Powell Industries Inc (POWL) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by, and welcome to the Powell Industries third quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSRUCTIONS). As a reminder, this conference is being recorded today on Wednesday, the 6th of August, 2008.

We'll now turn the conference over to Ms. Karen Roan of DRG&E. Please go ahead.

Thank you, Michael, and good morning, everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2008 third 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 have received a fax or email of the news 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 email distribution 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 August 13th and information on how to access the replay was in today's news release.

Please note that information reported on this call speaks only as of today, August 6th, 2008 and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of the replay. As you know, this conference 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 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, everyone. Thank you for joining us today to review our fiscal '08 third quarter. Before our discussion of the financial results, I'd like to review a number of announcements that we made during the last three months. In May, we announced a 10-year OEM and supply agreement with Hawker Siddeley Limited, a subsidiary of FKI which is located in the UK. This agreement makes Powell the sole representatives for the FKI DC Circuit breaker in North America. DC or direct current electrical systems are predominantly used in the light rail transit industry. Powell is a leading provider of traction power systems in North America and this agreement expands our DC Switch Gear Solutions business, enables us to better serve the North American market.

I'm also pleased to announce that in June, we strengthened our Board by electing two new Board members for a nearly total number of directors to nine. Chris Cragg, currently Senior Vice President of Operations of Oil States International, and our President, Pat McDonald, joined the Board on May the 30th.

And in July, we announced my plan to retire as Chief Executive Officer at the end of this fiscal year. On October the 1st, Pat McDonald will become the new CEO. This is in accordance with the succession plan that we initially announced in early 2007.

Now, for a brief review of the third quarter -- we had a strong third quarter with solid bookings of 188 million which is consistent with the order trend of recent quarters. We're still seeing some very large projects and therefore, order trends can be rather sporadic from quarter to quarter. We ended the quarter with a record backlog of $553 million and reported earnings per share of $0.069 which is up 30% over the second quarter.

Inquiry levels, bookings and backlog remained very strong. However, due to the weakness in some market segments traditionally served by our competitors, we are seeing more competitors looking to increase their presence in markets served by Powell.

Regarding the transition of my responsibilities to Pat, we've been working very closely since the original announcement in February of '07. During the last six months with my oversight, Pat has essentially been calling the shots and leading the Company. During that period, we've seen improvements and successes in our business and I am confident that with the full support of our people, suppliers and customers, Pat and the leadership team will build the Company's -- build on the Company's past achievements and guide it to further success in the future.

Now, I'd like to turn the call over to Pat and Don for a more detailed discussion of the quarter.

Thank you, Tom.

Thank you, Tom. We continue to improve in the area of operational effectiveness. We had some nice project closeouts in the third quarter and we are seeing improvement in the integration of our Power/Vac product line. Our gross profit margin in the quarter was 21.3%, raising our year-to-date gross margin to 19.6%.

Looking at our sectors, we see oil and gas continues to be strong and a major element of our success. Quotation and order input remain active for this sector. As we've indicated, many of our projects this year have been substantial in size, and we see some trend back to more normal project size quotation activity.

We are monitoring the latest releases from the oil companies where they are indicating that profit margins for refining have been eroding and what, if any, this impact might have on future business. We're looking at a potential upswing for international offshore platforms, along with new domestic activity if the relief for exploration passes Congress.

The opportunities in the utility sector will be a key to our continued growth. We have excellent relationships with our utility customers and are looking to expand our presence through focused business development activities and in conjunction with our marketing alliance with General Electric.

Speaking of GE, I'm sure that many of you are aware of the announcement to spin off the consumers and industrial organization into a separate company. In discussions with GE C&I, they assure us that this will be a smooth transition and any issues arising from the spin-off will have minimal impact on Powell.

As oil and gas prices have risen, so has ridership on our public transportation systems. This is leading to a higher level of activity in our traction business. We're actively pursuing jobs that have been on the bid list for some time, and we see this segment being robust for the foreseeable future.

With our trend in the transit and utility businesses, we have obtained approval from our Board to put an additional expansion onto our North Canton Division. This expansion will be a new, high-based space for further power control room and electrical product business.

I'm extremely proud of all our people as they work long, hard hours to meet our customers' expectations. I would also like to thank Tom Powell and the Board of Directors for the opportunity to lead this wonderful organization into the future.

Now, I will turn the call over to our Chief Financial Officer, Don Madison, to review the financial results.

Thank you, Pat. Revenues for the third quarter were $164.1 million compared to $149.1 million in the third quarter of fiscal 2007. Revenues have increased as we have responded to a strong market demand by increasing through-put and improving our utilization of facilities.

Gross margin was 21.3% in the third quarter compared to 18.4% in last year's third quarter. Excluding the results of the acquired Power/Vac product line, gross margin for the quarter was 22.4% compared to 22% a year ago.

Gross profits continued to improve. The third quarter benefited by the successful completion and close-out of various projects with margins that exceeded expectations -- a favorable cost spread between anticipated commodity costs and actual commodity costs, as well as a range of operational improvement.

Selling, general and administrative expenses decreased as a percent of revenue from 14.6% a year ago to 13.3% in the third quarter due to higher levels of business activity. SG&A expenses were $21.8 million, unchanged from last year's third quarter.

Interest expense was $697,000 in the third quarter, a decrease of $225,000 from a year ago. Interest income was $59,000 compared to $110,000 in the third quarter of 2007. Net income in the third quarter of fiscal 2008 was $7.9 million or $0.69 per diluted share compared to $3.2 million or $0.28 per diluted share in the third quarter of fiscal 2007.

For the nine months ended June 30th, 2008, revenues were $471.6 million, compared to $413.8 million in the same period a year ago. Revenues have increased as we've responded to a strong backlog which continued to strengthen based on the strength of our primary markets.

Gross margin was 19.6% for the nine month period compared to 17% a year ago. Excluding the results of the acquired Power/Vac product line, gross margin for the nine month period was 22% compared to 20% last year. Selling, general and administrative expenses was 13.3% of revenue compared to 13.6% of revenue for the first nine months of 2007. Year-to-date, SG&A expenses totaled $62.8 million compared to $56.5 million a year ago.

Our provision for income tax was an effective tax rate on earnings before income taxes of 36.8% compared to 35.5% for the first nine months of fiscal 2007. The effective tax rate has increased as a result of the relative shift in taxable income between domestic and international reporting jurisdictions, along with higher state income taxes in the United States.

For the nine months ended June 30th, 2008, net income was $17.5 million or $1.53 per diluted share compared to $7.5 million or $0.67 per diluted share a year ago. As of June 30th, our order backlog was $553.1 million compared to $465 -- excuse me -- $464.5 million at September 30th, 2007 and $410.9 million at last year's third quarter.

New orders remain strong, totaling $187.6 million in the third quarter compared to $151.2 million in the third quarter a year ago.

Year-to-date cash used for operating activities was $4.1 million compared to $8.2 million in the first nine months of fiscal 2007. Cash flow from operations is primarily influenced by demand for our products and services and is negatively impacted as our progress payment terms on projects with our customers typically extend beyond the payment terms with suppliers.

Investment and property, plant and equipment during the first nine months totaled approximately $2 million compared to $11.1 million in the first nine months of fiscal 2007. At June 30th, 2008, we had cash and cash equivalents of $6.8 million compared to $5.3 million at September 30th, 2007. Long-term debt and capital lease obligations, including current maturities, totaled $38.4 million at June 30th, 2008, compared to $35.8 million at September 30th, 2007.

Looking ahead, we now expect full year fiscal 2008 revenues to range between $645 million and $655 million and full year earnings to range between $1.10 and $1.20 (Sic See press release) per diluted share.

At this point, I'll turn it back to Tom.

All right. Thank you, Don. I'll make a few more remarks and then be happy to -- we'll be happy to take your questions. This is going to be my last conference call. As CEO, Pat will be leading the fourth quarter call, as well as subsequent conference calls. On a personal note, this has been a tough and sometimes emotional decision, but it's the right time for me and it's the right time for the Company, our employees and our customers, and certainly the shareholders.

We initially announced this succession plan on February the 26th of 2007 and made the preparation for a smooth transition. My involvement and interest in Powell will certainly remain the same. I will continue to serve as a Director and non-Executive Chairman of the Board for the foreseeable future. I am very pleased with how this transition has gone. It's been an 18-month process and I look forward to assisting the future growth and prosperity for the Powell team, our customers and certainly our suppliers. I have absolute confidence in this executive leadership team headed by Pat and the pursuit of excellence for the Powell organization.

At this point, be happy to try to answer any questions you might have. Thank you.

All right. Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. (OPERATOR INSTRUCTIONS). Fred [Boniford] with CGN Securities, please go ahead with your question.

Yes, good morning, gentlemen. Very nice quarter.

Thank you, Fred.

Tom, first I'd like to start out by extending our firm's best wishes to you, given that this is your last conference call, for a wonderful retirement and a great last few months at Powell. And congratulations to you, Pat, for stepping into the CEO position.

Thank you.

Thank you.

I guess my first question, you've talked about for the last couple of quarters -- or I guess the last quarter, a two to four month time line for bringing the new Power/Vac facility up to full efficiency. Is that correct?

Two to four quarters we've always talked about.

Right, two to four quarters. Has that time line changed or would we say now it's a three-quarter time line or how should we think about that?

Well, definitely as we've been talking in the last quarter, the two to four quarters, so I would say you drop a quarter off, we're still looking at -- our run rates for the end of fiscal '09 to be where we want them to be. We've seen some nice movement and improvement in certain areas and I can unfortunately say in some areas, we haven't made the strides that we would like, but I think we're on track to do what we set out to do.

Okay. So in other words, that hasn't accelerated in any way in terms of that time line?

I'm not prepared at this time to say we're ready to accelerate it.

Got it, got it. And obviously, outstanding margin improvement in the quarter and as you're kind of approaching those EBIT margins of the last peak in the cycle that you've talked in the 8 to 9% range, as you kind of reach that threshold, where do you think margins can go from there?

I think as we have been looking at, and as Don pointed out in his part of the discussion, in this quarter we did see some nice improvement in the margins as a result of, as we've always talked about, the way we look at our commodity price in the future of any project. As we also pointed out in the last quarter, there have been some substantial spikeups in commodities and some of those are going to impact us a little bit in the fourth quarter of this year. So we're always trying to mix where those commodities are, where our contracts are and how we're pricing to the future. So I think we still have room to continue to improve, but there will be some dampening on that as commodities have spiked up in this last quarter.

Great, thank you. I'll jump back in the queue.

All right. Thank you. Our next question is from the line of John Franzreb with Sidoti & Company. Please go ahead with your question.

Good morning, everyone. Tom, I just want to say congratulations. It's been great fun working with you for the past six years.

Thank you, John.

First question, you mentioned about competitors are moving into Powell's traditional markets. Can you elaborate a little bit on that comment and what it may mean to profitability on strategic contracts?

What we mean is every time -- every competitor has somewhat their niches of markets that they like to be very comfortable in and whenever a market goes down, they're always going to be looking for volume in other markets that are strong to fill in the gaps that they might be having in their business. What it means to us is we have to keep our pencils sharp at all times. We have to be prepared to meet competitive price levels and we have to be prepared to meet competitive service levels. And how to predict what that's truly going to mean to us, I can't say other than the fact that it is not a market that we can just do whatever we want. We have to stay competitive with our competitors at all times.

Okay. As my follow-up also in the prepared remarks, you talked about a new expansion plan you have going on. Could you elaborate, A, on the demand profile that led you to make this decision, and B, what is it going to do to the cap ex budget for this year and next, if it goes into that?

The expansion is, if you remember, we did have last year two major expansions, one onto North Canton Division and one to our Offshore Division.

Right.

We are adding again onto to the North Canton Division. It's adding about 18, 19,000 square feet of high bay area. It is a direct result of what we indicated. The traction business -- the transit business is very strong and very active due to ridership now and we want to be prepared to continue our presence and dominance in that marketplace, but also as we indicated, we see a nice new growth potential for us continuing on with our area of utility. And we want to have some more initiatives to be prepared to meet the demands and needs that the utility customers are telling us right now.

As far as the cap ex, it's pretty much in line with the guidance that we've been giving in our cap ex and the majority of that expansion will fall into our 2009 cap ex budget.

Okay. Thanks a lot, Pat.

All right. Thank you. Our next question is from the line of Ned Borland with Next Generation Equity Research. Please go ahead with your question.

Good morning, guys, and I would also like to congratulate Tom. Best of luck to you.

Thank you, Ned.

I guess my question is kind of a follow-up on the response Pat -- a previous question about the margins sequentially. I mean, if you've got the productivity improvements that -- and I guess the results are, I guess, perhaps mixed and you had the commodity impact. I mean, I would have expected, I guess, margins to kind of improve sequentially as the work force kind of gets up to speed on the productivity. Could you talk about that maybe and what's going on there?

Sure, and I'll let Don pipe in where he sees fit. Remember, productivity is one piece. The greatest number of our costs as it relates to our equipment is material, the material content. And the jobs that we will be working on and delivering in this next quarter were quoted 42 to 52 weeks ago and an order received. So at that point in time, we were looking at material costs of X and as we indicated, we're seeing some spikeup in that greater than what we had anticipated what the average inflation was going to be. That is a much more significant number than what the productivity of our work force can be.

And I would add to that, is that we're very pleased with the progress that we're making with the integration of the Power/Vac product line as well. They had an exceptionally good third quarter, but with any type of integration with custom products, a lot of that has to do with the mix of costs through any particular quarter and that there's still a lot of learning that's going on within that organization and to be realistic, that we could easily see some bumps in the road between now and the end of the two to four quarters that we've talked about in the past.

So I'd keep that mind when you're bringing up -- which basically is a Greenfield facility. There's going to be periods of time that you're going to make more progress than other periods of time, but you're still -- I think we're well on track to make our ultimate goal.

Okay. And then as a follow-up, the long-term target on operating margins has been roughly 10%. Is it possible to foresee a margin that can get higher than that as the work force gets up to speed?

Ned, I've always been very cautious to say where additionally more we can go. I think we're standing tall to our objective to meet and/or exceed the previous high of that. I think again, the realities of the marketplaces that we play in, and the competitive positions that we play in, further gains that we have seen in the last year with the rate that we have seen, you're going to see a slowdown in further gains. I mean, it's just -- it's the nature of the business that we're in.

Okay. Thank you.

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

Yes, good morning. I just had some questions regarding your Power/Vac line. First, is it still operating at sort of the 80 to $85 million run rate?

We're still in the 75 to $85 million run rate that we've been talking about.

Okay. And then in terms of, as you're getting that more productive there, do you still have quite a bit of potential to expand the margins in that? I mean, it looks like you're sort of running at low to mid-teens margin rate now. Do you think it comes up to the 21% range?

Again, our objective has been to try to get it to where it's not dilutionary to the rest of our business at all and we're still going to keep that as an objective as we go forward. I think, as Don pointed out, we're going to see some quarterly changes in those numbers and the productivity is going to be there. We've got to continue to manage the material content costs of the product line.

Okay, great. And then quickly for Don, in your discussion on the tax rate in the quarter due to some of the international stuff, did you mention sort of the outlook for the full year tax rate?

At this point in time, I would use -- the year-to-date number that we currently have in our reporting is 36.8 is our best estimate of what we anticipate the current year to be.

Great. Thanks, guys.

All right. Thank you. Our next question is from the line of Richard [Lieder] with First Houston Capital. Please go ahead.

Good morning, everyone, and congratulations for these great results particularly due to be able to do this in an environment of a slow economy.

Thank you, Richard.

And Tom, congratulations to you for all the achievements you've had throughout your entire career.

Thank you, Richard.

Just a couple -- three years ago, I think, we were hearing about brown-outs and problems with the electrical grid throughout the country. There was even, I think, some legislation in 2005 to force the electric companies to do more, to produce more power and to upgrade the grid. And we haven't seen much of that. Was there a big surge of activity as a result of those crises back a few years ago that has been solved and is the electric utility system in much better shape, in your opinion, or are we going to continue to see steady growth to solve that problem?

Richard, the way we've pretty much characterized this, if you think about that three to four years ago, a lot of that again was how do we stabilize the grid so that we didn't have that rolling brown-out, black-out, that happened from the Upper Midwest and into the Eastern corridor. And a lot of that was the grid, the way it was put together. Over the last three to four years, as that was stabilized, our belief is that the capacity over above what the band was, as the grid was differentiated, that has been shrinking. And today, there's not enough generating capacity online to continue the growth and demand that we have seen over the last three to four years.

And you couple that with a lot of the nuclear plants on the Eastern seaboard that are coming offline -- and I think we've mentioned there's about 13 of them right now. Something has got to change in the fundamental dynamics of generation in the country and it's got to happen within the next one to 10 years and we believe that's going to be the next growth. As we also keep talking about, it really doesn't matter to us what fuel source it is, whether it's green with wind; solar, we're not quite sure about yet, but whether it's coal, nuclear, gas-fired or any other methodology people come up with, we believe we've got a great play with our product and product offerings to help stabilize and run that generation. So I think it's going to happen.

But there is an inquiry pickup?

Oh, there is definitely an inquiry pickup and Mr. T. Boone Pickens is making a lot of noise in western Texas right now.

Yes, that's right. So you would say that despite the surge of activity we saw as a result of the crisis, that we're going to continue to see solid growth out of that area, not any kind of slowdown as a result of fixing it?

I believe it's going to continue to increase. I know my bill hasn't gone down any.

Yes. One other thing, Pat, under -- as far as you can see, not too long ago, the companies made acquisitions a part of their growth strategy. Is that likely to continue with you at the helm as CEO?

Oh, most assuredly, Richard. I can tell you, we continue to actively pursue and look at -- I would tell you, just as what Tom led us with, our mode will always be look for good opportunities, try to take those great opportunities and bring them into the fold of Powell, but very much then stabilize that opportunity. If we acquire one, make sure it's on the right track and then look for the next one. We're definitely not a company that can look at successive ongoing acquisitions and try to swallow those in our organization. We want to make sure that it's the right organization, it's the right fit for Powell and it's one that's going to lead us for the future.

Okay. Thanks a lot and congratulations again.

Thank you.

All right. Thank you. Our next question is from the line of Brent [Thielman] with D. A. Davidson. Please go ahead with your question.

Good morning. Congratulations on the quarter and also the best for your transition.

Thank you.

Just regarding the revenue guidance, I know you ticked it down a bit, maybe if you could just speak to sort of what transpired into that, I guess, sort of the $5 million reduction.

When you're looking at the guidance, what we've tried to do is we look at the upside that we saw in the third quarter and put out a realistic guidance of what we thought would be a normalized improvement and backing out the impacts that we saw on the project closeouts that would be hard to forecast and predict going forward, as well as taking into consideration what the commodity costs are doing and what we anticipate that impact could have on our fourth quarter. Clearly, we had an exceptionally good third quarter and we tried to put the other at outlook for the fourth quarter that makes sense when you're looking at the long-term activities of the business.

Sure, okay. And then on the -- I know it's much smaller, but the Process Controls Systems business, obviously a great quarter in terms of profitability there. I guess, the first question related -- were the project closeouts associated with that segment and I guess second question, I know it's very lumpy, but any sense on what you're seeing in terms of visibility in that segment if we look ahead into Q4?

Clearly, we had very favorable project results in the Process Controls Systems business as well. When I'm speaking to the project related benefits that we saw in the third quarter, it did affect both our electrical power business as well as our Process Controls Systems business. The ongoing rate that you would see in the Process Controls would be more indicative of our historical run rate. Clearly, the third quarter was a one-time benefit that we don't anticipate to repeat it in the fourth quarter.

We are seeing our quotation activity pick up. I wish we could be saying that we were saying the close ratio pick up at this point in time, but there's no doubt that our quotation activity and visibility of projects and discussions with municipalities to bring some of those projects forward to actually start to work them on a complete order, we're seeing a tickup in that.

Great. Thanks, guys.

All right. Thank you. Our next question is from the line of Eric Woodworth with DSM Capital Partners. Please go ahead.

Good morning and thanks for the call. Just a follow-up on the gross margins. I think you said that commodity costs may have spiked a little bit more than what you put into contracts a year ago. Has that caused you to reassess how you structure your contracts at all? Thanks.

We always look at how we can restructure our contracts. The reality is that not many of our customers like the idea of any type of escalation based on commodity prices. Again, I can only tell you we can constantly monitor all of our commodity prices and we always try to forward project where those commodities are going to be at the time that we do a quotation. And I think so far, we believe that has worked and that's why you are seeing the margin improvements that we have been showing.

Great, thank you.

All right. Thank you. Our next question is from the line of Tom Spiro with Spiro Capital Management. Please go ahead with your question.

Tom Spiro, Spiro Capital. Good morning.

Good morning, Tom.

Good morning, Thomas.

First, Tom, congratulations on a job well done.

Thank you.

And Pat, you've got some big shoes to fill. Good luck.

I -- thank you very much. I don't think I can ever fill them, but it's a great man to follow.

Number one, are you folks still increasing the work force (inaudible) work force?

Yes, we are.

Both domestically and overseas?

More so domestically right now, but we are increasing overseas. There's no doubt when you look at our split of domestic versus international, we still see domestic being a greater share than what it has been because of the size of the projects and because of our filling of all of our staffing rolls at our Power/Vac business. But we are increasing our rolls internationally, yes.

Secondly, the comment in the opening segment, the commentary about perhaps a little bit more competition from some of the other players, are there particular product lines you can point us towards or particular end markets where you see some of that competition coming in?

For sure in the oil and gas business.

Oil and gas, I see. A related point in the commentary, it was noted that oil and gas, the refinery margins have weakened a bit and that might have some impact on, I guess, orders going forward. I wondered if you might just expand on that comment a little bit.

Well, again, we try to monitor our customers' business too to find out where they're going to be going and there have been some announcements by some of our customers that their margins have been declining. There's been one that is now maybe a split-off of their refining from their production side of things. So again, we don't know what that's going to mean yet. There is one point that still falls out. Even though their margins have been declining, the cash flow that they have been generating has been substantial and we believe that they will continue to invest in good opportunities for them. And we hope that's going to happen and we also believe that they're going to be expanding more in the offshore production side of things again, which as we pointed out, is going to bode well for our offshore business and our equipment business in the future.

And lastly, Don, you mentioned in explaining the strong gross margin a couple of factors, the -- some of the good jobs were closed out and favorable copper pricing. Can you kind of quantify those numbers a little bit, just give us some ballpark sense of how much those factors may have helped us in the quarter?

Tom, let me -- we've discussed in the past, with a custom business where you don't have repetitive manufacturing, you can look at projects and you can analyze them and you can get a flavor for what's happening within your business, but trying to pull together an aggregate number is virtually impossible.

Okay. Well, thanks and good luck in Q4.

Thanks, Tom.

Thank you.

Thank you, Tom.

All right. Thank you. Our next question is from the line of George Gaspar with Robert W. Baird. Please go ahead.

Yes, thank you. Good morning and, Tom, there are a lot of congratulations to you, but I want to add mine after 18 years covering your company to the very successful leadership over the many years and for your diligent effort to bring quality management into Powell. And I wish Pat and Don there and the rest of the management team much success going forward.

Thank you, George.

Thank you.

I have -- I'd like to know if you could just follow-up on this backlog area. Can you relate any kind of a breakout on oil field-related business or let's say the oil field and the portion that's associated with the refining business, petrochemical, L&G versus power-gen?

We haven't pulled those numbers yet for the quarter to look at where they are. I would say, as we believe in the last quarter, we talked about 70% of our product right now is going into the oil and gas business, 60 to 70%.

Of the industrial.

Of the industrial. You're right, Don, thank you. Right now, I would say a bulk of that, a very large proportion of it, has been in the refining side of it especially with our announcement like with Motiva and some of the others and the order backlog. So we've done a lot in the refining business. We have had good success though in the production side of it with some of our offshore activity, but a large part of our business has definitely has been on the refining side.

Okay. All right. And then a follow-up on the comment that was made on the overview on power generation equipment needed. The comment that was made on nuclear plants, I think there was related 13 nuclear plants on the East Coast area that are coming offline. Could you just -- what's the mark on it? Are you talking for maintenance or is it -- and what period of time are we talking? Is there some specifics that you could give us on what the marketplace might be looking at there?

Yes, if you go out -- and I can't give you the website immediately right now, but it's with the Nuclear Regulatory Commission. You can look at all the nuclear plants and where they are and what their age is and you will see the ones that are being decommissioned. And if I remember right, these 13 are in the process of being decommissioned. As we have talked in past conference calls, nuclear plants had between a 30 and 45-year useful life. The last nuclear plant went in in late 1970s, so all of these plants are going through a period now where they either have to go through a decommissioning or a substantial upgrade if they're going to continue to generate power in the foreseeable future. So again, that's why we believe that there's going to be a need and a requirement for new generation in this country to supply the demand that's out there.

I see. I see. Okay. Thank you for that.

You're welcome.

All right. Thank you. Our next question is from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

Good morning and congratulations, Tom, on growing the company to this level, and congrats to Pat on what looks to be a fairly seamless transition here.

Thank you.

Thanks.

Just quickly on the gross margin, it looks like, if I'm running my numbers correctly, at the midpoint of the full year guidance, we had gross margins in the fourth quarter at around 18 to 19%. In the past, '07, '06, we did have a dropoff in the fourth quarter. And I'm just wondering, we've got -- your comments about the cost inflation, but I'm wondering if we also have just a big of a seasonality impact in the September quarter of each year?

We've never noticed those seasonality impacts. Again, it's really hard to look at a seasonality. The business is strong; the business that we're doing out there is strong. I think most of this, as we look at it, is more in the commodity side of things based on what our projects are doing right now.

Got it, okay. And on the energy side, I want to just come back to that for a second if I may. You mentioned the oil and gas piece -- well, total industrial gained 60 to 70% last quarter, I believe it was, but I know that oil and gas within that was probably just a little under 50%. Your comments about refinery versus offshore, should I take that to mean that of that 50%, more than half would be by refineries versus offshore?

Historically.

Yes, historically, that would be right.

Last (inaudible).

Okay.

Again, I think the thing that we've always tried to explain, even our oil companies go through cycles. They'll do a lot of refining, expansion, new refining, then they'll go back into production for their capital spend. Then they'll go back into refining again.

Got it. And from your comments about the capacity expansion, it sounds like we're seeing a bit of an acceleration or increased interest, increased order activity, on the utility side. That's still about a third of the business?

Approximately, yes.

Okay. All right. That's helpful. That's it for me now. Thank you so much.

Thank you.

All right. Thank you. (OPERATOR INSTRUCTIONS). We have a follow-up from the line of Brent Thielman. Please go ahead.

Hey, guys, just one quick follow-up. Pat, I know you talked about in the last quarter some supply chain constraints, I think particularly related to some of the components that you require. Have those generally been resolved or maybe just talk about the environment there as well.

I think for the most part, a lot of those have been resolved and what we saw that was affecting some of our jobs in the last quarter, but there still is no doubt, with some of these commodities that we have out there, there is some supply chain issues still cropping up that causes us some issues at any point in time on a project. And we continue to work them hard with our suppliers.

Sure, okay. Thanks, guys.

All right. Thank you. Our next question is also a follow-up from the line of Craig Bell. Please go ahead.

Yes, just a quick question on your cap ex sort of outlook kind of thing. You're doing this expansion at North Canton. Do you have any other large projects that you're looking at or evaluating or do you think the rest of the cap ex for next year will be similar to what you've done this year with some of the through-put improvements?

Well, Craig, I mean, clearly, we spent a substantial amount of money last year, this year. We have been focused on other ways of getting our effectiveness within the organization in getting the throughput issue. We're at $2 million through the third quarter and will probably end up plus or minus 3 million for the year. We've not completed our analysis of what we want to do next year, but clearly, we would expect to see, based on where we are in our process, that cap ex next year would be back to the most likely plus or minus $10 million as just a quick little (inaudible). At our next call, we will talk in more depth about our expectations for 2009 and we'll have finalized our cap ex spending at that point in time.

Great, thank you.

All right. Thank you. Fred Boniford, please go ahead with your follow-up question.

Yes, I just wanted to clarify one comment in the -- in Pat's quote in the press release where you're talking about managing throughput in times of high business activity can be challenging and obviously, you're expanding capacity and clearly, you're having strong demand. Are you finding that throughput is actually becoming a problem and as a result of this, are you becoming more selective on the project work that you're taking on?

Throughput is always an issue because when you're building as much products as we are, as we have talked about, whenever a power control room sits one day longer than it should on the floor, the next one doesn't get started. So we concentrate very heavily on our throughput so that we don't have a domino effect of those things. I don't think it's any more critical than it's ever been. It's just an issue that we have to continue to work on and it's a work between our own operations and our customers at all times.

And in terms of project selectivity increasing or is that pretty much steady state?

I think again, we try to service our customers. Our customers know us very well. Our customers come to us because we are Powell and what we do and we try to serve our customers with their needs each and every time. And I don't think we've become anymore selective than what we would at any point in time.

Okay, great. Thanks and we'll look forward to seeing you at our conference next week.

Thank you.

All right. Thank you. George Gaspar, please go ahead with your follow-up.

Yes, the follow-up is on the UK operation. Can you relate its volume size at this point relative to when it was acquired and what is represented by that backlog for UK versus maybe where it was when the backlog was -- when it was acquired? And how do you see that marketplace that points toward Europe and Middle East?

George, I'll start with the response and I'll let Pat give you the outlook on the international market, but historically, we have not and do not break out our individual business units as far as their size or their business performance unless there is a specific issue that needs to be clarified as far as the overall results of the Company. But we have communicated that that acquisition has been very successful. We've very pleased. It has grown from the time that we acquired it. One thing we talked about is at the time that we acquired it, we had around 300 employees and the last numbers I saw, that we were approaching 400 at this point in time. So that gives you an order of magnitude of the business level activity and the success that unit has had.

Regarding what the IEC market is, I'll let Pat talk a little bit about what we see in the market outlook.

Again, let me reiterate, S&I is a mirror image of Powell, only in the IEC marketplace. So the availability of oil and gas business and utility business domestically for the UK remains very strong. We're very active out there. It will be a growth platform continuing for us. We will continue to concentrate on the international marketplace again, because we see so many of our domestic customers playing very heavily in the future in international. And we will go where they want us to go and a lot -- many of them are now asking for IEC products, so we feel very confident that we're going to be able to supply their needs in the international marketplace regardless of whether it's [ANCI] or IEC standards.

I see. Okay. Thank you.

All right. Thank you. (OPERATOR INSTRUCTIONS). Shawn Boyd, please go ahead with your follow-up.

Sure. Just on the Process Control sector a second, it sounds like we've got better activity there and a little bit more of a pickup than we've had in the past, given what's going on with people -- greater ridership on transit systems, public transit. Can you give us a little bit more of a forward look on the business here in terms of do we -- should we think about margin expansion into '09? Should we think about this business being significantly greater on the revenue side? Is there enough yet that we're seeing on order activity to start thinking about this business being significantly greater?

I think your last comment is probably the best comment. We see good activity, but as we've talked about the last couple of quarters, we haven't seen that solidify into business. I think it's too early for us to make a call to say whether there's going to be an uptick in that business yet.

Okay. Okay, good enough. Thank you.

All right. Thank you. There are no further questions registered. Please continue with any closing comments.

If there are no other questions -- this is Tom Powell again. Thank you for joining us today. I'd like to thank you for your interest in Powell and for your support over these many, many years and I'm certain that the team here at Powell looks forward to talking with you again the next quarter. Thank you for being with us. Good day.

All right. Thank you, ladies and gentlemen. This does conclude the Powell Industries third quarter earnings conference call. If you would like to listen to a replay of today's conference in its entirety, you can do so by dialing 303-590-3000 and put the access code 11117714 -- once again, 303-590-3000 and put the access code 11117714. ACT would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.