraged with our second-quarter results. We saw substantial earnings improvement and have experienced continued strength in our electrical power products business. Our turnaround in earnings continued very strong. Earnings per share came in at $0.37 on revenues of 98 million. That's compared to a $0.03 loss this time a year ago.

Bookings for the second quarter were healthy at 81 million compared to 74 million in the second quarter of last year. This is down slightly from our first quarter of '06 bookings of 111 million as we are being more selective about the quality of orders we accept. Our backlog remains strong at 269 million, up from 161 million a year ago. While this is less than the record 287 million at the end of the first quarter of '06, it is consistent with our objective of remaining selective on the quality of orders.

Our second quarter's margin performance was much improved over both last year's second quarter and first quarter of '06 and this improved margin performance was the result of several factors.

We are realizing the benefits of the large capital investments and the process improvements that we have made over the last couple of years with resulting productivity improvements in our workforce. And we're continuing to refine productivity issues with our new fabricating and new finishing equipment.

The ramp up of our business volume has gone better than we expected. As you know, we've aggressively staffed our electrical power products facility with additional production workers to support the increased business volumes as well as added management in that segment of the business. The added management depth has had a positive impact on our business as new employees are coming up to speed.

In addition, we worked with our customers to reschedule some of our backlog as we worked to support their needs with emergency work that was related to last year's storm damage. This led to more profitable jobs being shipped in the quarter. So our product mix was very favorable in this quarter. We have continued to closely follow our raw material costs and adjust our pricing as we continued to experience volatile copper, steel and commodity prices. Looking forward, we're confident we're back on track for continuing progress.

At this point, I'll turn it over to Don Madison to give you the detailed review of the financial results. Don?

Thank you, Tom. Revenues for the second fiscal quarter increased $39.5 million to $98.4 million compared to last year's second quarter results of $58.9 million. Revenues have increased as a result of a general market recovery in our key markets and certain sales efforts in 2005 aimed at strengthening our backlog and the acquisition early of July 2005 of S&I. S&I added revenues of $14.3 million in the second quarter of fiscal 2006.

Gross margin for the quarter was 21.1% compared to 14.3% in last year's second quarter. This increase in gross margin is a result of improved pricing and operating efficiencies derived from increased volumes. In addition, we benefited from the capital investment and process improvements that we've made over the last couple of years that have resulted in productivity improvements in our workforce.

Raw material costs had a nominal impact on the quarter. However, last year's commodity cost increases are now driving up electrical component purchase costs.

Selling, general and administrative expenses decreased to 14.1% of revenue in the second quarter compared to 15.9% of revenues in the same period last year. SG&A expenses totaled $13.9 million, an increase of $4.5 million over the second quarter of 2005, of which operating activities for S&I accounted for $2.4 million of the increase.

In the first quarter of fiscal 2006, we adopted SFAS 123(R), share based payments, which requires us to expense the estimated compensation related to stock option. The adoption of this new accounting standard increased our SG&A by approximately $300,000 in the second quarter. The remainder of the increase is primarily attributable to increased sales commission, professional fees and salaries, which are consistent with the increase in revenue.

Interest expense increased by $187,000 to $326,000 in the second quarter compared to a year ago due to an increase in debt related to our S&I acquisition.

Interest income was relatively unchanged. Interest income was $237,000 compared to $317,000 a year ago.

Our income tax provision was an expense of $2.7 million in the second quarter compared to a benefit of $451,000 in the second quarter of 2005. Net income in the second quarter was $4.1 million or $0.37 per diluted share compared to a loss of $295,000 or $0.03 per diluted share in the second quarter of 2005.

As of April 30, 2006, our order backlog was $269 million compared to $161 million a year ago. New orders have continued to strengthen. Orders in the second quarter totaled $81 million compared to $74 million in the second quarter of 2005.

Turning to our business segments. Electrical Power Products segment reported revenues of $91.9 million compared to $48.4 million in the same period last year. The second quarter of fiscal 2006 includes revenues of $14.3 million related to the business operations of our S&I acquisition. Revenues in all of our major markets strengthened compared to the same period a year ago. Revenues from industrial customers, including the business operations of our recent acquisition, were $50 million compared to $19 million a year ago. Revenues from utility customers totaled nearly $34 million, an increase of approximately $6 million. The municipal and transit projects generated revenues of approximately $8 million compared to $2 million a year ago.

Income from continuing operations before income taxes for Electrical Power Products was $6.4 million compared to a loss of $1.5 million last year. Process Control Systems segment reported revenues of $6.6 million compared to $10.5 million in last year's second quarter. This decrease in revenues is primarily due to a reduction in subcontracted installation activity during the period.

Income before taxes for Process Control Systems was $365,000 compared to $785,000 a year ago. We ended the second quarter with $17 million in cash and marketable securities compared to $33 million at the end of fiscal 2005. During the quarter, cash used for operating activities was approximately $8.2 million. This reduction in cash was principally used to fund growth in inventories and costs related to uncompleted contracts, which were not billed. As we increase the business activities in our manufacturing operations, additional working capital has been required to support the higher levels of business volume. Additionally, we invested $1.3 million in capital improvements during the quarter.

Looking ahead at the balance of the year, as previously announced, we will change our fiscal year end to September 30 from October 31 effective September 30, 2006. This will result in an eleven-month year. Accordingly, our fiscal 2006 results will consist of 11 months compared to 12 months as you would normally expect. Based on our current level of backlog and our current product mix, we expect fiscal third quarter earnings to range between $0.30 and $0.35 per diluted share. As Tom noted earlier, we have had a lot of emergency work in the second quarter and at this time we see fewer requirements for emergency work.

We're raising our fiscal 2006 guidance. We now expect full-year revenues to range between $325 million and $350 million and full-year earnings are expected to be between $0.90 and $1.00 per diluted share. At this point, I'll turn it back to Tom.

Thank you, Don. Let me make a few brief comments and then we'll be happy to take your questions. This business is a project business; it's very complex; multi-product scope, a lot of starts, stops and changes; based on changing customer needs, field conditions and timing, which make it especially difficult to forecast our revenue and earnings. Looking ahead, many of our customers are beginning to have difficulties maintaining our field schedules due to their scheduling of other materials and equipment and to a very tight labor market. Their construction difficulties could result in some of our work currently planned for later this year being rescheduled. Having said that, looking at the bigger picture, the volume of opportunities remains healthy in all sectors of the business. We're seeing very strong activity, especially in the utility area, the oil and gas industry and the transit arena. We continue to emphasize and support our alliance partnerships. Some of these have originated as far back as 10 to 15 years ago and they've generated significant orders for our electrical power products business, including, certainly, our offshore business.

Our utility customers continue with inquiries for future projects associated with new generating capacity and emission controls for existing power plants, many of which will be based on our alliance agreements or preferred supplier arrangements. We're continuing to quote and secure orders for replacement equipment due to the aftermath of last year's hurricanes and we work hard to maintain the capability to produce this equipment on expedited schedules.

In conclusion, let me say to you, we're going forward with increased productive capacity based on our recent factory expansions, on our advanced manufacturing equipment, as well as a continued stream of new product introductions that enhance our leadership position in the arc resistant market. We're well-positioned to respond to continuing strong demand in the marketplace for our products and services. And needless to say, we're encouraged with the future projects for the business. That was brief, so at this point we'll turn it over to questions.

(Operator Instructions). Rich Leader, Burnham Asset Management.

Good morning, everyone. Congratulations on a great quarter and great outlook.

Thank you.

Tom, you have seen the cycles in your business come and go and the recent concerns in the marketplace lately stem from our new fed chairman saying that maybe the economy is too strong and maybe he wants to clamp down on monetary policy and slow things down. Do you get a sense that current strong economic conditions for Powell or anything like the kind of conditions that existed at previous peaks in your Company's history?

Richard, certainly the E&C's are staffing up. If you look at the want adds, they're staffing up left and right. And those projects that they generally will entail work that takes four to six years to complete. All of our input says this is going to continue certainly for two to three years. I don't see a slowdown. There is no slowdown in sight. It's possible they were reaching somewhat of a plateau in growth though, I suspect. Frankly at this point, we're certainly optimistic about what the next several years hold.

Are you reaching a plateau in what you're seeking in your bidding process the kind of margins that you would like to achieve? Is that plateauing in your contract bidding process?

Obviously, we could take more work but in our trying to be selective -- we certainly could take more, let me say that. I like what we are doing right now.

George Gaspar, Robert W. Baird.

Very good quarter. Follow on on the basis of your forecast for the remainder of the year and looking at your revenue stream and looking how much you've generated so far. This would suggest that you're looking for margin improvement beyond -- for the remainder of your year ending September from what you experienced in the last quarter. Is that a fair assessment?

George, this is Don. When you're looking at the outlook, what we have in our thought process is that from our normalized activities that we will see continued improvement in both revenues and in margins and earnings from those incremental revenues into the third quarter. We have factored in a more normalized emergency work into the third quarter. So there is some upside opportunity from that standpoint. When you are looking at the fourth quarter, we are beginning to be conservative about incremental growth not from our capabilities but from the ability of our customers to receive the equipment and do their installations.

Okay. And ongoing on the profit margin area, when you made the acquisition of the UK operation, you set a certain goal that it would generate a certain amount of income in the first 12 months. Is that on track to produce the income that you anticipated and how do you sense the profitability opportunity is in the UK going forward from where you are now?

Let me answer the first part of that question and then I will let Mark answer the growth first prospects from a market perspective. When you're looking at what we have accomplished or what they have accomplished, we're very pleased with the acquisition. We're very pleased with the performance of the business. At this point in time, we're closing in on our first 12 months of operations and, yes, it does seem very likely that they will reach our objectives that we set for our first 12 months of operation, both in business volume as well as contribution to the bottom line.

Hi, George, this is Mark Reid. And as far as revenue and overall market opportunities growth for our acquisition, they are also experiencing the same kind of market that we are and at this point are doing quite well. How much higher that can go is going to be driven by how we do on these larger projects. It is very much a large project business over there. And as we pursue those projects and see the outcomes, we will be in a better position to say how it's going to go forward in this coming year. As it stands now, we expect it to pretty much go along the way that it is and has been for the last six months.

(Operator Instructions). Gerry Heffernan Lord Abbett.

Good morning, gentlemen, and thank you very much for a real strong quarter. Hey, Don, in your prepared remarks, you went through a segment where you detailed I guess it was a year-over-year comparison of the revenue stream by customer segment for the utilities for the municipalities. Unfortunately, my writing hand wasn't working that well. Could I just ask you to go through that?

Sure, not a problem. Let me flip back to my notes here. Basically when you're looking at industrial customers, this second quarter, we did $50 million compared to $19 million a year ago. From utility customers, this quarter, we did $34 million. About $6 million greater than second quarter a year ago. And municipal projects generated $8 million in revenues in the second quarter compared to $2 million a year ago.

Okay, that municipal, that would be primarily transportation or is it --? (multiple speakers)

Includes municipal, which would include the transit projects, yes, sir.

Okay, so we sold --

For the Electrical Power Products business. When you are looking at the Process Control segment, it's virtually 100% in the municipal arena.

That I understand. This is just -- very good. I am with you.

Okay.

Hey, you spoke of higher working capital requirements due to the increased business activity and we'll certainly accept that problem. Where is the cash balance as of April 30?

As of April 30, we were at $17 million. I think from a working capital standpoint, we have about plateaued as to what our requirements are going to be and we are optimistic that we will reverse the recent trend over the coming months.

Do you recall or do you have in front of you where the cash balance was January?

In January, we were at around $26 million if my memory -- if I recall correctly and 33 million at the end of the fiscal year.

Thanks.

Tom Spiro, Spiro Capital Management.

Good morning, gentlemen. Congratulations on such a strong quarter. A couple of questions. Tom, you noted in your comments that the quarter just passed was helped by some emergency work. Can you quantify roughly how much of that kind of work helped us in the quarter and sort of what was more normal?

Somewhere between 4 to 6 million. Some of that is new equipment and some of it is emergency equipment for repairs. But 4 to 6 million.

I would presume the margins on that tend to be a little better than your normal margins?

A little bit, yes sir.

Secondly, the gyrations in the copper prices -- I think, Don, you mentioned in your comments the component prices are going up. I kind of wondered what your ability is to pass those things along over the next few quarters?

We certainly have raised prices to accommodate for that but it is a moving target. We also try to get in more escalation on some of these contracts with our customers but they fight that pretty hard. So we're trying to stay on top of it as best we can.

Do you worry that perhaps some of your customers will defer their own purchases on the theory that copper is so high it pays to wait?

No, I don't think it's driven by that. But they certainly don't want to pay higher prices. But I think these expansions to the utilities, the environmental issues, the need for more oil and gas and greater refining capacity has to go on. They've just got to pay the piper.

Tom, in your opening comments, you noted that incoming orders in Q2 were down a little bit from Q1. And you mentioned our selectivity. I was curious whether we have become more selective in the last couple of quarters or the last quarter or so and that accounts for the decline or business had moderated a little bit from the last quarter or a combination?

No, I think business has hit somewhat of an opportunities, that's somewhat of a plateau. But we're turning our focus more toward earnings and so we've become quite selective in some of the units. And some things have been -- some projects have been delayed because of a lack of availability of other products that they need to complete a project. We're just being more selective. Opportunity is certainly there.

I think in the last conference call, Tom, you mentioned that you folks are going to turn your attention to the terms and conditions of contracts as well as just the price. Have you had much success in tightening those terms and conditions?

Certainly there's an improvement in that but again they -- yes, we have got more progress payments upfront. Some escalation but not as much escalation opportunity as I would like to see.

James [Capello, Kearn] Capital Management.

Question relates to the gross margin. You mentioned that there was a certain degree of emergency work done. Will the gross margins be able to stay at these levels as the emergency work wanes in future quarters?

Jamie, when you're looking at our third quarter, which is looking out with a more normalized level of service and emergency work, we're forecasting $0.30 to $0.35. And that is based on primarily the gross margin improvement in the balance of the business. So yes, we are looking to see incremental margin improvement from productivity as well as the quality of the backlog in the third quarter. It will just be moderated slightly with the lower level or a more normalized level of services and emergency repair work.

Great, because my understanding from the comments today is that the gross margin improvement is more from productivity efficiencies and increased utilization.

Clearly, the base business, which is the majority of our business volume is seeing a substantial improvement in productivity. It's come along much quicker than we anticipated, as well as that we have now reached into the backlog that we have been talking back now for the last couple of calls, as far as the quality improvement being actually materializing into our revenues and earnings.

Great. And as the book to bill ratio was almost 1, but just a little bit shy of 1 and from comments today I'm thinking that that is on your doing rather than the actual business in the future being less.

Yes, sir, that is exactly the situation we're trying to portray.

(Operator Instructions). George Gaspar.

Thank you. Tom, can you talk a little bit about your total volume coming out of the oilfield platform work at ship channel in the quarter and relative to the total amount for total revenues for the quarter? What is the outlook there, or what do you envision going forward for the remainder of the current fiscal year?

Let me -- Mark was just down there. We're looking at some capital expenditures down there. We're going to have to expand that yard right now based on the available business that we see and work we've already taken. But let Mark answer that question. These folks are [doing it] than I am at the moment.

Yes, George, clearly if you look year on year, the activity at offshore has increased tremendously. In the last quarter or so, we saw the revenues of bookings that we had made in the last half of the calendar year 2005. That ramp up is pretty close to the top of what it would be running at going forward for the third and fourth quarter. They're going to produce about what they did in this second quarter and the third and fourth if you look at revenues. And as far as the future bookings opportunities, there are a lot of projects on the project follow sheet and if we do well with those and the customers continue with their intentions to build these large projects, going forward, the business out there should increase in the next fiscal year.

Okay. Can you give us a benchmark on the volume that you generated there in the quarter?

George, when you are looking at it, it's a twofold question. One is what is the amount of work that we actually did on the site and the other is the pull through business volume that goes through that from the intercompany channel. We really don't have a good information particularly here in front of us. But you're talking the mix of buyouts and the mix has increased in recent years or recent periods, quarters, but it's still fairly healthy. You're talking numbers, you know, if you are looking at just the houses themselves without all of the buyout and all of the equipment in it, you're probably well into the double digits in millions of dollars and it's becoming probably 10 to 15% of our business volume overall.

For just the houses part of it; is that what you are saying?

Well I mean when you're looking at the work that's actually done out there on the offshore site; that does not include the pull-through business.

I see, all right. And then on the employment side, maybe you mentioned this, if you could reiterate. Your employment gain for the second quarter and then for the first half and what are your intentions to hire in the second half? And what kind of retention rate are you experiencing on new personnel hires?

George, as far as hiring and what we're doing, we've ramped up and as you can see in the revenue produced in this quarter that we are at a pretty good run rate. We feel pretty good about the level of employment that we have at this time. In the tight labor market we're in, there is a continuous turnover rate and we have to -- we just have to live with that and continue to go out and replace people as they leave. But I don't think there will be a substantial amount of change in our employment levels going into the next quarter as compared with this last one.

And what were the numbers again on net hires for the quarter and the half?

Well let me just tell you where we are as far as employment. At the end of the second quarter, we ended up with around 1650 employees. And that compared to around 1500 at the beginning of the year and that is up approximately -- it's a little better than 500 over this time last year. I don't have that number in front of me but I believe it's somewhere between 500 and 550 employees over the past 12 months.

So effectively, are you saying that you have gone from 1100 plus to 1600 then?

Yes, if you look at a year ago, we were around somewhere in the neighborhood of 1100 employees, 11, 1150, and today, we are running around 1650.

I see, okay. The percentage of those in Houston as opposed to other manufacturing points?

I don't have that in front of me. But well over half of our employment is in the Houston area, between our Mosley complex and our offshore facility. But I would say it's somewhere, 60 maybe 65% of employment is here in Houston.

George, we still -- we're working a lot of overtime right now. Down at the channel, they're working seven twelves. We still need to do some hiring. I don't agree with some of the other remarks. I would say we need at least another 50 to 100 people overall here in the Houston area.

Need an additional 50 to 100?

I would say so. And it's a very tight labor market down here right now.

Oh, I can imagine. Okay, thank you.

Tom Spiro.

Just wondering if you could update us on the business prospects for the process control side of the house?

Well, I had hoped I had a big announcement to make but it didn't happen so it will happen next quarter I hope. We are seeing more projects on the horizon that we're bidding, so hopefully in the next quarter to half a year we will have some good words to say.

Some of the money from that highway bill of last year beginning to flow?

Yes, sir.

Great, good luck.

Gerry Heffernan.

You mentioned about the orders you're taking in the backlog that is being put in, you're being more selective on what you are taking. Can you tell us about what is your competition doing? Is everybody kind of walking in lock step with you? Is somebody out there still willing to take things at what you believe is low margin? What is going on?

Go ahead, Don.

Gerry, when you are looking at the market feedback that we are getting from business won versus business lost, it appears that the overall market is moving in the same direction we are. The information that we can glean from the marketplace is that the overall industry is seeing a similar growth in their business volumes. Most of our competitives have factories that are also have reached some level of increased capacity and are doing similar actions. We have all been hurt by the commodity cost and the price increases. I think that has clearly motivated everyone within the industry to try to regain some of that lost profitability from our cost increases. And so I would say that there is no one out there today that is not taking advantage of the strength of the market.

And the other issue that has happened is that one of our competitors here domestically has announced a closing of a facility in the U.S., relocating the facility to production to a facility in Mexico. Clearly, that is going to take some of the dynamics in the market and changed it going forward.

Okay. In regards to the current market dynamics, have there been any material changes in the way that you have been signing contracts? If I recall, when we were really getting a nasty bite due to the raw material price increases, you had basically signed contracts come to terms on projects where there was no pass-through of the raw materials so if there was a three-month lag, you had to eat that whole move. Certainly, you were going about making up for this, getting this back in the market. But have the terms of the contracts changed so that now materials are passed through or anything like that, whereas if we had a falloff in material prices going out the next three or four months, where for some reason, you wouldn't see the benefits of this, a la, having been hurt by it in the previous 12 months?

There has been marginal change in their contracts. We clearly have worked harder to get escalation in, particularly on the longer term contracts, those that are going out nine months or better. The shorter the term, the more difficult it is to get any material type of escalation into the contract. Where we work there is to assume as the engineering requirements are determined, is work to get those requirements locked in as quickly as possible to minimize any exposure. So we've worked a lot smarter I believe in the way that we are anticipating the movement in our market, in our pricing, in our costing model as we go into an order. I think that we're working smarter as far as the terms conditions on the larger or long-term contracts. But there's still exposure to the business for short cycle business if we had an immediate change over a period over three to four months.

When you're looking at the benefits of them, the way our contracts are written, if all of a sudden we were to see a dramatic reduction in our commodity prices, we would retain that profitability. Does that answer your question?

Yes, one last thing, Don, if I could. The dollar here has been weakening of late. If I recall in past cycles as an owner of Powell that periods of weakening dollars have been pretty kind to you. Any reason why that shouldn't continue in the future?

No, I would say that you would see the same type of increased benefit that we have seen in the past. Even from our international operations, a significant amount of the contracts are written in U.S. dollars.

George Gaspar.

Yes, on your UK operation, can you identify the revenue stream that is associated directly with the International Electrical Standard?

Basically 100% of their business volumes and their product base is based on IEC products.

Okay, all right. And that would be the total that you are doing on International Electrical? You're not transposing --

(multiple speakers) We're not producing any IEC equipment here in the states, no.

We are producing opportunities though domestically to sell IEC products through some of the local E&C firms and industrial accounts.

Yes, okay. Thank you.

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

Great, thank you. We certainly appreciate you joining us today and look forward to talking to you again in the next quarter. In closing, let me say we're certainly encouraged by the results this quarter. Our outlook is very positive going forward. And although federal financial policy, which is irritating, may impact us, we believe that municipal and utility projects are not as sensitive to rate changes as some of our industrial and commercial customers. But right now we're very positive looking forward. Thank you for joining us.

Ladies and gentlemen, this does conclude the Powell Industries second-quarter conference call. You may now disconnect and thank you for using AT&T Teleconferencing.