Powell Industries Inc (POWL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. 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, Wednesday, February 3, 2010. I would now like to turn the conference over to Karen Roan with DRG&E. Please go ahead, ma'am.

Thank you, Brandy, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2010 first-quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn the call over to management I have the normal details to cover. If you did not receive an e-mail of the news release issued this morning, please call our offices at DRG&E and we will get one to do. That number is 713-529-6600. Also, if you want to be on the permanent e-mail distribution list for Powell news releases, please relay that information to us.

There will be a replay of today's call and it will be available by webcast by going to the Company's website at www.PowellIND.com, or a recorded replay will be available until February 10, 2010 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, February 3, 2010, 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 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 risk; availability and price of 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.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our fiscal 2010 first-quarter results. Following my initial comments on the quarter and current market environment, Don will cover the financial details of the quarter. Then I will return with some final remarks.

While our performance in the first quarter was solid, the remainder of the year will be impacted by many factors beyond our control. The first quarter benefited from accelerated delivery needs by a few of our customers and our ongoing efforts to reduce operating costs. Order rates remained steady at the pace reported a last quarter, but we will continue to see some erosion in our backlog until the global economic climate further improves. The refining portion of our oil and gas markets will likely remain relatively weak as lower demand and increased capacity from recent expansions create a highly competitive environment.

On the positive side, we continue to see new reserve discoveries as well as projected plans for oil and gas production projects. The timing of these projects will be directly determined by the rate of economic recovery and the actions taken by Washington on tax and regulatory policy.

As consumer demand returns the demand for electrical power will once again be on the rise and the need for both replacement generation as well as a new generation will be recognized. While the demand for large new projects or expansions is less than in recent years, we have seen a modest uptick in the maintenance and service portion of the business. This is consistent with past cycles and we expect to see that activity continue as companies choose to maintain, upgrade and increase the lifecycle of existing infrastructure.

We still have no doubt that the long-term prospects for our primary markets are good and that the world will need more oil and more electrical power rather than less. It is only the timing of the activity that is in question.

In the current economic climate short-term predictions of business results are almost impossible. However, we are confident in our long-term outlook. We continue to use this time wisely and prepare our organization to be able to capitalize on opportunities as they arise. I will now turn over the call to Chief Financial Officer, Don Madison, to review our financial performance for the first quarter and then I will make some final remarks.

Thank you, Pat. Revenues were $135.9 million in the first quarter of fiscal 2010, a decrease of $34.6 million compared to the first quarter of fiscal 2009. Gross profit increased by approximately $3.3 million to $37.8 million as a result of a favorable mix of projects, cost reduction activities and cancellation fees for orders canceled from our backlog. Gross profit as a percentage of revenues increased to 27.8% compared to 20.2% in last year's first quarter. It is not anticipated that these gross margin levels will continue given the overall mix of jobs currently in our backlog.

Selling, general and administrative expenses were $22.6 million, an increase of approximately $1 million compared to the first quarter of fiscal 2009. SG&A expenses increased primarily due to expenses of approximately $1.6 million incurred for our recent acquisition in Canada and an increase of approximately $1 million in our estimated allowance for bad debts, partially offset by lower sales commission expenses.

Interest expense net of interest income was $140,000 in the first quarter, a decrease of $275,000 from a year ago. Our effective tax rate was 35.2% compared to 34.2% for fiscal 2009 and 35.3% for fiscal 2008. In the first quarter of fiscal 2010 we generated net income of $9.6 million or $0.83 per diluted share compared to $7.9 million or $0.68 per diluted share in the first quarter of fiscal 2009.

As of December 31, 2009 our order backlog was $341.7 million compared to $509.4 million a year ago. New orders were $108 million in the first quarter compared to $100 million in the previous quarter and $172 million in the first quarter of fiscal 2009.

In the first quarter, cash provided by operating activities totaled $15.3 million. Investments in property, plant and equipment totaled $614,000 compared to $2 million in the first quarter of fiscal 2009. At December 31, 2009 we had cash and cash equivalents of $83.2 million compared to $97.4 million at the end of fiscal 2009. Long-term debt, capital lease obligations, including current maturities, totaled $21.5 million compared to $9.5 million at September 30, 2009.

Looking ahead, given the uncertainty surrounding capital spending and the project driven environment of our primary markets it remains difficult to provide guidance for the current fiscal year. Based on a strong first quarter, current business conditions and our existing backlog we now expect full-year fiscal 2010 revenues to range between $550 million and $600 million and full-year earnings to range between $1.65 and $2 per diluted share.

We continue to maintain a strong balance sheet and expect to continue to generate solid cash flow in fiscal 2010. We believe we are well positioned to meet the current uncertainties in the marketplace and to take advantage of opportunities as they arise. At this point I will 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 acquisition of PowerComm, now named Powell Canada, is going smoothly and according to plan. Teams are in place and working to integrate our networks and infrastructure as well as plan for product and market development.

We are very pleased with the acquisition of this fine company and believe the oil and gas market in Western Canada offers great potential. The growth of that operation will allow us to participate in one of the largest proven reserves of oil and gas in North America.

We believe that being close to the customer is the best way of maintaining the close business relationships that play a key part in our strategy. The acquisition also brings greatly expands our service offering and our ability to develop job site and plant relationships that assist with the deeper understanding of the needs of our core customers.

In our activities we consider ourselves a virtual partner with our customers. The greater our understanding of our customer the greater the value we can provide. In our 60-year history Powell has seen many economic cycles. The peaks present challenges with throughput, training and resources; the valleys present challenges of market timing, shifting schedules and changing customer priorities. We have been here before and we'll see these situations again.

We remain focused on our customers and our people and know that business results will follow. Powell will continue to work with customers now and in the future to build value driven electrical power solutions. At this point we'll be more than happy to answer your questions.

(Operator Instructions). Fred Buonocore, CJS Securities.

Good morning, Pat and Don. I just wanted to drill down on the gross margin in the quarter a little bit. You indicated mix cost reductions and cancellations, and maybe if you could just give us a little bit more color on maybe the magnitude of the cancellation fee, how those three items were weighted in your -- in our view, outperformance on gross margin and what cost reduction actions you might be taking and will we see more of those in the coming quarters? Thank you.

Fred, I'll talk to some of the cost reduction and the mix and then Don can talk to you about the cancellation area.

Great.

The mix is one that we talk to that is really a timing of mix. As the backlog has declined and orders have come in in the quarter we definitely had more closeouts of projects than we had starts. And a lot of those closeouts were of large major projects that we've had ongoing for quite some period of time.

As we look at our revenue stream and our percentage of completion profit that we take we necessarily are fairly conservative so that we try to make sure that we are projecting the most accurate possibilities of those projects. And as they have closed out we have seen an improvement in our gross profit levels on those projects, which is a whole lot better than seeing the other side of it. So, as we close out more than we started this year, we definitely benefited in the quarter from that.

As far as mix goes though, although there has been some price pressure on new orders, the jobs that are in the backlog do not have any significant change in price levels in them than what they have had in the past. We continue to work that hard, we continue to watch where we're trying to go with that.

As far as the cost reduction activity, one, we have taken a lot of variable cost in the number of employees out that we have in our organization. We scrutinize every cost that we are putting into the Company at this point in time. And we are taking, as we've talked about in other calls, as we have idle resources -- and I don't mean idol from the bad sense -- but engineers especially.

We're devoting them to cost reduction and standardization activities that are starting to pay benefits for us in those areas of being able to look at new ways of building the product, new ways of putting it together or new vendors or suppliers that are able to do things for us at a lower cost than what we were able to do when we were running 150 miles an hour. Don?

The only thing I'd add to that is that from a cancellation standpoint is that we did receive approximately $1.2 million in gross cancellation fees in the quarter that related to some orders that were canceled in the current quarter, but more of it actually related to quarters that were -- excuse me, orders that were canceled in the previous fiscal year that we were able to negotiate to see and actually receive that in the current quarter.

So the gross amount was around $1.2 million, there were costs associated with many of those orders, which is the nature of the negotiation. But clearly it did benefit us in the current quarter (technical difficulty).

Got it. And then just as a follow-up to that, Don, do you think you could see this in future quarters? I mean, are there other projects in the backlog, albeit a smaller backlog now that you think may be at a heightened risk of cancellation? Thank you very much.

I mean, at this point in time we're not aware of any orders that have been put on indefinite hold or that have been discussed as possible cancellations. To say that it won't happen, I can't. But there are none that we are aware of at this point in time.

Great, thank you.

John Franzreb, Sidoti & Company.

Good morning, guys. I want to talk a little bit about the order trends. We're kind of flat lining around 100. Two things, one, I'm wondering if that order number includes PowerComm and if so what kind of impact is in that. And if it doesn't, can you talk a little bit about what's looking relatively good versus what continues to look relatively soft?

The order level flattening out has just a small amount of PowerComm/Powell Canada in it. So it would be insignificant, not even really something to talk about at this point in time.

Okay.

What's going good? As we've talked about in the past, we continue to see activity in the transit business. However, I would caution that now because even we're seeing there that with the current general economic situation ridership is down, therefore fees to the transit companies are down. With the general economic situation we're also seeing that tax revenues are down in many municipalities and states.

So now they're starting to feel the pinch of not having enough money to fund some of the projects that they have been talking about and looking towards and have gone back out to try to look at can I take more cost out of those projects and go forward?

So, one area that we were looking at I think now is the economy is starting to catch up with it and their ability to fund the projects that they have. I don't think that's a massive trend but it is one that kind of bothers us. We are seeing an uptick in Canada.

Two weeks ago two fairly large projects in Canada that had been put on an indefinite hold process, the companies have now come through and said that they are now going to go forward within this, the ConocoPhillips Total, the Husky Energy and BP PLC one, and then on the tail end of that week the Canadian Natural Resources said that they are now going to go ahead with their Horizon Oil project by the end of the year.

So, how much that's going to impact us in fiscal 2010, don't know, could impact us in the order side of things. But we are seeing an uptick in the Canadian business in the oil sand area that people are starting to release projects and go forward with their projects.

The other thing I think we've seen is a lot of our petroleum-based companies are on calendar years. Many of our people have said that they have been longer in releasing their budgets to their people than ever before. So they're just now getting their budgets. We are seeing some activity increase here on projects in the quotation level. Is that a trend? I can't tell you that.

And our service business has seen an uptick on that as people are continuing to look at how do I maintain what I have. So we're seeing some upticks, but none of them I would call a trend yet that we can say we're going to see a general recovery in the marketplace.

Okay. And as my follow-up, the (inaudible) downturn, from what I remember there was a European competitor that kind of upset the apple cart in terms of pricing. You said that your backlog pricing so far has been stable. Has there been any indication that that same competitor may become more aggressive as jobs become scarcer?

I think there's always a fear that foreign competitors in our marketplace -- and there's more than just one -- could do that at any point in time. Again, we have not seen any movement in that area, but I would tell you we've got to be very sharp on every project. And we've lost a couple of potential orders for some very small sums of money. So it is a more competitive situation, but I would say that there is not any mass downturn in pricing as a result. I hope people learn from this.

Okay, thanks a lot.

Craig Bell, Madison Williams.

Good morning. Pat, in your prepared marks you talked about one of the things impacting margin was accelerated delivery needs for customers. Is that implying that you had projects that you closed out during the quarter that you had originally thought were in future quarters?

We thought that we would see some sliding of our projects as a result of the economic situation into future quarters. And what we have found is more as our customers, because of their desire to complete their projects and get their cash flows moving, they have really been trying to hold to their schedules or slightly improve some of their schedules so that they can close their stuff out. I mean, let's face it, as soon as they close it out they can generate a revenue stream.

Okay.

And then December is always kind of a hard one because of the amount of holidays around it. So they're keeping the pressure on us.

Okay. And then on the booking side, John had asked about where the order levels had been. And sort of following up on that, it doesn't sound like that in the very short term here that you're expecting a significant upturn in that at all. At what point do we need to be concerned that these booking levels are here and that they're going to start impacting say 2011 results for you?

Well, we're still a long ways out from 2011. I would tell you right now bookings over the next couple of months, three months, we can still react in 2010 on those. But each month is going to start to flow into 2011. The next two quarters are going to tell us what 2011 could potentially start to look like.

But one thing that's unique here versus last cycle, let's not forget, the level of quotation activity that we're still undergoing and are being asked to respond to today is still relatively high. The average dollar size is down from a year ago, but the quantity of quotations that we're doing and the backlog of open quotations is probably as high as it's been in some time.

If you remember the last cycle downturn, EPC companies were laying off right and left. I mean they were down. We didn't even have quotes in here to work on, as Don mentioned. We have quotes we're working on as to when are those going to get let, and our EPC companies are keeping their employment levels relatively stable and in certain project areas they're hiring.

Okay, great. Thanks, guys.

Ned Borland, Hudson Securities.

Good morning, guys. Maybe we could get a little more granular on the business levels here. Power/Vac, you bought it a couple years ago, it was more economically sensitive than your core business. How is it that business reacting here?

It's still economically sensitive. We have not seen a real uptick in the light commercial -- commercial/light industrial type areas. And again, that's not to say that Power/Vac totally played in those markets, they did not. They played in the industrial and the heavy industrial also. But we have not seen a recovery in that area yet.

But we are seeing, especially with some of our competitors who play in other market segments than we do, there is some anticipation of some slight recovery in the housing area and that will lead to some of the commercial. So, again, when that starts to happen we'll start to see an uptick in that business.

Okay. And then maybe some color on international projects. Is there anything clicking overseas that is worth mentioning?

Not really. I guess the only one I would mention that is a negative was one of the major projects that we were following that we thought we had right in our hip pocket, which was in Germany, that was put on indefinite hold. Again, we're seeing projects, we're having to work them and work them hard because of the amount of competitors out there against those projects, but we're not seeing any big major uptick in that area.

Okay. And then finally, on cash. $83 million in cash on hand is quite an impressive number. I mean, what -- are there still acquisitions that you're hunting or what are your plans for the cash?

We're always hunting acquisitions. Again, I think we have been very successful as a company in acquiring companies that for the most part have the same mode of operation, the same business philosophy that people believe the way we do. I'm very pleased with our Powell Canada, that people have taken to the Powell name very quickly and keeping the PowerComm name, but they're very excited and seeing opportunities as a result of that.

We will continue to look for companies that have that same like mindset. We will look for, again, more things that can add to our product portfolio base or solution base that strengthens our relationship with our current customers or gets us into customers that have that same type of relationship desire. We are not particularly looking for anything that's going to be transactional oriented.

But, yes, we're always looking, but we will also be a company that acquires, stabilizes -- it's a stair step deal. And then you go get the next one, but you don't look in that manner, you have to constantly be looking for the acquisitions.

Okay, thank you.

Brent Thielman, D.A. Davidson.

Hi, good morning. Just a question on -- you mentioned the project cancellations. Can you take a shot at what the impact on sales was for the quarter?

Go ahead, Don.

Any impact on sales in the current quarter was negligible. These were orders that would have been shipped in future periods.

Okay. So just to clarify. I mean, the run rate on sales over the last three quarters has been obviously significantly higher and clearly your backlog has declined. But is that just the timing of projects?

That's the timing of delivery requests and meeting the client's construction schedules.

Let me clarify. An order cancellation does not affect sales; it only affects order and backlog. The only things that affected sales were cancellation fees that we acquired.

Got you. Okay. And then looking ahead; is there any shift in the mix of types of products and projects that you'll execute on in the coming quarters that would have a material impact on margins going forward?

I would say again, we don't see a material mix in the types of jobs; the size of the jobs is much smaller. Where we might have delivered 15 to 19 substations for a project, you're down to three to eight substations for a project. But there's still a basic substation of power using a medium voltage equipment, low voltage, medium voltage motor control and things like that.

I would say also, as we're looking for other customers and projects that we can go after, we might see a small mix change to more medium voltage only without a power control room. But that should have no significant change in our profitability.

Okay. And then is there anything happening and the Process Control Systems segment that would have a more material impact going forward?

That business, I mean I kind of left that out in our uptick -- they are seeing good quotations, seeing a lot of opportunities and we're working hard again, combining our forces both in the traction power and the transit type business, the systems operated business to make a complete solution to our customers.

I think that side of the business will continue as people look for information to understand how do I monitor my systems better, how do I look for green opportunities, how do I make sure my energy usage is the best it can possibly be. So I think we're going to see good business there. But in the overall size of the scheme of Powell it's not that big of a change.

Okay. All right, thanks, guys.

(Operator Instructions). Beth Lilly, Gabelli Funds.

Good morning. I wanted to just chat about cap and trade for a minute and just do you think -- how much of an impact on your business do you think that's having?

I don't think cap and trade at this moment in time has any impact on our business. The fear of cap and trade (multiple speakers) --

Yes.

-- has an impact on our business.

That's what I'm talking about.

How much that is I can't say, Beth. As I've said before and as we've talked when we've met, stability for our customers from the political environment is everything that we need. When people can understand what the game is that they are playing and how they can return an investment to their shareholders people will make decisions on what that is that they can and will do. I hope it's dead, but I don't think we can ever say it's going to be dead at this moment in time.

Do you think -- is it affecting your quotation level or can you give just a little more granularity?

No, it's affecting the people's desire to place a purchase order. We have quotations for projects, those projects could end up being impacted by cap and trade and how they would have to pass those costs along. So they're sitting waiting, they have quotations, some of them are going back out for requotation, we're seeing a lot of that.

Now not necessarily on our side of it because, again, we're such a small part of the spin of a total major project. They are going back out for the requoting of projects on the piping and the contract labor and everything else that goes into it. But it's the releasing of the order that people are fearful to go do right now.

Yes. So, if we see cap and trade not being -- seemingly what happened yesterday I guess. There's a feeling that it's going to go away. Do you think that that will release some orders for you?

I believe that if cap and trade can clearly go away, and if they go ahead and, as proposed, institute the tax or the elimination of the tax preferential treatment that say for instance the oil companies had had, if that was the only thing that was on the table I believe that we would start to see an uptick in orders. At $70 to $80 a barrel for oil there's no reason why we shouldn't see an uptick in business.

Okay, that's helpful. Thank you very much.

John Franzreb, Sidoti & Company.

Pat, one of the prior questions kind of reminded me that you guys are supposed to have utilized the GE sales force to kind of pitch Powell products. Can you give us an update on how that process has gone relative to your expectations?

We continue to work that very strongly with them. I would say GE -- and again, I won't speak clearly for them. With all the turmoil that they have had of where C&I organization exist in their company and now that they've moved it under the energy side of their business I think -- we're hoping we're going to see stabilization and future direction with them and we'll continue to work that situation. I think we've worked hard, we've quoted a lot, we've not been as successful as I would like to have seen us. So we just need to keep working at to see if we can improve that.

Okay, but the sales force is fully -- pitching your products in conjunction with their old prior midsize switchgear products? (multiple speakers). Is that the case or is there --?

They are engaged and I have people constantly on the road meeting with their salespeople to continue to engage them.

Okay, so there still needs to be work to be done or is the process complete, I guess is what I'm trying to get at.

I would -- the process is never complete. You have to constantly work it. Dealing with another sales organization is like also dealing with rep organizations, you have to be constantly out there because you can slip on their visibility so quickly. Because something else gets their attention you have to be constantly out there reminding them of what you're trying to do.

Okay. And, John, can you just break down the margin? If I want to look at like X amount of basis points was impacted by I guess all the variables you talked about versus what a normalized gross margin, can you just walk us through that break down or is that you're not able to do that?

We're not able to do that. But I would think that subjectively the ranking would be more the mix of business that we saw as we saw more quarters completing as opposed to starting followed by our cost reduction activities and the least amount of impact was the net impact of the cancellation fees. The order of magnitude (multiple speakers)

Thanks (multiple speakers).

(multiple speakers) the ranking.

Okay. Thanks a lot, guys.

(Operator Instructions). Fred Buonocore, CJS Securities.

Yes, just another follow-up on the gross margin discussion. So looking at the volume declines that we're expecting through the year just based on the deterioration of the backlog and the countervailing force of the cost reductions, have you cut enough costs or do you plan on cutting enough cost to maybe see gross margins sustained in the zone they were in in fiscal 2009? Or should we see a volume-related compression?

You're going to see a volume -- volume compression issue with our gross margins that, as we talked in the past to you that SG&A, even including the acquisition, is going to be relatively stable from what we saw. So the compression we're seeing in our EPS is all coming from the volume and gross margin impacts of the business looking at the balance of the year.

And then on the SG&A point, the acquisition integrated -- integration or closing expense that we saw in Q1, we really shouldn't see that (multiple speakers)?

That is a one-time expense.

Got it. So we see the -- should in theory see SG&A drop sequentially then?

Quarter over quarter -- that is correct.

Great, thanks very much.

At this time there are no further questions. I'd like to turn the call back over to management for any closing remarks.

Thank you a lot for joining us today. I tell you, I'll deviate a little bit. I don't know about the rest of you, but we have difficulty with 2010 rolling off our tongues. But we'll continue to work on it the rest of this year. We really appreciate your interest in Powell and we look forward to seeing you again on the next quarter.

Thank you.

Ladies and gentlemen, this concludes the Powell Industries first-quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030, followed by pass code of 420-4785. ACT would like to thank you for your participation. You may now disconnect.