Powell Industries Inc (POWL) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Powell Industries, Incorporated first quarter 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, February 7, 2007. I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead.

Thank you, Heidi, and good morning, everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2007 first quarter results. We would also like to welcome our internet participants listening to the call over the internet.

Before I turn the call over to management, I have the normal details to cover. You could have received a fax or email of the news release this morning. Occasionally, there are technical difficulties experienced during these broadcasts, so if you didn't get your release, please call our offices at DRG&E at 713-529-6600 and we will get one to you. Also, if you want to be on the permanent email 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 February 14 and that information is in today's press release. Please note that information reported on this call speaks only as of today, February 7, 2007, and, therefore, you're advised that time sensitive information may no longer be accurate as of the time 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 pressure, 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, Vice President and Chief Financial Officer; and Mark Reid, Executive Vice President. I will now turn the call over to Tom.

Good morning, thank you, Karen. Thank you folks for joining us today to review our fiscal '07 first quarter results. We're pleased to begin the year with a very solid quarter. We generated strong year-over-year revenue growth of 46%, roughly half of this increase in revenue is attributable to our acquisition of the Power/Vac product line from General Electric, with our ongoing businesses showing a strong increase of 21% over last year's first quarter.

This increase is in spite of adverse weather which had an impact on revenues and profitability, especially at our offshore division where final assembly is done outdoors. Our earnings more than doubled to $0.26 per share. Our bookings in the quarter were $148 million, that's a 33% increase over the previous year. The backlog closed at a record $384 million, that is up from $355 million reported at the 2006 year-end. And market price levels have remained firm while material costs have moderated.

A lot of what we're experiencing has not changed since we spoke two months ago. We're seeing a number of opportunities in our historically strong segments of oil and gas, that's both in production and in refining, and at utilities where spending for new generation and environmental upgrade is continuing to grow. We're seeing a number of megaprojects, projects both domestic and international where our ability to integrate and coordinate large equipment requirements makes us uniquely qualified for success.

We continue to see numerous opportunities in large traction power projects where our recent success rate has been strong and is increasing. We're also seeing strong activity from green power initiatives such as wind power and clean coal power generation. So the opportunities are numerous and they are markets where we have generally a strong presence where Powell typically does very well.

We're working hard to expand our capabilities while we're dealing with the realities of a tight labor market. We have an increased sense of optimism and accomplishment for the new challenges that we face, and at this point I will just turn it over to Don Madison to discuss the financials.

Thank you, Tom. First, let me remind everyone that effective September 30, 2006, we changed our fiscal year from October 31 to September 30. We have not restated prior year financial statements to conform to the new fiscal year as we don't believe the results would materially be different. Therefore, our consolidated operating results for the three months ended December 31, 2006, our first quarter of fiscal 2007, is compared to the operating results for the three months ended January 31, 2006, the first quarter of fiscal 2006.

Now, looking at our first quarter results. Revenues increased $39 million to $122.8 million in the first quarter of fiscal 2007, compared to $83.8 million in the first quarter of 2006. Revenues increased due to the ongoing strength in our primary markets, concerted sales efforts aimed at strengthening our backlog, and the acquisition in August 2006 of the Power/Vac product line from GE. The acquisition of the Power/Vac's product line added revenues of $21.3 million in the first quarter of fiscal 2007.

Gross margin for the quarter was 17.5% compared to 17.6% in last year's first quarter. Excluding the direct impact of the Power/Vac product line acquisition, in its related integration cost, gross profit would have been approximately 20% in the first quarter of fiscal 2007. The relocation of the Power/Vac product line from GE's facilities to our Houston operations has offset most of the gross profit from this product line in the first quarter. We anticipate that the integration of this product line will be completed by early fiscal 2008.

Overall, we continue to experience strong demand for our products and services and prices in our markets have improved along with an overall increase in business activity. Selling, general and administrative expenses decreased to 13.3% of revenue in the first quarter of fiscal 2007, compared to 15.5% of revenues in the first quarter of fiscal 2006. SG&A expenses were $16.3 million, an increase of $3.3 million over the first quarter of 2006. SG&A includes approximately $900,000 and $300,000 respectively, related to non-cash amortization expense resulting from the amortization of intangibles related to our acquisition.

The balance of this increase over last year is primarily attributable to increased sales and administrative costs related to the integration and related operations of the Power/Vac product line as well as increased payroll and recruiting costs which, are consistent with the overall increase in business volume. Interest expense increased by $353,000 to $688,000 in the first quarter of fiscal 2007, compared to the first quarter of 2006. The increase in interest expense is primarily due to interest expense imputed on the discounted purchase price for the acquisition of the Power/Vac product line.

Interest income was $180,000 compared to approximately $300,000 in the first quarter of fiscal 2006. The decrease resulted from a reduction in our cash available for investment. Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 36.9% in both the first quarters of fiscal 2007, and fiscal 2006. Net income in the first quarter was $2.9 million or $0.26 per diluted share compared to $1.1 million or $0.10 per diluted share in the first quarter 2006.

Higher revenues, improved gross profits in our Electrical Power Products business segment, partially offset by increased selling, general administrative expenses related to higher levels of business activity, improved net income in the first quarter of fiscal 2007, compared to the first quarter of 2006.

As of December 31, 2006, our order backlog was $384 million compared to $355 million at September 30, 2006, and $287 million at the end of last year's first quarter. New orders continued to strengthen. Orders in the first quarter totaled $148 million compared to $111 million in the first quarter of 2006.

Turning to our business segments. Electrical Power Products segment reported revenues of $117.3 million in the first quarter of fiscal 2007, compared to $76.6 million in the first quarter of fiscal 2006. The first quarter of fiscal 2007 includes revenues of $21.3 million related to the operations of our acquisitions. Income before income taxes for Electrical Power Products was $4.6 million compared to $1.4 million last year.

The Process Control Systems segment reported revenues of $5.4 million compared to $7.1 million in last year's first quarter. Income before income taxes for Process Control Systems was $83,000 compared to $361,000 a year ago. We ended the first quarter with $5 million in cash compared to $10 million at the end of fiscal 2006. During the quarter, cash used in operating activities was approximately $5.6 million. As we increased the business activity in our manufacturing operations, additional working capital has been required to support the higher levels of business volume. Additionally, we invested $5.3 million in capital improvements during the quarter.

Looking ahead, we continue to expect full year fiscal 2007 revenues to range between $475 million and $500 million. And full year earnings to range between $1.20 and $1.45 per diluted share, which includes the integration cost of the Power/Vac product line acquisition. At this point, I will turn it back to Tom.

Thank you, Don. Let me make a few comments and then we'll be happy to take your questions. The GE Power/Vac product line transition, not without its challenges, is going well so far with the pace of transition picking up and gaining momentum, yet we still have a significant amount of work to relocate the product line to Houston. I'm happy to report that activity in the Process Controls Systems segment of our business, which had been sluggish in '06 is looking much more promising in '07, and we're shortlisted on a number of nice projects currently.

We're pleased with the overall efforts of our marketing and sales professionals and with the success of our new products which we have introduced into the marketplace over the last several years. Again, we're certainly pleased with the improvement in our first quarter results, our markets are strong and the integration of our GE acquisition is proceeding well. Our GE commercial alliance enabled us to diversify our existing markets and we look forward to continued strength for the rest of this year and on into '08. At this point, we would just be happy to answer any questions you might have. Thank you. Hello?

Are you ready for questions, sir?

I think I am.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] One moment, please, for our first question. Our first question comes from John Franzreb with Sidoti & Co. Please go ahead.

Good morning, guys.

Hello, John.

Good morning.

How are you doing?

Doing fine. Have a parking lot full of people out here, so -- [LAUGHTER] -- I hope that's all customers and I'm anxious to go visit.

Everything sounds good so far. My first question is regarding the SG&A that you posted for the quarter. Is that representative of the ongoing SG&A rate? How should we think of that?

For the short-term, I would say, yes. Keeping in mind that a portion of our recruiting and training costs and the integration of the product line is flowing through the SG&A, so as we've talked in the past, that will be lumpy and somewhat unpredictable quarter-to-quarter. But in general, I would agree with what you've stated, yes.

Okay, and the gross margin, you said would have been 20%, if not for integration costs? Can you just give me the absolute term that that flows through the P&L and what you're expecting to book now you that have that GE purchase -- looking into how much you expect to book for the full year as far as integration costs this year?

Our outlook on the integration is consistent with what we have said in the past is that we do not expect this product line to have a material contribution in the current fiscal year. That post integration we fully expect that EBITDA contributions to be between $7 million to $8 million. So that is why I would like to stick with is where we have been in the past and because when we're breaking out the cost of the integration into an existing operation, it's difficult to collect all the costs. There is a lot of indirect costs that does impact the operation and so with the training and the building up of the employees, it's very difficult to give you an absolute dollar figure.

Okay, how about just for the quarter completed? You have a hard number for that?

No -- I have the -- not with all the indirect costs, no, I do not.

Okay, I'll get back into queue. Thank you, guys.

Thank you, our next question comes from Ned Borland with Next Generation Equity Research. Please go ahead.

Hi, Tom and Don.

Good morning.

Question here on the contribution from GE on the order side. Now if I remember correctly, you had a large initial order from -- for Power/Vac of about $49 million last quarter and sequentially orders have ticked down. I'm just looking for the normal run rate, what the order contribution, if any, came from Power/Vac in this previous quarter?

Basically, we had a modest backlog growth in the first quarter from this product line, orders were in line with revenues in this particular quarter was slightly ahead.

Orders were slightly ahead of revenues in the quarter?

Yes.

Okay. And then could that -- what you received in this quarter, would that be kind of a normal run rate? Going out quarter-to-quarter?

Based on our limited experience, I think it's reasonable to assume.

Okay. One more quick question on CapEx. I think you guided $10 million to $12 million for full fiscal '07. You did about $5.3 million this quarter. I am just wondering whether everything is sort of on plan or whether that CapEx guidance might go up a little bit?

At this point in time, we are still in line with the guidance that we gave for the first, for the full year. During the first quarter, we had some expenses that we're wrapping up projects from last year that will be completed here in the next 90 days or so and then barring any unforeseen capacity issues, if we bring up the Power/Vac product line, the $10 million to $12 million should still be in line.

Okay, I'll get back in queue. Thanks.

Thank you, our next question comes from Richard Leader with First Houston Capital. Please go ahead.

Good morning, gentlemen, and Karen, too.

Hello, Richard.

Hello, Richard.

Congratulations on some great numbers here. I don't know if you mentioned this or break it out separately, but given the acquisitions and some of the megaprojects you talked about, Thomas, is the Company becoming more international in nature, and do you break out how much revenues do come from international sources?

I would say at this point it's still 20%. Certainly, there is a lot of activity internationally, but there is also a lot of competition out of Europe and areas.

Yes.

Our S&I subsidiary, of course, in the U.K. has done quite well. We're very proud of those folks and just booked a very nice order internationally with one of the major E&C firms here in Houston, so we are beginning to work better together as a team. Total international revenues were somewhere just slightly under $45 million.

Yes. So the nature of the Company hasn't really changed that much?

No.

Okay. It's roughly about three years ago, Tom, I think we had that big blackout in the northeast and 50 million people were left in the dark and that seemed to be a stimulus to -- for the utilities to start spending more. In fact, I was reading an article that mentioned the estimate by the Edison Electric Institute that since that time, since the 2003 blackout, utilities' capital spending is up 65%. Is it over? Or is this just a continuing ramp-up in your opinion? Do -- is this a crisis that's now passed and we've solved the problem, can you comment on that?

I don't think we solved the problem. I still think we need additional generation and distribution facilities, and there is a great deal of activity going on all throughout the country. There is some concern, of course, with -- well, you're looked at the Houston Chronicle lately, Richard.

You have seen all of this about coal is dirty, et cetera, et cetera, et cetera, sponsored by the Sierra Club. That could spot some of the grassroots coal plants that are being planned right now that we're also bidding on. On the other hand, it will add more scrubbers and environmental clean up to existing facilities, so it's the good news/bad news story. We need more generation in this country, I would say within the next two to three years, we'll see 10 to 20 nuclear plants on the drawing board and some are on there already, so people are going have to make a choice, it's either coal or nuclear.

Yes.

Coal is about 60% of our generating production today in this country.

Okay, congratulations again on those good numbers, Tom.

Thank you.

Thank you, our next question comes from Craig Bell with Sanders Morris Harris. Please go ahead.

Good morning, I was kind of wondering with the Power/Vac line, if you ignore the integration costs, are the gross margins on that coming in line with traditional Powell business?

Craig, based on everything that we have seen to date and looking and monitoring the business as we're relocating it to Houston, there is nothing that has come to our attention that would change our opinion or outlook on what the financial performance would be post-integration.

Okay. And then if -- on the last call, you talked about the activity level at S&I. Are you seeing the same kinds of trends there in terms of the inquiry rates?

Inquiry rates are strong there. The backlog is growing in that aspect of our business, as well as what we're seeing here domestically.

All right. Thank you.

Thank you, our next question comes from Tom Spiro with Spiro Capital. Please go ahead.

Good morning, everybody.

Hello, Mr. Spiro. How are you, sir?

I'm fine. I'm fine. Congratulations on a great start to the year.

I see you're always chipper as always.

You keep producing these kinds of quarters and I'll be chipper.

Okay.

A couple of questions, number one, two or three quarters ago, Tom, you expressed a concern that some of our customers might not be able to take a delivery because they themselves are so backed up. Are you seeing any of that as you look across the business?

There is some of that getting construction people into the field to help with the final integration of all of these products. It's an issue, hiring engineers. I just, [fluere] just recently out here in Houston. Advertised it for another thousand engineers and designers and engineers are certainly in short supply. There is also a little bit of backup due to weather. It seems like it's rained 60 out of 90 days down here in this quarter and it's creating some issues. But overall, it's not insurmountable issues.

Speaking of hiring, apart from the hiring that we're doing associated with the GE acquisition, are we still doing hiring for what I would describe as the old Powell, the core Powell?

Absolutely, the young, core Powell, you know, we're only 60 years old.

The young, core Powell.

That's it. Yes, you're making me feel old now, well, actually, I am. No, we have hired -- in the last 30 days, we hired under 100, about 25 of them were professionals and the rest are employees for the plant and we're undergoing extensive training with those folks and I think we have made a good selection and got some fine people in here.

We still running overtime with the young, core Powell?

Are we doing overtime? Absolutely, right now.

We have hired a lot of folks in the last, I guess, 12 or 18 months. Is the -- is the workforce generally now operating kind of at standard or still not quite there yet?

Well, the -- some of the new employees, obviously, need more training which detracts from those more experienced people that are going through the training, so, but we think we're doing a good job of bringing them up to speed. We actually have somebody hired that does regular classes, teaching them a wrench from a screwdriver, you know.

What is the status of our plans to expand the ship channel facility?

The ships -- that -- due to the weather conditions, that has slipped. We hope to have that done now by, the contractor says the end of February, I would say mid-March and we're getting to the point where we certainly need that facility, but it is just way, way too much rain. It's also slowed down the expansion at our facility at North Canton, but at least the manufacturing part of the bay has been dried in and completed, but there is an office expansion there, as well, and that is yet to be started.

Finally, Tom, you mentioned in your commentary there are a couple of megaprojects floating out there that have our attention. What order of magnitude, what is the size of a project that you would call a megaproject?

I would say anything over $10 million.

Okay. Thank you very much.

Yes, sir.

Thank you, our next question comes from Michael Christodolou with Inwood Capital. Please go ahead.

Good morning, a couple of questions. One detail question and then a bigger-picture question. First, Don, on the GE business last quarter, from the third to the fourth quarters, the backlog was up $68 million and I know you all commented that $49 million of it was the one-time upfront initial transfer of the backlog that GE had, and then I was trying to reconcile that with your latest statement that the GE orders for the first quarter were ahead of GE revenues of $21 million. So basically, backlog further built. Is that correct for the GE business?

That is correct.

Okay.

The only thing I would qualify from your original comment is that the two numbers you quoted was orders not backlog.

Sorry. Sorry.

In the period as well.

That's right. I'm sorry, that's orders. There was a lot of comment about that's non-recurring. The fact is it's non-recurring because you're only buying the business once.

That's correct.

It will keep on ---- .

There is a base-level backlog that was initially passed to us through a purchase order that we've called the initial purchase order that would be similar to any other acquired business where you get business already in the backlog.

Okay. And is -- should we look at it all or is it telling to look at the ratio of backlog, orders and backlog to the revenue base? In other words, these seem to be, if I had to guess, less custom, more mid-tier product. So there is probably a faster cycle time?

There is some truth to that but, I mean, it's all relative. The cycle time is still going to be in the magnitude of six months.

Okay.

From the time that you receive an order until we ship it on average.

Okay.

I think what -- I would take away from the growing backlog is that the business has not been negatively impacted as a result of the purchase by Powell and, nor has it been impacted by the transition of the production to our facilities in Houston. The business is continuing to grow along with the economy and the overall market.

Very good. And then a big picture question for Tom. One of the earlier questioners mentioned this Edison International report, and it was written up yesterday in the Wall Street Journal on Page A10. Their projection is there is going to be $25 billion spent on just investor-owned utilities over the next three to four years. Tom, I was wondering if you had any wild rule of thumb between generation and transmission, how much could fall, you know, what percentage of say $25 billion could, roughly speaking, fall to the types of control and distribution equipment that you and your competitors would be making?

The -- that's a tough one. Maybe 1%, 2%. I'm just throwing that out. That's not a very educated guess.

Okay, so --

I can tell you we're covered up right now with that work and opportunities. Most of the E&C's are staffing up and much of it has to do with new generation and distribution networks, but I don't really have a solid figure on that.

Well, keep up the great work, gentlemen.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from John Franzreb with Sidoti & Co. Please go ahead.

Tom, last year you called the current environment one of the best you have ever seen and that you thought there would be a three to five-year cycle. With oil coming back a little bit and losing its luster, what are your thoughts now about how long the cycle's going to be, how, you know, how robust is it? Has that changed at all?

John, not really. Many of these major projects, once they're started it takes three to five, seven years to get these things up and operational, so it still looks good at this point. The only concern we have is any slowdown that might be created by legislative actions and so forth toward the coal-fired burning and some of the taxes for oil and gas. I certainly can't predict that. I feel pretty good about the next three years.

Okay, and one question. I don't know if you have this number. But you talked about the rain and how it hurt the offshore assembly work, as far as the top line. Do you know how much you had in deferred revenues or pushback revenues because of that?

It probably affected us a couple of, $2 million to $3 million. You're not as efficient out there when working in the rain. We have a good facility, there is only so much work that we can do in this enclosed facility before you have to roll it out. This is a pancake design where you have multilevels and you can't do that in the building. So it held us back several million dollars and certainly some margin.

Great, thanks much. Have a good day.

Thank you, our next question comes from Josh Cahill with Portland Capital Management. Please go ahead.

Good morning, thanks for taking my question. I was curious, the last call on earnings there was a question about S&I's contribution to backlog in orders that wouldn't have happened without the Powell association. So I am just curious as to whether -- you said a couple trickled in, takes a long time. I'm wondering if there is any update there on the trend? Thank you.

Well, yes. Hi, this is Mark Reid, and I think I spoke to that last time, but the order that Tom just mentioned that we received here from one of the Houston EPC firms was evidence of that kind of activity that we're looking to gain, and the project list of active projects is just about one full page. And those are all in the U.S. S&I didn't typically spend time, didn't have the sales resources to spend as much time in the United States and, therefore, that activity level is new to them and those are projects that fit their kind of profile. So, it's -- that momentum is being gaining and we're seeing it carry in forward and we have got our first really big order as a result.

That's helpful. Thank you.

Thank you, our next question comes from Brad Evans with Heartland Funds. Please go ahead.

Good morning, everyone.

Hello, Brad.

Don, I guess I was curious, could you break out S&I for the quarter?

No, sir.

Was it up -- was it up versus the fourth quarter?

It is continuing to grow consistent with the overall business. As I stated earlier, its backlog has improved during the quarter, the orders are good. The business is performing to our expectations, if not exceeding our expectations.

That's great. Tom, do you think you have pricing power at this point? I mean are you able to raise prices?

Within certain limits. Certainly, we can be more selective. Those jobs that are coming in that they want liquidated damages and penalties and everything else, and retention and so forth, we have more of a tendency to avoid those.

So the terms are improving?

Terms are improving, yes, sir, and certainly some progress payments on some of the larger projects.

You wouldn't be able to hazard a guess as to the embedded margin in backlog, would you?

That would be a little bit hazardous. Again, it depends on the product mix. Some products bring in more than others and I have not set down and sorted that out. But I don't know if that's the smartest thing I can do.

My last question is, for Don, I guess, in terms of stock-based compensation for the quarter?

Stock-based compensation in the quarter, I don't have it [INAUDIBLE] on my notes here. The best I can recollect it was about $300,000 and change.

Should we just annualize that for a good number for the full year?

That -- it will not be annualized. If you have looked at the proxy, there is a proposal out there in the proxy that is for a new stock-based compensation program, assuming that is approved by the shareholders at the annual meeting. There will be a reformulation of the plan and it would impact expenses for the balance of the year.

Okay, I'm sorry, just thought of another question, I guess, with respect to the first quarter and then the annual guidance, is it fair that working capitals should turn into a source of cash flow here in the back half of the year or do you see further working capital needs?

Not in the current fiscal year. Do you recall that we're relocating the Power/Vac product line from GE operation and building it up here into our operations. As that transfer takes place, our working capital requirements associated with that revenue will grow.

We projected in the past that business will consume by the end of its transition probably in the neighborhood of $15 million of working capital and we're at the very early stages of that. When you're looking at our overall ramp-up of production between now and the end of the year, plus the CapEx spending that we're continuing to forecast that I would say that you're going to see a use of cash between $15 million and $20 million for the full year. Rough numbers.

Okay. Thank you very much.

Thank you, our next question comes from Tom Spiro with Spiro Capital. Please go ahead.

Just a question for Mark. Are there any plans to expand S&I, either personnel or square footage?

That is a fair question and --

We're discussing it.

We're in the middle of discussions. That's right. But it clearly, the business momentum is building there and we want to support them.

And the big project that was won, where is it going to? What part of the world?

I'm sorry, repeat the question?

The job that S&I won, you mentioned S&I won a pretty big job. I was just curious where it's going?

It's going to Middle East.

Well, thanks much and good luck.

Thank you.

Thanks.

Thank you, we have no further questions at this time.

That's great. Folks, thank you for joining us. Our record backlog and favorable market conditions have provided significant momentum for us in 2007 which we look forward to. We're currently wrapping up the expansion of two of our existing facilities and there potentially could be something else that we need to do to improve our capacity. We intend to capitalize on this momentum, and we look forward to reporting back to you with our progress in the next quarter. Have a nice day. Thank you.

Ladies and gentlemen, this concludes the Powell Industries first quarter call. Thank you for your participation. You may now disconnect.