Powell Industries Inc (POWL) 2009 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 open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, February 10th of 2009. I would now like to turn the conference over to Ken Denard of DRG&E.

Please go ahead, sir.

Thank you. And good morning, everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2009 first quarter results. We would also like to welcome our internet participants listening to the call simulcast over the web.

Before the I turn the call over to management, I have the normal housekeeping details to run through. You could have received a fax or e-mail of the news release. Occasionally there are technical difficulties experienced during these broadcasts. So if you didn't get your release or you'd like to be put on an e-mail distribution list, please call our offices at DRG&E and that's (713) 529-6600. There will be a replay of today's call and it will be available via webcast by going to the Company's website and that's www.powellind.com. Or a recorded replay will be available for the next seven days and information on how to access the replay was provided to you in the press release. Please note that information reported on this call speaks only as of today, February 10, 2009, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replace listening.

Also as you know, this call includes certain statements including statements related to the Company's expectations of its future operating results that may be deemed 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 that - - 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 in 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 Pat McDonald, President and Chief Executive Officer and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I would now like to turn the call over to Pat.

Thank you, Ken. Good morning, everyone.

Thank you for joining us today to review our fiscal 2009 first quarter results. A few weeks ago many watched the historic inauguration of our new president along with nearly 1.8 million people who attended in person and crowded the mall in our nation's Capitol. What you may not know is how Powell was associated with that event. Back in May of 2005 Powell was awarded a $50 million contract to supply Traction Power substations and assist with a major upgrade to the Wamada Rail Transportation system that serves the Washington, DC area. The upgrade modernized the system and enabled a greater number of railcars per train to carry the ever increasing passenger volume on the Wamada system. A significant portion of the 1.8 million people who attended the inauguration were transported via the Wamada trains powered by Powell Products and Systems. In a glowing report from Wamada officials, the new system operated as planned and without issue, in fact, surpassing expectations. The only issue they reported was the shortage of parking space for all the automobiles at outlying park and ride facilities.

The need for public transportation including light rail has never been greater. In the November - - elections, eight out of 10 rail ballot initiatives passed including cities such as Honolulu, Seattle and Albuquerque, among others. The list of FTA funded light rail funded projects for 2009 is even longer. There is little doubt in our minds that the future of light rail is bright and that Powell solutions will play a significant role. We believe 2009 will be a solid year for Powell because of our healthy order backlog and our first quarter results show we are on track to deliver the performance indicated by the guidance we presented last quarter. Over the past two years the robust nature of the markets we serve combined with our product, service and system based solutions has enabled us to produce orders that built the sizable backlog.

What we face today is the dynamic nature of schedule changes due to realignment by our customers as they work to manage the timing of cash outflows and keep project costs in line with the reality of the economic cycle. These movements may create some short-term quarter-to-quarter issues when projects at times shift across quarters in terms of delivery and schedule. However, with change comes opportunity and we will continue to work with our customers on a daily basis to provide our solutions when and where they are needed. We are now and will continue to be a relationship focused Company. Powell's long-term prospects are bright and our long-term outlook is upbeat. In the future the US and the world will need more oil and natural gas, not less, and the US will need more electrical power and more public transportation systems, not less.

Current news stories and industry surveys support our position as everything points to the greater need for the exact products, systems and solutions that Powell offers. We continue our efforts to broaden our scope and leverage the opportunities of the market as we look for new applications and solutions with smart systems and intelligent products that provide even greater customer value. Our short-term focus is; to the best of our ability constantly adjust our business in relationship to our customers' needs for their projects; make sure we monitor and keep our business resources in line with our order flow and backlog; continue to focus on through put and cost containment; and use project management procedures on our jobs to minimize the need for working capital.

Now I will turn the call over to our Chief Financial Officer, Don Madison, to review our solid financial performance in what is traditionally a tough quarter for our Company.

Thank you, Pat.

Revenues for the first quarter of fiscal 2009 were $170.5 million, compared to $147.1 million in the first quarter of 2008. Gross margin was 20.2% in the first quarter, compared to 18.1% in last year's first quarter. We are pleased to report that the first quarter gross margin performance of the acquired Power/Vac product was in line with the balance of the Company. It has been a long and difficult process but we have now reached our short-term objectives that we set for this business at the time of its acquisition. Today we have over 300 trained employees dedicated to support and manufacture the Power/Vac product line.

Selling, general and administrative expenses decreased as a percentage of revenue from 13.7% a year ago to 12.6% in the first quarter due to higher levels of business activity. SG&A expenses were $21.6 million, compared to $20.1 million in last year's first quarter. Interest expense was $472,000 in the first quarter, a decrease of $393,000 from a year ago. Interest income was $57,000, compared to $115,000 in last year's quarter - - first quarter of 2008. Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 35.1%, which compares to an effective tax rate of 35.3% for fiscal 2008. Net income for the first quarter of fiscal 2009 was $7.9 million, or $0.68 per diluted share compared to $3.6 million, or $0.32 per diluted share in the first quarter of fiscal 2008.

New orders placed in the first quarter totaled $172.2 million, compared to $185.1 million in the first quarter of 2008. Order volume in the quarter improved by $35.8 million over the fourth quarter of fiscal 2008. As of December 31, 2008, our order backlog decreased by $9.2 million to $509.4 million, compared to our backlog at September 30, 2008. This decrease was due to the effect of exchange rate differences between the two periods. Cash flow provided by operations was $38 million for the first quarter due to lower levels of working capital. This decrease in working capital resulted from our efforts to manage inventories and billings to our customers. Investment in property, plant and equipment during the first quarter totaled approximately $2 million, compared to $746,000 during the first quarter of fiscal 2008.

At December 31, 2008, we had cash and cash equivalence of $25 million, compared to $10.1 million at September 30th, 2008. Long-term debt and capital lease obligations including current maturities totaled $20.4 million at - - excuse me - - $20.4 million at December 31, 2008, compared to $41.8 million at September 30, 2008. Looking ahead, we continue to expect full-year fiscal 2009 revenues to range between $700 million and $725 million and full-year earnings to range between $2.60 and $2.85 per diluted share.

At this point I'll turn it back to Pat.

Thank you, Don. Let me make a few more remarks and then we will be happy to take your questions.

Powell remains well positioned in its markets and we are working to broaden our scope as we look to the future needs of the market and build even stronger relationships with our customer base. In these uncertain economic times, Powell remains dedicated to providing solutions that deliver superior value to our customers while in alignment with agreed upon timeframes and schedules.

At this point we will be happy to answer any questions you might have.

We will now begin the question and answer session. (Operator instructions). Our first question comes from the line of John Franzreb with Sidoti and Company. Please go ahead.

Good morning, Pat and Don.

Good morning, John.

Good morning.

First question is really just an obvious kind of housekeeping question. What percentage of the oil and gas business was part of your commercial and industrial revenue?

John, we don't typically break that out. But historically it's run greater than 50%, typically somewhere between 60% and 80%. This last quarter it continued to be a relatively strong pace.

Okay. I guess differently than - - yesterday OPEC announced - - putting on hold of 35 drilling projects and what we're hearing in the states about cancellations and deferrals. Pat, you kind of touched on it a little bit. But could you talk a little bit about how oil and gas is impacting your backlog one way or the other? Are you seeing a refill with other types in the utility market? Can you just kind of discuss that topic because it certainly seems to be something that investors are concerned about?

I think - - the concern is a real concern - - as we look at the volatility of the market today. Our backlog continues to remain strong in the oil and gas area, we have constant discussions with our customers about where they are going. There's no doubt that we are seeing in our new order expectation levels a lot of projects that we have seen and were anticipating potentially for future orders for us are sometimes being deferred to a later time period. I think what we are seeing is that we are deferral. There's very few other than maybe some speculative projects that we are seeing that people are saying, no, we are cancelling it. We don't see the need for that project. Most people are saying we are deferring - - to see where the economic times are going on this.

There's no doubt as we do this, as we indicated in what we talked about here, we are looking for new opportunities and greater opportunities in the transportation area. That's very solid. We are very, very pleased about where that business is going and what is being anticipated in the speculation of the stimulus package, of how that can go up. We are very interested in the infrastructure areas and we still see a lot in the generation and environmental side of the utility business. So we see strong - - positions that we can go participate in.

Okay. Great. Thanks a lot, Pat.

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

Good morning, guys. Just talking about Power/Vac for a minute here. How would those sales trend through the quarter and - - have you seen any slowness in particular with - - some of the commercial construction markets that you serve there?

I think - - the revenue side of it still looked into the $75 million to $85 million side of it if you annualized it out. I would say, again, if we look at where we have some of our greatest volatility in new incoming orders would be the market segments that are served by the Power/Vac product line and we are having to watch that very closely.

Okay. And then you've said that the productivity at Power/Vac is in line with what you have at the legacy business. Are there any other labor productivity gains that you guys have sort of put into your forecast?

We always have forecasts of through-put gains. It's really hard in an assembled product business to really look at what your productivity is so we look at what our through-put is. We still - - are pushing hard for through-put gains because through-put gains create capacity opportunities for us.

Okay. Thank you.

Thank you. Our next question comes from the line of Fred Buonocore with CJS Securities. Please go ahead.

Yes. Good morning, Pat and Don. Nice quarter.

Thanks, Fred.

Just on the gross margins, while they were up very nicely year-over-year, versus your Q3 and Q4 in FY '08 they were a bit weaker. And I just kind of wanted to get a sense for - - is that mix related or - - just trying to get a sense for - - what gross margins should look like for much of FY '09.

Fred, as we have talked in the past, it is clearly - - in a project-related business, each and every project is not exactly the same, each project does have some characteristic of its own and that's what we saw again in the first quarter. We saw certain - - a couple large projects that were coming through the factory during the early phases of the production. And we had some cost overruns in engineering that we went on and recognized relative to our percentage of completion accounting. And but yet there is still a lot of opportunity in front of those orders to recover and improve those as they go through the system. But, yes, when you're looking at this current quarter relative to the fourth quarter, particularly when you take into consideration the impact improvements that we saw from the Power/Vac product line, first quarter gross margins were slightly down compared to the Q4.

Got it. So, in other words, some of those early phase projects as they move into more mature phases would probably get a margin pickup, you would think?

We are working to that effect.

Okay. That makes sense. On the backlog and the impact from FX, can you give us a sense for roughly - - how much of your backlog is denominated in foreign currency or - - I guess it's S&I backlog, I would assume.

Well the vast majority of it is in S&I but it relates basically to the pounds sterling. We do have some backlog in Euros and to a much smaller degree, even the sing dollar. So we are exposed to more than one currency. But clearly the vast majority of it is the impact that we saw this last quarter on the pound sterling relative to the US dollar. We saw a fairly significant drop, you can look at the exchange rates and we saw - - nearly 80 - - 20% drop, 80% at the end of the December timeframe relative to what it was in September. The pound to the dollar, which translated into a little over $10 million US dollar decline in the backlog. When you're looking at the outlook, though, we are seeing that beginning to move back where the pound is strengthening to the US dollar and don't - - it's still questionable as to what the full-year impact would be.

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

Yes. Good morning. Don, just quickly following up on the foreign exchanges. You say that there was also a negative currency impact for your fiscal fourth quarter?

We were looking for first quarter, you look at from the two periods and when you look at the fourth quarter, my recollection it was a nominal difference in the fourth quarter.

Okay.

You know, the September quarter relative to the June quarter. We saw I believe the June quarter was running just under $2 to the pound. September timeframe it would drop down to $1.80 something and then like I say, we ended December at less than $1.50 to the pound. So the most dramatic drop was in the December quarter.

Okay. Great. And then other than - - sort of call it normal hiring levels for replacement, are you guys still in the hiring mode?

We continue to look for good talent. I mean, as we look for people to replace - - people who are retiring or leaving the Company or whatever. We are constantly hiring, but we also continue to look to fill skill sets and opportunities that we think are going to be necessary for us to maintain the positions that we are in, engineering, project management. We have put a great emphasis on those areas and we are constantly looking for good talent. But overall we are probably flat.

Thank you. (Operator Instructions) Please ask one question and one follow-up question and requeue for additional questions.

Our next question comes from the line of George Gaspar with Robert W. Baird. Please go ahead.

Yes, good morning.

Good morning, George. Good morning, George.

Good quarter for you guys. It's nice to see. Question on CapEx outlook for '09 and your project outlook facility by facility. What are your thoughts on what you have to accomplish this year?

Facility by facility, again, George - - we don't talk facility by facility. In the electrical power products - - segment we continue to look for capacity expansions and through-put improvements. We still expect our CapEx spending this year to be in the $8 million to $10 million range. And the majority of our spend in the first quarter was in capacity improvement areas. So we will continue to look - - by the market segments and see where the market segments are telling us to put the capacity in and we will continue to invest in capacity.

Okay. All right. And one follow-up on some of the comments that you were making on refinery. The oil and gas area in general and my question is specifically on refinery infrastructure enhancement. How are you sensing that business right now? It seems like there is more refineries that are trying to get hydro cracked into the lower end of the barrel which to produce more diesel. Is this offering anything special to you in terms of added power requirements on the part of the refineries?

George, you're right on. Any time a refinery looks at changing its mix, its blend, its way of doing things, it typically requires an additional power capacity expansion. And - - those always create opportunities for us. I think we are still going to see good opportunities, they are going to be tentative at times - - as people are watching their cash flow on this. But there's going to be good opportunities out there for us to continue to improve what they are trying to do.

Thank you. Our next question comes from the line of Brendon Watkins with D.A. Davidson. Please go ahead.

Hello, guys. Good morning.

Good morning.

I'm looking at new orders in the quarter and I was wondering if there's been any material change in pricing versus previous quarters.

I can't say that there's any material change in pricing. I mean, we continue to try to price to the market and - - as the job and the things that - - the customer is asking us to do, we continue to price to those types of specs, and we have been relative consistent on our pricing with those.

Okay. And then last question, as far as your competitive environment is concerned. I was wondering if there's been any changes on the contracts that are out for bid.

We continue to see more people bidding them than we have in the past. There's no doubt about that.

Thank you. And we have a follow-up question from the line of Fred Buonocore with CJS securities. Please go ahead.

Yes, Don, it was a very strong cash flow quarter and I just wanted to get a sense if you could give us some more detail on that. Are you starting to be able to implement more progress payments early on in projects and - - what's your expectations are as we move through the year on cash flow from operations.

Clearly this is something that we have been talking about and working on internally now for well over a year. We are a long cycle business with an order cycle many times going in excess of 12 months. It takes time to implement change within an organization. And we are pleased to now begin to see the benefits of the work that has gone on throughout our organization over the last year, year and a half. What we are seeing in the current quarter is driving inventories down.

Some of this is coming through process changes, some of this is coming through new business information systems that we have implemented over the last couple of years. And some of this is also getting the efficiencies of the Power/Vac product line where we had duplicated inventories at a period of time. We are working those off and we are driving the business to be an effective and efficient, not only from a labor resource standpoint, but also from a cash utilization standpoint of managing the inventories.

From the building cycle standpoint, yes, we have seen improvements in the way that we have negotiated contracts. Again, going back to well over a year ago and it's not only negotiating the contract, but it's the execution to the contract throughout its phase. And like I say, we still think there's additional opportunities on where we are today. But I'm not going to sit here and say that we are going to see $38 million each and every quarter going forward. But clearly I think that we have turned the corner and you will see positive cash flow from Powell not necessarily quarter to quarter, but clearly you will see continued improvements through the balance of the year.

So would you think it would be - - you had previously indicated free cash flow would be modestly positive for the year. Do you think it might be a little bit better than that in light of your Q1.

It all depends on how you define modesty. Clearly I think we are not as good as we are going to get. When it gets to cash flow, any one blip on the radar screen can hurt you momentarily and if that blip occurred in September, it will impact the year, obviously, when you're looking at a point in time. But I clearly think you're going to see continued improvement of where we are today.

Thank you. (Operator Instructions)

Our next question comes from the line of John Franzreb with Sidoti and Company. Please go ahead.

Pat, you indicated that rail and transit is a significant opportunity out there. I'm assuming that business is about 5% of sales, maybe 6% of sales right now. Looking a few years forward, how big of an opportunity do you think that could be?

- - I really haven't put the pencil and paper to the number of how big it could be. I think it can be definitely more significant than what it is today, and, again, as we look at - - it's not only just the traction that we have been providing, it's the combination of traction and smart systems. I mean, everybody is looking for better ways to manage their energy usage, their flow of energy, the reading of the energy, where the cars, the trains, - - where the rails are. And we want a bigger piece of that, so, again, it's not just how many more projects we can take, but how much we can more broaden the amount of each project that we take with the customer base.

Okay. And in the utility market in the quarter, it's about $38.5 million. It's down a low double-digit number year-over-year. Could you just talk to what happened there and should we infer anything from that?

I think it's just mix. I mean, our target of who we are attacking in the utility marketplace is good and right on. We are going to continue to work to expand that now, but it was mostly mix in the quarter.

Keep in mind that, John, when you're looking at our revenues by quarter, it all depends on which projects are in the shop at any one point in time. And that's not necessarily consistent day in and day out. Because our projects in the factory are based on the delivery requirements of our clients.

Thank you. Our next question comes from the line of Beth Lily with Gabelli & Company. Please go ahead.

Good morning, Pat and Don.

Hi, Beth.

I wanted to just talk a little bit more about just the competitive environment. You've spoken about it on the last couple of conference calls and can you - - has it worsened? I mean, you've talked about additional players coming into your markets. But would you say that the competitive environment has become tougher or just the same amount of competitors and just people are bidding? I mean, can you just expand upon that a little bit?

I think again, the number of competitors are - - is about the same. I mean, we always have the same number of competitors. It's how many are bidding on any job at any one point in time. I mean, our competitors remain the same competitors that we always talk to. It's where their focus is at any one point in time. So I mean, they come in and they try to bid the projects and some of them are very good. And we respect all of our competitors, but we still believe that nobody provides the same type of solution to our customer bases the way Powell does. And it is the value side that we try to bring forward.

Okay. So it's not as though things have gotten more competitive. It's just that - - I mean, there's not new entrants, it's just the same ones?

Same ones.

Thank you. And we have a follow-up question from the line of George Gaspar with Robert W. Baird. Please go ahead.

Yes. Thank you. Again, Pat, on the new applications for Powell equipment side, R&D wise, is there anything special that y'all are working on or trying to implement into the market that can bring you some broadening opportunity?

Well, when I look at - - George, when you look at product specific, yes, there are some new ones that we are going to have coming on line here before too much longer. I think what I look at, though, that I think the greatest opportunity for us is is we are trying much - - in a much more proactive manner to combine the forces of our systems intelligence architecture across our Process Control and our Electrical Power process businesses. A lot of the things that they did were very much the same. So we are trying to build our critical mass together across those businesses to provide better solutions for our customers for what they are asking - - these different systems to talk to and how they act and how they work. So I'm really excited about that opportunity.

I see. Okay. Thank you.

Thank you.

Thank you. And at this time I'm showing no further questions in the queue. I'd like to turn the conference back over to Pat McDonald. Please go ahead.

Again, thank you for joining us today. We really appreciate and thank your interest in Powell and we are definitely looking forward to talking with you again next quarter.

Ladies and gentlemen, this concludes the Powell Industries first quarter earnings conference call. This conference will be available for replay after 1:00 p.m. eastern standard time today through February 17, 2009, at midnight. You may access the replay system at any time by dialing (303) 590-3000 and entering the access code of 11125908#. Thank you for your participation and you may now disconnect.