Powell Industries Inc (POWL) 2008 Q1 法說會逐字稿

Welcome to the Powell Industries first quarter earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. This conference is being recorded today, Wednesday, February 6, 2008. I would like to turn it over to our host Karen Roan of DRG&E.

Thank you, operator, good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2008 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 over to management, I have the normal details to cover.

You should have received a fax or e-mail of the news release this morning. Occasionally there are technical difficulties experienced during these broadcasts. So if you did not get the release, please call our offices at DRG&E 713-529-6600, and we will send 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 February 13. And information on how to access the replay was provided in today's press release.

Please note that information reported on this call speaks only of as today, February 6, 2008, and therefore you're 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 related 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 Chief Executive Officer; Pat McDonald, President and Chief Operating Officer; and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn the call over to Tom.

Thank you, Karen. Good morning. Thank you for joining us today to review our fiscal '08 first quarter results. I'll make a few comments about the quarter and our markets and then I'll turn the call over to Pat and Don for a more detailed discussion.

Little has changed in the two months since our last conference call. This call will be shorter than normal. Having said that, we continue to see strong demand for our products in all of our markets. The oil and gas sector continues to invest in infrastructure, especially refining capacity. The utility market investment is ongoing as we continue to expand in order to meet the growing demand for electrical energy. And our transit industry is very active. In fact, we're covered up with opportunities overall. In my 45 years in this business, I've never seen as much activity.

We're pleased with our first-quarter results. Bookings were $185 million. Our bookings were at a record level for the first -- for a first quarter. We've now posted a record backlog for five consecutive quarters. Our backlog totals $502 million. Inquire levels remain high from all of our traditional customer base, and most importantly, we've not been affected by the recession worries in our markets. We see many opportunities, and we continue to close business very successfully. We are confident that our markets and our business will remain healthy for the foreseeable future. I'll now turn the call over to our President and Chief Operating Officer, Pat McDonald.

Thank you, Tom. The size of our backlog, we had a strong first quarter compared to first-quarter 2007. Traditionally, our first quarter is the lowest during the year due to the high level of holidays in November and December. As we have discussed in previous calls, we continue our growth pace to add personnel into our organization. Last year, our principal increases were initially to satisfy our requirements to staff our power-back business and secondly to handle the volume loads in the remainder of the businesses. We are still increasing the staffing in power-back, but the majority of our needs are to handle the backlog levels and incoming orders that will be converted to shipments in the future. We are hiring across all positions within Powell. We have added 220 employees in the last quarter and 703 since December, 2006.

As Tom pointed out, we have a strong backlog, and all divisions are working continuously to improve their operations. There is no doubt that our cost to train all the people we have hired have put pressure on our earnings. However, we still delivered $0.32 per share in earning for our first quarter, well ahead last year's first quarter, and our last quarter of fiscal year 2007. On our last call, I mentioned that we had three primary goals for our future. And I would like to update you on these.

First, finalize the transition of the power-back product line. We have stated that our goal is to finalize the transition by March of this year, and we are still on track to accomplish that goal. All assembly and tests of the power-back is in our [Curlin] facility and much of the fabrication of parts has moved to either our Mosely plant our outside suppliers. Second, drive for gross profit improvements in all business. Our gross profit continues to improve and we achieved an 18% gross margin in the quarter, an improvement over last year's first quarter and the third quarter. Third, improve our working through capital turns through solid project management, milestone billing, cash collection, and timely inventory management.

We are moving forward on our working capital improvement areas. Each division has working capital improvement goals. Our entire team from sales, project management, and finance is working to improve our timeliness of milestone billings as well as working with our customers to ensure timely payments. Each of these areas will continue to be a key focus, and all the teams understand their importance and have the drive to demonstrate improvement. Now I would like to turn the call over to our Chief Financial Officer, Don Madison, to review the financial results.

Thank you, Pat. Revenues were $147.1 million in the first quarter of fiscal, 2008, compared to $122.8 million in the first quarter of fiscal 2007. Revenues increased due to ongoing strength in our primary market and a strength in backlog. Gross margin for the first quarter was 18.1%, compared to 16.4% in last year's first quarter.

Looking at our historical operation which excludes the direct impact of the acquired Power/Vac product line, gross margin for the quarter was 21.3% compared to 18.5% a year ago. Overall, we continue to experience strong demand for our products and services. Selling, general, and administrative expenses increased to 13.7% of revenue in the first quarter compared to 13.3% of revenues in the first quarter of fiscal 2007. SG&A expenses increased primarily due to costs related to the integration and operation of the Power/Vac product line. Interest expense in the first quarter was $865,000. An increase of approximately $177,000 from the first quarter a year ago. The increase in interest expense is primarily due to an increase in borrowings necessary to support our levels of business volume and the acquisitions in the Power/Vac product line.

Interest income was $115,000 compared $180,000 in the first quarter of 2007. This decrease resulted as cash was used to fund working capital in the first quarter of fiscal 2008. Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 35.5%. Net income in the first quarter was $3.6 million or $0.32 per diluted share compared to $2 million or $0.18 per diluted share in the first quarter of 2007. As of December 31, 2007, our order backlog was $501.7 million compared to $464.5 million at September 30, 2007, and $384.5 million at the end of the first quarter a year ago.

New orders remained strong. New orders placed in the first quarter totaled $185.1 million compared to $147.5 million in the first quarter of fiscal 2007. During the quarter, cash used in operating activities was approximately $14.6 million. Cash flow from operations is primarily influenced by working capital needs to support the growth in demand for our products and services. Investments in property, plant, and equipment during the first quarter totaled approximately $746,000 compared to $5.4 million during the first quarter of fiscal 2007. At December 31, 2007, we had cash, cash equivalents, and marketable securities of $6.6 million compared to $5.3 million at September 30, 2007. Long-term debt, capital lease obligations including current maturities totaled $50 million at December 30, 2007, compared to $35.8 million at September 30, 2007.

Looking ahead, we continue to expect full-year fiscal 2008 revenues to range between $625 million and $650 million, and full-year earnings to range between $1.65 and $1.90 per diluted share. At this point I'll turn it back to Tom.

Thank you, Don. Let me make a few more remarks, and then we'll be happy to take your questions. Let me reiterate, in the market segments we serve, as our booking and our backlog indicate, we continue to see heavy levels of activity as we have seen in the last few quarters. We've not seen any signs of a slowdown. Regarding our primary markets of oil and gas, utility and transit, the U.S. is still way behind the curve in power generating capacity and energy production, and the transit market is still showing good demand. So we continue to be pleased and confident in our business. Our end markets remain vigorous, and all indications are that that activity will remain at recent levels. We are confident we will continue to see growth, healthy growth for the foreseeable future. That's short and sweet. At this point we'll be happy to answer any questions you might have. Hello?

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Please ask one question and one follow-up and requeue for additional questions. Our first question comes from the line of [Fred Fanacor] with [DJS Securities]. Please go ahead.

Yes, good morning, gentlemen. Great quarter.

Good morning.

Just wanted to see, did you give out the Power/Vac revenue in the quarter as a contribution to EPP, or could you give that to us, please.

Basically, what -- where we are and the way we would like to go forward with that is basically talk about the business as a whole. But I can say that the orders and revenues were in line with the first quarter of last year and in line with our expectations for the year.

Got it. Great. Thanks. And then a follow-up. In terms of the book to bill that you turned this quarter, do you expect that to be sustainable through the balance of the year? In as much as it's that strong, I guess 1.25 times?

Well, again, I think you're going to see quarter-to-quarter changes in that number. There's going to be ups and downs, as we've been indicating to people, with a lot of the size of the jobs that we see continuous looking at quarter to quarter is going to be difficult because any -- any one order can ship from one quarter to the next quarter. We still see a strong business level out there. There's no doubt we've got to convert all that into shipments and revenue. So whether it's going to continue at that rate on a quarter-to-quarter basis I can't say. We're going to have a good, healthy year.

Great. Thank you very much.

Thank you. The next question comes from the line of Ned Borland with Next Generation Equity. Please go ahead.

Good morning, guys.

Good morning.

Just a question on the guidance. No change obviously from two months ago. I'm just trying to understand is there -- what are you looking at that is the variable between the low end and the high end because I mean I know you have some Power/Vac hangover still in this coming quarter. But what do the margins look like in your backlog that you have here?

Ned, let me try to explain a little bit about the change. First off, keep in mind there's only 11 million shares outstanding. So when you're looking at it in dollar values, the range is not quite as broad as it looks from an EPS perspective. The variability that we're looking at in the range this year basically revolves around two major issues. The two major issues being the completion of the transition and relocation of the Power/Vac product line has two factors. One is time, and we're on schedule for time. The second is cost. At this point time, month-to-month cost is still somewhat of a variable. We're focused on getting it done, getting it done quickly so that we can get it behind us.

The second issue which is probably the more dramatic issue when you're looking at 2008 is the effectiveness in the productivity of our workforce. We've talked about it in the past. We have over doubled our workforce now in less than three years. Pat mentioned in the -- earlier in the call is that we've hired over 700 employees in the last 12 months. Over 200 employees in the last 30 to 90 days. So the effectiveness and the efficiency of our organization as it comes up to speed is one that also puts into play the variability in our outlook.

Okay. That -- that's helpful. And then on the backlog $500 million obviously a record. But how much of that is scheduled to turn in this current fiscal year?

As of the end of our fiscal year, approximately 80% of our backlog was scheduled to turn in the current year. I do not have an update as of the end of December. But I would expect it's not materially different when you're looking at a 12-month time period.

Okay. And the margins on that business should be consistent with what we've seen so far ex Power/Vac?

We continue to quote at the margin levels that we are expecting for our business to be healthy, and we continue to convert those to ever-improving margin levels.

Okay. Great quarter. Thanks.

Thank you.

Thank you. The next question comes from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, everybody. I'd like to talk a little bit about the Legacy business, not so much about Power/Vac. Back in the last peak your gross margins in that business exceeded 22%. I'm wondering what the gross margin contribution is in the legacy business today?

The legacy business as of the quarter just completed, historical operations, gross margins was 21.3%. And that compares to 18.5% a year ago.

Okay. So directionally we're going the right way. So it seems like we still have more room to grow unless there's a competitive factor out there that I don't really understand?

The -- our goal has been to reach and outperform the 2002 level with this market cycle. The number one challenge we have to take it from 21% to 22%-plus is the productivity and efficiency of our workforce.

Okay. Second question kind of follow-up. The process control business, the backlog there has been flatlined for I don't know, four, five quarters it looks like now. With the prospect of maybe lower tax receipts in the future, should we be concerned at all about a weakening in that business or is there an order outlook that's more positive out there than we realize?

This is Tom Powell. No question the bookings have not been up to plan. We have several very large projects that we're short listed on. Hopefully we'll know the outcome on those within the next three months. So we are optimistic that we will be successful with one or several of those opportunities. We're monitoring it very closely, sir.

And Tom, are those projects of size or are they just status quo?

I didn't understand the question.

Are they sizeable projects, Tom?

There's a healthy mix of projects in there, some of which could become sizeable.

Thanks a lot, guys, keep up the good work.

The next question comes from the line of Richard Leader with First Houston Capital. Please go ahead.

Tom, I'd like to get your views on the M&A picture. You folks have been real successful in acquiring companies over the last two or three years and then Pat made a comment that it looked like the assimilation of Power/Vac was pretty well behind you at this point. What do you see there at this point, has the demise of private equity opened up opportunities for you in this area? And should investors in Powell come to expect various acquisitions to occur on an ongoing basis?

We're actively looking, we've not seen that many opportunities. Frankly, we're going to spend an awful lot of our waking hours making sure we improve the efficiency here and are able to produce for our customers. But we're not going to pass any opportunities.

Thank you. The next question comes from the line of Craig Bell with SMH Capital. Please go ahead.

Good morning. I just wonder, you talk about since December of '06 you've hired over 700 and 200 in the last quarter. What's kind of the timeline to get those workers up to your expected productivity levels?

Craig, we have various timelines. It depends on where we're putting people in. And like I said, we're hiring across all -- all lines of areas of our business from engineers, project managers out to the shop floor. And again, it -- varies. A lot of times our shop -- shop people will take six months or more to get up to speed if it's complex wiring person, it can be up to a year. Definitely with an engineer because our tradition has been to bring in engineers and really hire them and train them to the Powell way. An engineer can take two or more years to really come up to speed with what we're looking for. So it just depends on what -- what they bring in, what their capacities and capabilities and the role that they're playing for our Company.

Okay. And then in terms of the margin in the quarter, obviously it's fairly strong. Was there any surprises on the positive side? Did you get some more complex projects that really helped you out, or was it just solid execution all around?

Again, as we pointed out, we drive for solid execution. All the -- the managers review their projects on a monthly basis, and we review them with them also. And it's a matter of just good, solid execution. There's no major surprises there.

And this one's for Don. Last quarter you had talked about expecting to see a step up in the gross margin in the second quarter. Is that still the case?

Basically what we talked about in the past is there will be a noticeable improvement in our gross margin as we complete the integration of the Power/Vac product line. So that would impact the third quarter. It would be as a result of the completion of activities planned for the second quarter.

All right. Great. Thanks, guys.

Thank you.

Thank you. The next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

Good morning, gentlemen. How you doing?

Fine.

Just a couple if we could on the bookings. At $185 million, I know bookings can really move around a little bit. They were down in the June quarter and then way back up in September. Is there anything -- is that just what's going on, we've just got normal fluctuations here, or is there anything more that we should read into that?

No. There are normal fluctuations. As we've always said, you can't really -- if you look back to the old construction business, there's not that type of a cyclicality to the North versus the South. But there is the fluctuations again with the size of the jobs and the timing and the letting of those jobs how it impacts our order in any one quarter.

Got it. And we've got the Q4 seasonality hitting here, as well.

Again, a lot of our business comes in in the oil business which a lot of it is in the South. The Q4 cyclicality likes that to the commercial construction market really doesn't play a lot here.

Okay. If I could get just a little bit more color here from maybe Don from the transition on Power/Vac. You mentioned assembly and test is already over, and most of the fabrication has moved?

I'll defer that to Pat. Pat's closer to it.

Yes, all the assembly and test is in Curlin now, and we are in the process and have significantly moved, started to move all of the fabrication out of the Burlington, Iowa, facility. Like I said it goes to one of two places, either to outside suppliers where we had fixed hard tooling and also our Mosely facility here where we have all of our fabrication and paint capability.

Got it. Okay. So just to follow-up on that relative to the other question, when you mention a step up in margins Don, that's a June quarter event as June quarter is -- should be completely -- we should have a full quarter there with the transition complete.

The fourth quarter -- we'll have a full quarter the transition complete. But keep in mind there will still be incremental improvements as a result of the effectiveness of the work force. That work force with the exception of probably 10% to 15% that were relocated from our other facility here in Houston. You're looking at 85% of the employees have less -- not much more than a year seniority with the Company. So we still will have a lot of work to do come April 1, to get the facility operating at an effectiveness level that we're targeting.

Thank you. Our next question comes from the line of Thomas Spiro with with Spiro Capital Management. Please go ahead.

Good morning, everyone.

Hey, Tom.

Tom, I think you began the call by saying that Powell these days is full up with opportunities. I think that was your phrase.

Yes, sir.

And that's a nice problem to have, Tom. I was curious with how you deal with such abundance. Do you -- do you become more selective, do you allocate capacity among customers, how do you deal with that kind of a problem?

You just beat the hell out of them to get it out the door. We are--.

And I've got bumps, Tom.

We are obviously very busy keeping up with the demand for engineering. These jobs are much more complex today with SCATA systems and so forth. And we are trying to be certainly more selective. And we do have customer that are -- all of our customers certainly are valuable. Some of them are bigger and might be considered more important. So it's a fine line to walk here. And our job is just to bring in these new employees and get them trained as quickly as we can. Here in the local area, you get a lot of people that want a job. Not as many want to work as in years past. So we're spending a lot of effort training these people, and I'm proud of some of those folks we have. Right now in some cases, we're on 12-hour days, four days a week, and two 8s trying to get it out -- perform for our customers. We're just going to stay at it.

Are you turning down any jobs that two or three quarters ago you might have taken?

On occasion. On occasion. If they want it short cycle, it's a little bit more difficult.

Tom, this is Pat. As Tom said, where we might have a short-term capacity constraint with the amount of business that we already have laid in, those would be the jobs that would be affected. Since the majority of our customers are -- are long-term customers with us, a lot of them are Alliance customers, as you can see our approach is we've got to continue to increase our capacity. What our customers are asking us to go do. We don't try to constrain our capacity and pick our business. So our job is to keep increasing our capacity to what our customers are asking us to deliver.

That sounds like if the business is there you'd like to keep increasing your backlog. And it's 500, isn't the max?

I'd like to keep matching my capacity with what the customers are wanting to send orders in for.

What's going on over in the UK? How is S&I faring?

S&I is doing very well. They continue to perform to the expectation levels that we have. It's been a very good acquisition for Powell. They mirror image the rest of our business very closely. And I would say today our two teams, I say two teams, but the integration of the people from the UK in alignment with Powell and people from various segments of Powell working with the UK teams is the strongest it's ever been.

Are there particular jobs that S&I has won because of the alliance with Powell?

Yes, there have been particular jobs. Again, as I mentioned in previous calls, we took one of our people here, sent them over to the UK. He trained quite heavily for a long period of time on IEC products so that he can talk to our customers here about IEC products. The next phase of what we're trying to do is try to train up some people in the UK on ANSI-type products. So again, as their customer base out there is talking about ANSI products, they can talk intelligently about those products along with IEC.

Thank you. Our next question comes from the line of Michael Christodolou with Inwood Capital. Go ahead.

Congratulations on the progress. A couple of questions. Of the 703 employees added in the last year, could you roughly break that out. How many was for the Power/Vac acquisition, and how many is for the organic growth at the core legacy business they've been experiencing?

Well, roughly since the August acquisition of Power/Vac, we've approximately put about 300, slightly over 300 people in for that acquisition. If you want to look just year to year, you could say, approximately some 300 of that 700 was in the Power/Vac area.

So the other 400 is just your core business?

Is just our core business.

Wow. And how many more openings, Pat, do you have over the next 12 months? Clearly if the opportunities are there, you may be hiring for the next two or three years it sounds like.

We continue to have ourselves geared up to continue to hire. And -- and we're out searching for people. So.

Right. And just a question on the gross margin. So the 18% gross margin would have been really 21.3 for the legacy business, and I'm trying to get a sense, though, clearly if you've got some margin -- if you don't have your optimum margins yet because of some productivity issues, I'm going to imagine that you've got productivity issues as well for the 400 people hired into the core business, right? So is that 21.3, is that net of some pro forma inefficiency lower productivity measure? You know where I'm going with this? In other words, could the margins be a couple of hundred basis points even higher if you didn't have a productivity issue with the new hires, in a non-Power/Vac business?

Clearly in our historical operations the 21.3% includes the inefficiencies of the maturity of our work force, particularly. Keep in mind that we talked about 400 in the last 12 months. But also keep in mind that in the first quarter of 2005, since that point in time, we have over doubled our work force. So it's the -- the maturity of our organization and the effectiveness of the organization is netted within the gross margins that we're talking about. How you would try to quantify that, it would be very subjective, but clearly I would say given where we are and what we know, there is additional opportunity in our gross margin.

All right. But again, there's no -- there's no magic to that April 1 date after Power/Vac is integrated because you're saying those 300 people that have been hired still have to move up to productivity curve. And you're saying also that those other 400 people in the core business also need to move up to productivity curve as both of those gains--?

Right. And the hiring that we do during the current quarter will impact. We're still on the growth curve, we're still hiring and training people. But clearly, the cost of the integration will improve when we have all of the product physically in Houston.

Right. Right. Are there any measures? Clearly I don't know how much lean manufacturing you guys are doing, but beside just looking at, say, revenues per employee, are there other throughput measures that you're looking at you could share with us? Is it pieces per hour, or man hours per $5 million module? Are there any metrics you could throw out to us?

We don't have any beautiful, wonderful metrics like what you're throwing out there or lovely parts per million type that you would get from Six Sigma. Quite frankly our concentration continues to be on throughput. And what we are basically looking at there is how long and how predictable are we from the time that we actually start a project, the first area of fabrication and everything, to the time that it actually goes out the door to the customer. Because in our business, since we build a lot of this equipment, especially with our power control rooms and modules, the longer a job sits on the floor, that means the next job can't start. So that is our key significant measurement that we track and follow to see how well we are gaining throughput and traction through our business.

How much revenue do you think you guys, given you've expanded your bulkhead at the harbor and you've got that Mosely facility up and running, but between Curlin and Mosely, what -- what kind -- and the S&I capacity overseas, what kind of revenue capacity do you think your physical plant could support?

I couldn't even tell you a number on that. Again, as we talked about a lot of our growth is paced with our people. And there is flow doubt, though, at this point time just as you mentioned, we are continuing to watch and look at how we can leverage all of the capacity across Powell, not any one, single location. So we are taking some measures to look at how we leverage, where one area might be slightly down in a particular moment in time. Can we leverage that capacity for the betterment of Powell. But I don't -- I don't have a number that I can look at, that could be our revenue capacity as a result of our actual structures.

Thank you. Our next question comes from the line of John Franzreb of Sidoti& Company. Go ahead.

I was wondering if you could update us on the G.E. salesforce and the sellthrough of Powell products through that pipeline.

We continue to work very closely with the G.E. salesforce. Again as we talked about though, our primary emphasis at this point in time is to continue to finalize this integration and continue to sell the Power/Vac product through their market segments to their people. And we have to continue to work real close with them to improve what we're doing there so that their customers are satisfied that we are a good supplier for them. So again at this moment in time, that's where our concentration is. We have had opportunities with G.E. for traditional Power/Vac, and we have won some orders on that. But we want to stay focused very much to supply their customers with their products first, and then see how we move forward.

You earlier referenced that the Power/Vac sales were relatively flat year over year. Does that suggest there may be more cyclicality involved in the Power/Vac product line than the growth that you're experiencing in your legacy business?

Again, considering as we talk to a lot of people, John, when we show the transactional versus the relationship sell model, the markets that they serve do have more cyclicality to it. I would not be saying, though, that I am speaking for their markets or where they think their markets are at this point time. But there is a potential for more cyclicality. It is also a fact that we've been working with them very closely to make sure that we are selecting the right jobs at all the times. So I don't think you can read a market or anything into the flatness. That's kind of just the way we are and the way we are working to operate the business with G.E. at this point time. Through the transition.

Okay. So the order trends are where you would expect them to be given where we are in the integration process, and it's not a function of softening in the macro environment that may be weighing a little bit on the top line for that business?

I think that's a very good statement.

Okay. Great, thank you.

Thank you, our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

Hi, just a couple of follow-ups here if I may. Going back to our earlier conversation on the margins, Don, and that step-up, I understand we've got some -- we've got an awful lot of new workers, and we're thinking about getting them up to speed. When we look at -- at the revenues without Power/Vac -- excuse me, margins without Power/Vac, 20 to 21, a little bit over, very consistently here over the past few quarters, you think that you have a tendency to look at that and say okay, well, on a stand-alone basis let's think about a 21% margin. Can you just help us, do you think that the lack of the productivity is 100 basis point discount to that, 50, 200? Can you give us any more clarity on that?

At this point in time, as I spoke earlier, it gets to be very subjective when you're in a custom product business. We're not repetitive manufacturing where you have standards for operation and you have hard metrics as to what the effectiveness and efficiency of each individual employee is. And a custom business, there's no two orders that we manufacture that are the same. So it is much more subjective than in the repetitive manufacturing business. But clearly we understand the fact, working with the new employees, and again, that can be from one to three years. As there's more opportunity there as they learn how to perform the task that we've asked them to do, and the way that Powell approaches manufacturing. But to try to quantify that into a hard number would be extremely subjective.

Okay. Fair enough. And just last question on the margin, is there anything that you guys see right now that would take us back -- in other words, have margins dropping on a quarter-to-quarter basis?

Again, I've always cautioned people--.

On an operating basis.

I've always cautioned people to be careful looking at our business sequentially and drawing conclusions can be lumpier than maybe in some other businesses. But, beyond the fact of just the lumpiness of our business, individual orders coming through our operations, there's nothing in the incoming orders, there's nothing from an operational perspective that would give us any reason to believe that we should see deterioration in our gross margins going forward.

Okay. That's very helpful. And last question, I think it was Pat, you mentioned on the -- on the process control systems right now looking at several large jobs, can you just give me a better feel for timing. At what point you think those would either roll into backlog or not go into backlog.

We're hoping to have closure on several of those opportunities within a three-month timeframe.

Okay. Very good. Keep up the good work. Thank you.

Thank you. Let me interject something at this point. I've got some customers in here waiting to see me. I'm going to exit this meeting at this point. Thank you for joining us I'll let Don and Pat finish this. I'm going to meet these customers. Have a nice day. I'll get with you guys after a while.

Thank you. Ladies and gentlemen, that concludes the Powell Industries first quarter earnings conference call. If you would like to listen to a replay of today's call, please--.

Ma'am? Excuse me. I think we're going to continue to take a few more questions. He just had to leave. Now.

Okay. That's fine. Our next question comes from the line of Fred Francor with DJS Securities. Please go ahead.

Yes. Just wanted to follow-up as it relates with the hiring you've been doing. With respect to the labor market trend, would you say that that's improving, gotten more challenging for you to get the kind of people you've been looking for, been relatively stable over the last few quarters?

Fred, it continues to be challenging. It is the reality of the market that we live in, and we have to search high and low to find people. And we've used sometimes and said that, for 700, that means we probably hired double that. We interviewed triple that. So, I mean, that -- that's the type of magnitude and efforts that we run through to get people because the hiring market in and about especially the Houston area is a very tight market.

Yes. Interesting. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Craig Bell with SMH Capital. Please go ahead.

Yes. Just a quick question for you, Don, on the tax rate. Is that the -- the tax rate in the quarter, should we expect that through the remainder of the year, or should we expect that to come down a little bit, like it did last year?

From a planning perspective, I would not expect it to come down. But I would not expect it to fluctuate dramatically from where we are today. Based on what we know.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Michael Christodolou with Inwood Capital. Please go ahead.

Yes, a couple quick follow-ons. Pat, I had asked that earlier question about capacity utilization, and you said you were going to look at it more on a global basis. Could you envision a day whether you're making ANSI product in the UK and IEC product in the US?

No, I don't really look at it that way. Let me give you a prime for example. We are quoting and have quoted some -- some major PCRs to some of our customers that would include IEC product. So moving IEC product from the UK to one of our PCR manufacturing locations is not an unheard of thing. And we may be looking at going the other way at some point in time in the future. More of the capacity shuffling that we're looking at here is -- is kind of within the domestic U.S. businesses of how do we best use our offshore facility, our additions that we made to our North Canton facility, and -- and our Mosely facility here.

Okay. And another question, with the weak dollar, are you seeing any competitive edge versus some of your international competitors? I don't know if there's a frequency of RFPs or orders that you could cite an increase in? I was going to ask you about the weak dollar. And I was also going to ask about copper being 15% to 20% off its highs. Could that be a way that you're not going to adjust your pricing every month, that you could effectively see some margin expansion, just by, frankly, sitting on some of these -- sitting on this spread as it widens?

Again. Let me answer on the spread of the margin on things like copper, again, we -- we forecast and we view and we -- when we bid, we try to anticipate where our raw commodities are going to be at time of delivery. There can be spot fluctuation on that for sure. There's no doubt about that. But that's a predictable thing. That also goes into our pricing thought process at the time that we quote the project. Remind me again what the first part was.

The weak dollar.

The weak dollar, yes, thank you. The weak dollar as we've indicated numerous times, since a bulk of the business that we do and even for our S&I business in the UK is U.S.-based dollar, in other words our customers are transacting in U.S.-based dollars, it really doesn't make us any more competitive. At times, though, however, if we are competing against an international manufacturer who is local, it can make them slightly less competitive. But we don't see any major changes in the competitive landscape as a result of the weak dollar right now.

Thank you. Keep up the great work.

Thank you.

Thank you. The next question comes from the line of Thomas Spiro with Spiro Capital Management. Please go ahead.

Focusing on S&I for a moment, are you hiring over there as you're hiring in the U.S.?

Yes, Tom, we are.

Any -- any numbers you'd like to share with us, you know, ballpark hires in the last quarter or six months?

No. Again, Don pointed out earlier, we look at our entire business and try to give all of our numbers out in that form and fashion. There isn't a location that we have that really isn't hiring at this moment in time.

And how about the physical plant over there, is it sufficient, or do you need to expand it?

It is sufficient for where we are at this moment in time. As Tom pointed out, we are always looking for opportunities and if the right opportunity came around in the international market, we would definitely be wanting to look at it.

And shifting to Power/Vac for one last question, as I recall when we did the transaction, one of the appeals was an opportunity for us to pick up some service and replacement business over time. Have we seen any of that come our way?

Again, as one other person had asked us, right now our concentration is making sure that the business is running the way we need to to support their customers as it is. And we need to continue to focus that and I would say as we've pointed out, as soon we get this transition behind us and we stabilize this business, is when we'll really start more aggressively pursuing other opportunities with our partners at General Electric.

Well, thanks a lot, and good luck.

Thank you.

Thank you. There are no further questions in the queue. I'll send it back over to management for any closing remarks.

Thank you very much. Since Tom had to leave, we do appreciate you joining us today. And we definitely look forward to talking with you again next quarter. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Powell Industries first-quarter earnings conference call. Thank you for your participation. If you would like to listen to a replay of today's call, please dial 303-590-3000 or 800-405-2236, enter the passcode 11108076. Once again, that is 303-590-3000 or 800-405-2236, enter the passcode 11108076. Thank you for your participation. You may disconnect.