Powell Industries Inc (POWL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries third quarter earnings call. (Operator Instructions) This conference is being recorded today, Wednesday, August 4, 2010. I would now like to turn the conference over to Karen Roan with DRG&E. Please go ahead.

Thank you, Luke, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today, to review fiscal 2010 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. 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 you. 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 via webcast by going to the Company's website at www.powellind.com, or a recorded replay will be available until August 11, 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, August 4, 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 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 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 third 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.

Our performance in the third quarter was once again better than anticipated and follows the excellent start we posted in the first six months of the fiscal year. Margin levels, while still high, are trending toward more traditional levels, which will be the norm until the overall economy shows significant improvement. We continue to focus on areas over which we have control, such as our internal engineering and project management processes, and are working to strengthen new and existing customer relationships.

Third quarter orders were up, both on a sequential and year-over-year basis. However, we do not believe there has been a recovery in our markets and do not expect it to happen until the global economic climate improves. Though some of the most recent events in the Gulf of Mexico are positive, it is just the end of the first phase. What impact this will have on the future of deepwater drilling in US waters is still uncertain. We still anticipate the next oil and gas industry projects will be on the upstream side with many involving platforms scheduled for the Gulf of Mexico as companies work to move wells into production that were completed prior to the current situation. It is the timing of these projects that is in question, and they are dependent on the rate of economic recovery and actions taken by Washington and tax and regulatory policy.

As the oil and gas market shifts the focus to projects outside the United States, it is likely to benefit the oil sands in Canada. Our new presence in Canada is showing positive results as we work to integrate it into our business. Powell is prepared to provide solutions for our oil and gas customers wherever they choose to apply their capital investments. We are watching the economic conditions carefully. We believe that oil and gas, as well as electrical utility investments will incur. It is just a question of when. As consumer demands returns, so will the obvious need for additional capacity.

For now, we are using our time wisely by looking into other market segments where our expertise can be applied. Markets of interest are those that [not] only use bulk electrical energy, but those that value customer supplier relationships, have a focus on safety, and recognize the value that comes with the quality.

Strategically, the international growth rate going forward is likely to exceed that of the United States. In preparation, we have recently completed and launched a newly-designed circuit breaker along with associated switch gear for the IEC market. This product expands ratings beyond current market offerings and provides a differentiator between Powell and our competition. We continue to see improvement in the maintenance and service portion of our business, which is consistent with past cycles, however, at a rate below our expectations.

There has not been a fundamental change in our markets over the past quarter. We are working vigorously on things over which we have control, such as improvements in processes, skill building, and customer relationship management. However, we have no control over many things that drive our business and markets. Short-term business results are unpredictable, but we are confident in the long-term outlook.

I will now turn over the call to our Chief Financial Officer, Don Madison, to review our financial performance for the third quarter. Then I will make some final remarks.

Thank you, Pat. Revenues were $138.9 million in the third quarter of fiscal 2010, a decrease of $27 million compared to the third quarter of fiscal 2009. Gross profit decreased by approximately $2.9 million to $38.2 million due to lower revenues partially offset by higher margins. Gross profit as a percentage of revenues increased to 27.5% compared to 24.8% in last year's third quarter. This increase resulted from strong market demand when the projects were negotiated and reduced project costs. Additionally, the successful negotiation of change orders and a customer claim contributed to the increase in gross margin. As we discussed last quarter, we do not anticipate that gross margin will continue at this level given the overall mix of projects currently in our backlog.

Selling, general and administrative expenses were $22.2 million, an increase of approximately $1.8 million compared to the third quarter of fiscal 2009. This increase primarily relates to our acquisition of Powell Canada. Interest expense, net of interest income was $179,000 in the third quarter, a decrease of $16,000 from a year ago.

In the third quarter of fiscal 2010, we generated net income of $10.3 million, or $0.88 per diluted share, compared to $13.1 million, or $1.14 per diluted share in the third quarter of fiscal 2009.

For the nine months ended June 30, 2010, revenues were $416.9 million compared to $505 million in the same period a year ago. Gross margin was 27% for the nine-month period compared to 21.9% a year ago. Selling, general and administrative expenses were $66 million compared to $62.3 million for the first nine months of fiscal 2009. This increase relates to the acquisition of Powell Canada. In addition to ongoing operations we incurred one-time fees and costs of $2.3 million for the acquisition during the first nine months of fiscal 2010.

Interest expense net of interest income for the nine months ended June 30, 2010 decreased by $405,000 to $432,000 compared to the same period in 2009. Year-to-date our provision for income taxes reflects an effective tax rate on earnings before income taxes of $35.1%. This compares to 34.2% for fiscal 2009, and 35.3% for fiscal 2008.

For the nine months ended June 30, 2010, net income was $29.8 million, or $2.56 per diluted share, compared to $29.8 million, or $2.59 per diluted share a year ago. At June 30, 2010, our order backlog was $310 million compared to $313 million as of March 31, 2010, and $426 million a year ago.

New orders were $136 million in the third quarter compared to $113 million in the previous quarter, and to $103 million in the third quarter of fiscal 2009.

In the third quarter cash provided by operating activities totaled $6.2 million. Investments in property plant equipment totaled $2 million. At June 30, 2010, we had cash and cash equivalents of $117.1 million compared to $97.4 million at the end of fiscal 2009. Long-term debt and capital lease obligations, including current maturities, totaled $19.9 million compared to $9.5 million at September 30, 2009.

Looking ahead. Based on strong year-to-date performance, current business conditions and our existing backlog, we now expect full year fiscal 2010 revenues to range between $560 million and $575 million, and full year earnings to range between $2.95 and $3.20 per diluted share. We continue to maintain a strong balance sheet and expect to continue to generate solid cash flow. We believe we are well positioned to meet current market uncertainties 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 will be happy to take your questions. We continue to prepare for the future and the opportunities it will bring, but we also understand that our markets are cyclical in nature. We have weathered the peaks and valleys before and we will do so again. Our objective is to drive for higher performance and provide ever better solutions for our customers. Our balance sheet strength positions us to capitalize on market opportunities. It is likely that more, rather than fewer, opportunities will present themselves from outside the United States in years to come. We have and continue to build an organization with the ability to respond to those market decisions and intend to be alongside our customers wherever in the world they decide to invest. We remain focused on our customers and our people. Our driving force is to keep moving forward while taking every opportunity to grow strong and gain greater capability. We are ready when our customers decide it is time. At this point, we will be more than happy to answer your questions.

(Operator Instructions) Our first question comes from the line of Fred Buonocore with CJS Securities. Please go ahead.

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

Just fine, Fred.

Great. I guess I'll start out with the obvious topic. The gross margin, can you kind of talk about the importance of the different aspects that you highlighted in terms of the profitable change orders, favorable closeouts and so on, and what their significance was in the margin this quarter? And as a second part to that, it appears that your implied gross margin expectation for Q4 is somewhere in the low 20% range, and after several quarters of blowing our expectations out of the water, why we should think that that is really -- that kind of drop is really going to occur in Q4?

I think Don and I will both tag-team on that answer. Let me give you a little bit of the first piece and then I'll let Don talk to you about the expectation on it. As we break those pieces down, Fred, it's not only just the what, but it's what we are trying to do in our processes. There is no doubt that the idea of change orders and how we work with our customers is one that we have focused a [large] amount of time and spent a lot of time with our project management to work at and understand. We are also working with our customers for future projects of how we work better with them that may or may not alleviate change orders in the future, depending on how their projects go forward. But we always want to be prepared as the conditions happen and that we understand where the project is and take it and work that situation with our customer.

As it relates to job closeouts, again, as we look at our project management, it is ever knowing better how we manage our projects. And our focus is to continue to work and always be a little bit more predictable in the future than what we have been in the past with it.

As it relates to our ongoing business of just the margin against the projects that we are trying to execute, again, there is no doubt that with the jobs that are out there and with everybody that is trying to bid these things, we have to be ever-present and sharp on our pricing, which will have a tendency to potentially depress our margins as we are looking at these projects on a go-forward basis. Don?

The only thing I will add to that is when you are looking at the quarter-over-quarter impact year-over-year and looking at the percentage change, while there is a base level of improvement in the execution, the majority of it came from the end of the project, change orders, negotiations, and wrapping up of projects. That opportunity is diminishing rapidly from our backlog, as most of the projects that were substantially completed in the past and earlier this year have now come to a complete conclusion. Are we still working on some? Yes, but we don't think of anything near the magnitude of what we have had because the projects are much smaller.

These project meetings that we have had had at the closeout and discussions with the clients, because of our ability to explain and why change orders are warranted and reach agreement with clients, there has also been conversations, as Pat alluded to, as to how do we do better going forward meeting the client saying how do I minimize this? What do I need to do differently? And our project management team is helping differentiate Powell with the client of working with them. Again, that will minimize the end of project opportunities as we go forward in future years.

Thank you very much. And then as a follow-up to that, you were kind of talking about not seeing at least what has you convinced is that your end markets are getting stronger, but yet you have had a few conservative quarters of pretty decent sequential bookings increases. And I am not sure how much of that is related to the position of the PowerComm business or how much of that is in your core business. But, I mean, can you shed a little light on why you don't really think that it is necessarily sustainable at this point or a symbol of improving end market? And, secondly, if you could give us a sense for what booking trends have looked like since the end of the quarter to date? That would be helpful. Thanks.

Well, first off, on bookings since the end of the quarter, I can't give you that because that would be a forward-looking viewpoint. But in any case, I think the other side of that is, there is no doubt the acquisition and Powell Canada is adding to our order input, and that is a clear significant trend. And, as we indicated, a trend that we are seeing, the oil sands market pick up activity. That is true.

What we are seeing domestically is still a flat or what I would call a soft market. We are still getting quotes, we are still seeing opportunities, but people are still sitting on the sidelines. And I would even carry that over, as we said, in our service opportunities. Although we have seen service grow, not to the level that we would have expected in normal downturns. What we are seeing are people not only not investing in the new capital, but even trying to extend the life of their equipment by not doing maintenance. You know, they are going as far as they possibly can. Now, that is going to be beneficial for us at some point in time in the future, because they are going to have to maintain it or they are going to have to replace it, or they are going to have to change it out.

So, we see the opportunities really starting to pick up in the international environment. As we always talked, if it's an ANSI job, an ANSI standard, we are going to be a significant player. If it's an IEC job, that is going to be a much more competitive situation. If it's one that we can influence or a domestic manufacturer, then we will have an ability to influence that. But it will be a more competitive situation than if that job is an ANSI job.

Okay. Well, thank you very much and we will look forward to seeing you in a couple of weeks at our conference.

Our next question comes from the line of Ned Borland with Hudson Securities. Please go ahead.

Good morning, guys. Another surprisingly good quarter here. I think if I'm hearing you right on the commentary on the gross margin, it is a little bit from column A, you got more of a depressed capital investing environment in energy, and then column B is more of -- your opportunities are more international and you are facing more competition. Which is the more, the bigger swing factor, I guess, in your margin opportunity going forward?

Well, there is no doubt the international, again, is going to be very competitive, but I would even say domestically the price levels are very competitive. You just -- we can't -- everybody is looking for how do they keep their capital costs low. I think the one thing that we all have to realize through this last big growth cycle, and, as Don alluded to, our discussions with our customers now.

When we are doing post-mortems with them on their projects, there is no doubt they all believe that they spent way too much for their projects in the hype of this thing. So, I think going forward every customer is being more conscientious about how do I buy better in the future? How do I spec my job better, which may take away from change orders in the future? But, most importantly, how do I keep my capital spend down? I think every one of them got surprised in their refining projects of how much overrun they ran into. And I think they are going to be much more cautious going forward. So, that is going to put pressure on our margins.

Okay. And then on the orders in the previous quarter, a nice sequential pickup. Is this a scenario where orders kind of build from here, or is it -- I mean, the international picture, I would imagine you are going to get more orders overseas or in international markets. Does that translate necessarily to a higher early run rate of sales, or are these projects longer, shorter, the same as the type of stuff that you are running through now? Can you help us think about that?

Yes. I think as we have always said, Ned, no one quarter makes a trend. I think it was a nice view for us. I am very hesitant to say that there is an upward trend on this. I think our viewpoint right now, still, is it's more of a flat trend. There will be some spikes up and maybe some spikes down on this thing, but it is more of a flat trend than what I would say there is any indication that we are going to start to see a growth initiative in the marketplaces for the future. And if we do, I think with some of the EPC companies and what they are saying right now, if we do see that, it would be probably more towards the mid to latter part of 2011 before we might see a growth trend in some of those capital good markets.

Okay. And then just one final one. On the new IEC switchgear product. I mean, can you give us a sense of how that helps you competitively in the international markets?

How it makes us competitive is, first and foremost, it is our product and one that we have designed and really modified from the design of the PowlVac circuit breaker that we had, and we made it a truly IEC-rated product. We also then remade our entire switchgear line in UK to go around that product. So, it's both the switchgear and the breaker. Where it has made us more competitive is, Powell has always been great on its higher end functionality. With a 63kA rating, which is something that has not been seen in the international marketplace, and every time I go over I visit with customers and there is a lot of customers who are now starting to see higher fault currents in their area and are going to be looking for higher fault current-capable equipment.

So, again, I think it's a great distinguishing factor for Powell, that we are able to go and create a breaker and get one of the highest rated fault currents in the marketplace in the international environment.

Okay, thank you.

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

Good morning, Pat and John.

Good morning.

Can we just go back to the gross margin? Should we be thinking about it coming maybe out of the downturn as a higher reset, having made structural changes. You know, when they lead a top to 21%, 22% normal kind of gross margin you have during the peak of the cycle, or how do you try to communicate to us that the pricing environment will keep you from maintaining any kind of structural change benefit that you put in place?

I think the hardest thing in any engineered order -- I've been in this business almost 30 years. I've been both in the flow side of the business, the piece parts, and then most of my career has been in the engineered to order. The hardest thing in the engineered to order is to be able to tell somebody how much of a change in margin is related to price and how much of it is related to efficiencies and changes in your cost structure, because no two projects are exactly alike.

I think we have made great strides in our process improvements. The way we go about things, the way we try to do things, the way we look at our products, the way we try to procure our materials, the way we are trying to leverage our information systems to do better on that has definitely had an uptick in our margin level. I think always, though, in this business you can work and work and work and get those things, and one fell swoop of a competitive environment you can wipe it all out in a price structure, because you've got to be competitive to go secure that project.

So, my old adage used to be one point of price is worth about three times the effort in the cost side of things. So, we have to be very mindful of that. So, I am very cautious to say where we are in that cycle because it goes project-by-project and cost component-to-cost component, and each one is independent.

So, I guess what you are saying you wouldn't sign off on being able to sustain a gross margin above traditional levels. Is that the read for that, Pat?

John, I would add to it. I think what we've done with internal process, when you are looking at a market cycle, we will be able to continue to achieve our objective with outperforming where we were at the previous point. I think what we've tried to say here in near term, because of market levels and competitive pressures, recent experience in large projects, it is going to become difficult to capture that same level of price that we might have been able to do two years ago, when things were extremely strong. That doesn't mean, though, that when the market rebounds to a similar strength that we would at this point in time forecast a material difference in the price level.

Okay. Okay, thank you. And as a follow-up, you have a lot of cash available. You mentioned some, at least I thought you were mentioning some sort of M&A activity, or some additional M&A activity. It sounds to me like you are talking opportunities outside the US. Is that the case? Is that the right read there? What are you seeing as far as the preset environment for M&A?

We are looking for any opportunity. There is no doubt we continue to look internationally as well as domestically. I think the opportunities are there, but as we have talked about on previous calls, there is still an issue over the pricing of all these as to what somebody thinks their business is worth. So, we are always looking at different ways on how we can acquire that. But there is no doubt our funnel is one that we are continuing to try to manage right now to see where our opportunities might lead us in adding more products and service capabilities to our portfolio for our customers, and very much in the international environment.

Okay. Thank you very much, guys.

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

Yes, hi, good morning.

Good morning.

Yes, Pat or Don, the $136 million in bookings for the quarter, any sort of orders or projects of particular size that you point out in there?

The overall size is consistent with what we have seen in the previous few quarters. There are no large-scale projects, no one that has made a significant difference in the overall volume. What we have seen that is the quarter-over-quarter growth. And, again, I am very cautious to say it's a trend. But the quarter-over-quarter growth was predominantly from opportunities outside the United States, about half of them in Canada and about half of them elsewhere.

Okay, that's helpful, and then maybe just an update on the projects or opportunities you are pursuing on the transit side?

We've got a large funnel on the transit side. The transit side, what we are seeing as a slowing of activity. Not that the funnel is changing, but, you know what? Every municipality is now hurting for money, so a lot of them are delaying, pulling back from where we thought they were going to be having commitments. Again, the federal money is there, it is the local match that they are having big issues with right now.

Okay, so nothing in terms of a near-term horizon?

I don't see any major big changes in the transit opportunity in the near term future. There are some that we have looked at in Canada, and we will continue to pursue those opportunities in Canada now that we are present in Canada.

If you are looking at the three-year outlook, I would say there are a lot of projects that are going to come into place, but clearly there is a clear indication of delaying the execution of projects that are currently on the books, as well as pushing things out that we would have expected to have happened in 2011, that may now not happen until 2012.

Okay, thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Hi. Good morning, Pat and Don.

Good morning.

Don, cash, you said was at $117 million? I missed it.

$117.1 million.

.1, perfect, okay. And then what's the net effect of still in the Gulf? I know you are on production platforms and the ones being built, as you said in your prepared comments, you are still going to deliver product to. But as you think about the impact of the Gulf and the shortfall being filled by onshore resources likely from Canadian oil sands, the net effect, is this positive to you? Is it neutral? Do you not really know?

If you look at just the true upstream project, which I would say is the platform versus what we would do to a SAGD operation, for instance, in Canada, if it's just a change, one for the other, I don't see much change in that. Could be some, but it's almost, to some extent, a tit-for-tat.

I think what we really have to look at and consider and worry about is, Canada is one thing. But if these deep shore drilling rigs go someplace else, then what that means is not only potentially we might not have and capture the platform and the electrical on the platform, but you also have to look at where is the refining going to be for that? And if the refining then happens in the same geographical area around the world and, again, if it goes IEC, it's going to be a much more competitive environment. So, it's that cascading effect from the platform to the refining side of it, to even the downstream side of it that I think we are in a critical position as a country, that all of that could potentially be moving offshore.

Right, okay. Okay, thanks for your insight, guys.

Thank you. We now have a follow-up question from the line of Fred Buonocore with CJS Securities. Please go ahead.

Yes. On the PowerComm business, I'm not sure if I missed it on the call, but can you break out what the revenue from that business was? I think it was going to be like $15 million or $20 million per quarter, and perhaps if it's maybe tracking ahead of your expectations at this point?

At this particular quarter we did just shy of $20 million.

Okay.

Through the new acquisition.

So, roughly in line with what you were looking for?

That is correct.

Thanks very much.

Thank you. (Operator Instructions) And we have a follow-up question from the line of John Franzreb with Sidoti & Company. Please go ahead.

Just a follow-up on Fred's question. Did you break out -- can you break out a similar number on the order books for PowerComm?

They had a slight growth in their backlog during the period, but I really don't want to get into going beyond that. Their backlog is improving.

Okay. How about similarly to the transit business, can you discuss what the order book is looking like, what the quotation activity is in the utility side of the business?

Well, when you are looking at the transit, keep in mind that most of those are large-scale projects. So, they typically happen in big lumps, and quarter-to-quarter comparisons are really not relevant. Even year-over-year, I don't think we will see a material difference, but we could see a difference looking at 2011. Utility, I don't have as good a feel for, but I am not aware of any radical change.

No. The only thing I would look at in the utility, I think, again, a lot of the utilities are very cautious about their spend right now. The positive upside is some potential for some new EPA regulations that might be going through on additional scrubbing for coal-fired generation with a 2014 deadline, if that does happen to go through. Some of EPCs are looking that that could be a next wave of growth. If that is, that could be very positive for us, because we have done a considerable number of scrubber projects, and it might even be the first real impetus that if a coal plant can't meet the standard, that it might have to be replaced and new generation might have to come on line. So, if that would happen, that potentially could be a positive outlook for us in the future.

Okay. Thanks a lot, guys.

Thank you. Management, there are no further questions in the queue. Please proceed.

Thank you again for joining us today. We really do appreciate your continued interest in Powell, and we definitely look forward to talking to you next quarter at the end of our year.

Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 303-590-3030, with the access code 4331080. Thank you for participating. You may now disconnect.