Powell Industries Inc (POWL) 2009 Q2 法說會逐字稿

Welcome to the Powell Industries second 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, Wednesday, May 6, 2009. Now, I'd like to turn the conference over to Ms. Karen Roan with DRG&E. Please go ahead.

Thank you, David, and good morning everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2009 second quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn the call over to management I have the normal details to cover. You could 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 your release please call our offices at DRG&E. That is (713)529 6600 and we will get one to you. Also if you want to be on the permanent e mail 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 May 13th, 2009 and information on how to access the replay was provided in today's news release. Please note that information reported on this call speaks only as of today, May 6, 2009, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

As you know this conference call includes certain statements including statements 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 Pat McDonald, President and Chief Executive Officer and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Pat.

Thanks, Karen, and good morning everyone. Thank you for joining us today to review our fiscal 2009 second quarter results. We are pleased with our second quarter results as we delivered another solid operating performance in the midst of difficult market conditions. I will begin with some comments on the current market environment and then Don will cover the financial details of the quarter.

According to recent "Oil and Gas Journal" survey the US petrochemical industry plans to reduce capital spending by approximately 26% in 2009 compared to 2008. Even at this reduced level that still represents approximately $242 billion in capital investment. Although the current weak economic climate is expected to continue for some time the total impact on US industry as a whole is unknown. And the business environment is not without its bright spots. Let me discuss a few of these.

The spot price for oil has become more stable in recent months and our oil and gas customers can now make sound investment decisions when the price of oil is stable at almost any reasonable level. It is when the price becomes volatile and unpredictable that these decisions are postponed. It is good to note that the oil has stabilized in the $50 per barrel range as predicted by many industry analysts some months ago.

While the high level of activity in major refinery expansions is declining there is an increase in the activity among second tier refinery operations as they work to increase efficiency and employ newer technologies in order to remain competitive. We now see many customers expediting deliveries on projects that had previously suffered from late placement and delayed approvals. The oil and gas industry is not in total retrenchment, but more accurately is in a period of reevaluating and re prioritizing.

On the utility front wind farm activity is growing and we are well positioned to participate in these projects. These projects typically require shorter lead times than our oil and gas business and our power product portfolio, especially our 38kV switch gear is well suited for these opportunities. We are seeing more [scrubber] upgrade projects since many utility generation facilities have mandates to add clean coal technologies to existing operations by 2014. In order to achieve these goals they must start their projects now.

In addition, we are working hard to adjust our business to correspond with our customers' needs for their projects. In the case of many quotations known projects that were expected to close are being extended due to a higher level of scrutiny by upper management. Projects that typically would have closed in 30 to 45 days are now taking 60 days and longer. That being said we still note that proposal activity continues to hold steady. We are seeing a large number of projects, but they are smaller in size.

As indicated in our recent press release we continue to see strength in the transit market as the activity in electric rail remains high. The stimulus package is helping to move these projects forward with the promise of financial support and the public interest in mass transit systems is at a higher level than seen in many years. We have the right combination of solutions to participate in these infrastructure investments with both power and information and control systems.

Now, I'd like to turn the call over to Chief Financial Officer Don Madison to review our financial performance for the second quarter and then I will make some final remarks.

Thank you, Pat. Revenues were $164.1 million in the second quarter of fiscal 2009 compared to $160.3 million in the second quarter of fiscal 2008. Gross margin was 20.6% compared to 19.1% in last year's second quarter. Selling, general and administrative expenses decreased to 12.4% of revenues compared to 13.1% of revenues in the second quarter of 2008. SG&A expenses decreased by $638,000 compared to last year's second quarter. Interest expense net of interest income was $259,000 in the second quarter, a decrease of $426,000 from a year ago.

Our provisions for income taxes reflects an effective tax rate on earnings before income taxes of 35.1%. No change from the first quarter. Net income for the second quarter of fiscal 2009 was $8.9 million or $0.77 per diluted share compared to $6 million or $0.53 per diluted share in the second quarter of fiscal 2008.

For the six months ended March 31, 2009 revenues were $334.6 million compared to $307.5 million in the same period a year ago. Gross margin was 20.4% for the six month period compared to 18.7% a year ago. Selling, general and administrative expenses were 12.5% of revenue compared to 13.4% of revenues for the first six months of 2008. Year to date SG&A expenses were $41.9 million compared to $41.1 million a year ago.

Interest expense net of interest income for the six months ended March 31st, 2009 decreased by $761,000 to $674,000 compared to the same period in 2008. Year to date our provision for income taxes reflects an effective tax rate on earnings before income taxes of 35.1%.

For the six months ended March 31, 2009 net income was $16.7 million or $1.45 per diluted share compared to $9.6 million or $0.84 per diluted share a year ago. As of March 31st, 2009 our order backlog remains healthy totaling $486.5 million. This compares to $509.4 million at December 31, 2008 and to $536.5 million at the end of the second quarter a year ago. New orders were $154.3 million in the second quarter compared to $196.2 million in the second quarter of fiscal 2008.

Year to date cash provided by operating activities was $79.8 million. Working capital excluding cash has decreased by $58.7 million over the past six months in a period where we continue to experience growth in our business volume. Investments in property, plant and equipment during the first six months totaled approximately $3 million compared to $1.5 million in the first six months of fiscal 2008.

At March 31, 2009 we had cash and cash equivalents of $60.1 million, an increase of $50 million compared to the balance at September 30, 2008. Long term debt and capital lease obligations including current maturities totaled $14.6 million, a decrease of $27.1 million compared to the balance six months ago.

Looking ahead we now expect full year fiscal 2009 revenues to range between $670 million and $695 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 comments and then we'll be happy to take your questions. Our vision for the Company has not changed. We are a relationship driven company and we value the relationships we have with our customers, our suppliers and our employees just as they value their relationship with us. Our focus continues to be on process improvements and operational execution and we are working diligently to align our business resources with our order flow and backlog. We are paying close attention to managing throughput and containing costs while refining project management procedures and our jobs to minimize our working capital needs.

Our experience tells us that often during down cycles the greatest opportunities present themselves and we believe we are well prepared to make the most of these opportunities as they arise. Our efforts in process improvement and operational execution are producing valuable gains. We have a strong balance sheet and are well positioned in our markets. Our long term prospects still remain bright as the world will need more energy and power in the future.

At this time we'll be more than happy to answer your questions.

Thank you, sir. 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, guys.

Hi, John.

Hi, John.

My first question is during the last downturn you guys made a "strategic shift" in business away from the utility market into the oil and gas, which was very fortuitous considering the upturn we've had in the oil and gas market. Seeing the potential now, a shift in oil and gas you've clearly gotten some transit work. Do you see yourself drifting away from being so oil and gas focused? Is there any kind of strategic shift going on in the corporate level to address new markets or revisit old markets that you were in in the past?

John, we've never shifted away from markets. I think we've always been one that as the opportunity presented itself we try to capitalize on those opportunities. Again, that's what we're trying to do right now. Where we see the markets are going to have strength and we do see areas I have strength, how do we go capitalize on those? I think strategically we always look at how do we continue to try to balance our portfolio and the market segments we serve in and that's what we're going to continue to drive.

Okay. Now, the Dulles job two parts to this question. A, is it included in the backlog?

Yes.

Okay. And do most transit jobs have a long lead time like that job? Was that unusually long delivery time?

No, that's very much consistent with the transit projects. As they go forward with transit projects there's always are you upgrading? Are you adding rails? Are you having to gain right aways. And each of those requires an amount of time period. So, that's a very normal cycle for transit projects.

Okay. So, if I kind of back that out and think about the balance of what I'll call the rest of the business it certainly suggests there was a significant drop off in the rest of the business. Where did that order drop off come from?

I think as we've been talking in the past and I think what we're going to be seeing here from here on out is there is greater volatility on the quarter by quarter as opportunities are converted to orders. The drop-off was in basically the rest of the business and there was definitely a lot in the oil and gas segment. There's no doubt about that. But given that, we still have a significant number of RFQs in our pipeline and are actively quoting projects with our customer base.

One last question. Given the tougher environment can you talk a little bit about the pricing environment and the competition? Last conference call, Pat, you kind of mentioned that you're seeing more people bidding on the same projects.

We've not seen any change in that in the last quarter since our last discussion. Again, our drive is to continue to impress upon our customers with our relationship and the value add that we supply. We can only be within a guidance level where we're above somebody else in price level. We always have to be competitive, but at this moment in time we don't see any indications that somebody is trying to make any foolish moves out in the marketplace.

Great. Thanks a lot. I'll get back in queue.

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

Yes, good morning, Pat and Don. How are you?

Hey, Fred. We're doing fine.

Great. Don, just wanted to touch base on SG&A. You saw a year over year decline and wanted to see if there was anything unusual that you could remind us of in the second quarter last year? And also does the current dollar level represent a good run rate for the balance of the year?

When you're looking at the dollar rate year to date that's probably a reasonable estimate of what we will see over the near term. When you're looking at it compared to last year, the second quarter we had a partial impact of the transition with Power Vac. If you remember the Power Vac product line was completed in our second quarter 2008, so there was a modest impact in 2008, but I think what you're seeing more than anything else is just the stability within the organization relative to where we were a year or two ago.

Got it. And then kind of along the lines of what John was asking about. If you look at your overall mix of shipments in this quarter in Q2 has that changed as oil and gas as an overall percentage of your shipment declines? Are you seeing growth on the utility side as a percentage of that pie? Or does it kind of come down evenly as you look at that distribution?

When you look at I don't have the percentages here in front of me, but the overall distribution was not materially different than what we saw in the first quarter. As a percentage I would say here roughly looking at it that the industrial side could have actually been a point or two up over the previous quarter. Looking at the numbers that you'll see in our Q when it becomes filed we ended up with a utility business in the second quarter of approximately $30 million, about $108 million within the industrial sector and the municipal markets for both in traction both for the process and electrical totaled to about $27 million, $28 million.

Great. Thank you. That's helpful. How is the Power Vac business doing? Are their volumes off quite a bit in the current environment or are they holding up okay?

When you're looking at the Power Vac product line we're not going to talk in detail like we have historically, but to give you a little bit of flavor for that segment of the business is that the margins held in line with the first quarter. Business volume was slightly down, but due to the nature of that particular product line it's probably sitting with the shortest backlog of the balance of our products.

Great. And then just final. You're doing tremendously in terms of building up your balance sheet and your cash balance. Any specific plans or are you closely eying acquisition opportunities to use your cash?

If we had them, of course, we couldn't really talk about them. As we've always indicated we are always looking in the marketplace for opportunities to where we can either widen our portfolio or get deeper with our customers and we continue to look at that. And if those opportunities present themselves we'll be more than happy to use the strength of our balance sheet to go solidify one of them.

Great. Thank you very much.

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

Good morning, Pat and Don.

Hey, Ned. How are you doing?

Good. Just a follow up on the previous question with regard to SG&A. If we're going to take this quarter's SG&A run rate on a dollar value that sort of implies if we take your guidance on the revenue that the gross margins are going to get pinched a bit in the second half. Is that just because of lower throughput or are there other things there that are going to put a crimp in the margins gross margins?

The gross margins, again, Ned, as we look at and forecast our future margins it always comes back to execution on each and every project. And we have some big projects that we're still trying to work on and execute and this is a mix of what's in the backlog at this moment in time. Our job is to make sure that we go execute it at that level. This is not the typical traditional way that you look at margins that I constantly work for a little bit additional productivity improvement; I can build that. Ours is execution of each and every project each and every time and that's why we're seeing the improvements that we've made and that's why we've been seeing improvements in the balance sheet.

Okay. So, it's just more having to do with the specific projects than anything operational?

That's right. It is the projects that are in the backlog at this point in time.

Okay. And then on some of the transit projects out there I seem to remember there were a fair amount of them and I think you alluded to this in your prepared remarks about transit projects connected with stimulus funding. I was just wondering what may be when we may start hearing about some of those projects being let out for bid and so forth?

I think some are being let out for bid. I can tell you our quotation activity has grown on that side of the business, that market segment. When they are actually going to convert in letters of intent to go forward that still is always the question with any municipality. I can tell you even on our business where we do our systems we're seeing an increase in quotation activity there as people are looking at roads and highways and signage and things like that. So, we're seeing improvement in that as people are looking at their stimulus money being potentially released to go forward.

Okay. Thank you.

The timing still is very difficult to gauge.

Okay. Thanks.

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

Good morning. On your revenue guidance since it's come down some I was wondering is that a result of slower order inflows or is that a push out following some existing backlog projects?

It's predominantly push out on existing projects and as we see those moving it's given us some values that are going to push out into the first and second quarter of next year on some of these projects. There are, though, opportunities that as projects push out it create holes and as we've talked about some of the other market segments we looked at have got shorter lead time that provides an opportunity for us to go after shorter lead time business.

Okay. And then looking at your current employment. The last year or so we keep talking about have you been able to hire enough people and all that. Assuming that you're not having to struggle with that nearly as much how would you sort of characterize your staffing levels as we sit here today?

It's down slightly from where we were just previously one quarter ago, but I would put it in the "it's holding steady" range.

Okay. Is it down slightly just natural attrition or is that an effort on your part?

Most of it is natural attrition and just rebalancing. Again, as we look at the jobs that we need and a lot of that rebalancing comes in some of the contract area that we use.

Okay. And so, then I'm assuming from that comment then as you sit here and look at what you have in backlog and what your overall view is on what you have for bid requests coming in that you're comfortable with where you're staffed at today?

We're comfortable with where we're staffed, yes.

Okay. Great. Thanks a lot.

Thank you sir. Our next question comes from the line of Brent Thielman with D.A. Davidson. Please go ahead.

Hey, good morning guys.

Good morning.

Good morning, Brent.

Just a question. In terms of the given lower revenue guidance and your ability to hold the EPS guidance I guess we're sort of assuming we'll still see some pretty solid margins here in the second half. I guess what I'm wondering is given your ability to sustain that profitability for some of the traditional Powell products is there also some benefit to margin shifts from the Power Vac line just becoming a smaller proportion of sales in the second half?

As we were talking late last year the Power Vac product line was coming in line with the aggregate average of the corporation. So, therefore, a reduction that particular business volume would not necessarily improve the weighted average.

Okay. That's helpful. And I guess just one more on the rail opportunities, again, assuming we do begin to see some more of these come forward. And obviously, you guys have already made some additions to your facility in Ohio to address these opportunities, but do you have the ability to potentially address some of this type of work through some of your other facilities, perhaps in Houston?

Brent, great point. One of the things that we've worked on very hard in the last year, year and a half is how do we use our total capacity for the business. So, again where we're going to have capacity and potentially where we're going to be in a geographic reference to a project we're going to be able to capitalize on that and use all of Powell's resources to deliver those projects. We don't hold ourselves to any one facility location to do these.

Okay. That's helpful. And then just lastly broadly looking at the oil and gas piece. Can you talk about any specific sectors there that I guess in terms of spend that have been a little bit more resilient versus other areas?

First, I'd say the size. We had a lot of major megaprojects last year that we took and we don't see any of those on the near term horizon. If I look at the pecking order of things offshore drilling still looks in the near term future to be strong. People are definitely continuing to invest in there. Onshore drilling I think you're going to see some of it, but it's kind of waning a little bit. Refining is definitely looking to be down.

Chemical side is probably the largest down. And a lot of that has to do with the market segments like automotive that they supplied chemicals to. We all know we're it is right now. Pipelines are going to be very much into what's going on. So, we still see strength in the production side of things in the offshore drilling and the movement of oil and gas in the pipelines, but a lot of weakness still on the chemical side of things.

Has that been at least on the offshore side been particularly reflected in some of your business as well for some of the modules?

We're quoting. We have not seen those turn into orders yet.

Okay. Thanks a lot guys.

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

Yes, George Gaspar. Thank you. Good morning.

Good morning, George.

Good morning.

I've got a question here on the liability side. Your current liabilities are up, but your long term debt shows down $8 million from $33.9 million from back in September. I assume that it has moved into your long term has to be refinanced this year to an extent. What's going on there? How much are you needing to refinance? What are the prospects for your getting that done? And is that going to fall back then into long term?

George, basically all of our long term debt we have today none of it is coming due in less than 24 months. The majority of our long term debt today goes back to the industrial revenue bond that we took out in 2001 for expansion of our Chicago facility. And so, that basically was a 30 month facility that we had to cover that. Secondarily, we do have the balance of the term note that we have on the acquisition of [Esena], but that basically will be paid off through cash flows to operations. It will not need to be refinanced. Our revolving credit line basically at this point in time goes out two years.

Okay. So, where would you see your current liability being at the end of the year relative to the $165 million you show now?

The current liabilities will be somewhat dependent upon projects. The biggest volatile area that comes into the current liability has to do with our contract execution and where we are on the building milestones as to whether it becomes an asset or whether it shows up as a liability.

Okay. All right. And on

Keep in mind, George, when you're looking at the assets versus the liability roughly $60 million of the assets today is actually cash in bank relative to where we were. That's roughly a $50 million increase over the beginning of the year.

I see. Okay. A question on process control. Your backlog order rates is up it was up in the last quarter -- $3 million or $4 million, whatever. And your profitability in this last quarter was down. Where is the improvement in that backlog coming from? Is that related to some extent from the rail projects or is it something else? Can you improve the profitability there in the quarters going forward?

George, the question is in regard to the profitability of our process control business segment?

Yes.

Basically what you're dealing with there is you recall that it is a project basis. We typically have had an opportunity in the past to have some favorable pick up on projects as they close out. Where we are today is on the early stages of several projects and the actual where we are in overall is that we're early stages and we've run into a couple of bumps along the road. That doesn't mean we won't be able to recover on these projects before we complete them.

Can you describe where the build in the backlog is specifically coming from; what type of project?

From a process control standpoint?

Yes.

The process control majority of that's going to be in the transportation area.

Transportation. Okay. All right. And then back on the order trend and you're seeing this push out. In order to get to your target, your low side revenue target, you guys generate about $338 million versus your backlog current backlog of $486 million. You got any thoughts on what this backlog might look like at the end of your current fiscal year?

George, it's too volatile to say. I would also tell you, though, you always have to be very careful in looking at the future value of earnings off of the backlog because a larger backlog with longer lead time cycles in there and longer projects creates a conversion area. And what we try to also indicate as we see some of our backlog come down and orders push out it does give us greater opportunity as we are also decreasing our lead times and our capability in our facility to supply projects in a much shorter time period. So, that means we're going to cycle our backlog faster as those opportunities present themselves and we go capitalize on them.

All right. Thank you sir. (Operator Instructions). Our next question is a follow up from the line of John Franzreb with Sidoti and Company. Please go ahead.

Just regarding the push outs you referenced to earlier. What end markets are more likely or have the flexibility to push out their projects?

I'd say right now the oil and gas business.

Okay.

And again, John, if you remember we talked in the last quarter. Most of our customers have moved from a "let's get the project done quick" to "how do I manage the cost and the cost basis as well as I possibly can". There's another viewpoint that's coming into this right now also is as some of their commodity costs to do, let's say, a refining project have been on the decline there may be a window here in the next, let's say, 18 months that they may be at their lowest cost possible potential solution to make their investments. So, we don't know where that's going to factor in, but if this economy does start to rebound and stimulate and inflation does start to take in like some people are predicting that means the cost of delaying will mean their cost of construction will go up.

Okay. So, Pat, does that mean, I guess, cost cutting has never been part of the story because the demand cycle over the past couple years has been so good for your company and plus you have what's going on with Power Vac into the mix. Now, it seems from your comments before that you're happy with the current staffing level, but it also seems that you're anticipating a mild down cycle. But from what you just said now there's a potential for that rebound. Is that why we're not hearing an awful lot about cost cutting right now in the business mix; that you want to be flexible enough to adjust demand should it rebound quicker?

John, I think the reality of who Powell is and the reality that we're going to continue our vision is because if you're a relationship company and we start with our people, you've got to be a forward looking company with people. They interact with the customer. They create the solution. If I go into the mode of other companies of just starting to cut costs, slash the organization, we're not going to be able to keep that customer relationship the way we have always done that. So, we will really err heavily on our people side to keep our relationships up and invest in new relationships where there's opportunities out there.

Okay. Thanks a lot, Pat.

Thank you sir. Our next question is also a follow up from the line of George Gaspar with Robert W. Baird. Please go ahead.

Yes, just pursue one additional thing on the backlog and pushing out and so on. The rail contract that you picked up in the quarter from D.C. What's the scheduled release of that contract into revenue stream for the rest of this fiscal year? Or is this more a 2010 revenue generator?

Right now, George, I believe the majority of it would be only engineering revenue based, if any, in fiscal 2009 and we would actually start in substation delivery in the 2010 area.

I see. And that substation delivery comes out of, what, mostly Canton?

At this moment in time, but it does include products out of other divisions also to go into North Canton.

Okay. Thank you.

Thank you.

We have no further questions in the queue. I'd like to turn it back to management for any closing remarks.

Thank you for joining us today. We definitely appreciate the interest that everybody has in Powell and we look forward to talking with you again next quarter.

Ladies and gentleman, this concludes the Powell Industries second quarter earnings conference call. If you'd like to listen to a replay of today's conference please dial (303)590 3030 or toll free 1 800 406 7325 and enter access code number 4062303. AT&T would like to thank you for your participation. You may now disconnect.