Powell Industries Inc (POWL) 2011 Q1 法說會逐字稿

Good day, 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 opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, February 6 (sic), 2011.

I would now like to turn the conference over to Ms. Karen Roan of DRG&L. Please go ahead, ma'am.

Thank you, Jeremy, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2011 first-quarter results. We would also like to welcome our Internet participants listening to the call, simulcast live over the Internet.

Before I turn over the call to management, I have the normal details to cover. If you did not receive an e-mail of the news release issued yesterday afternoon, please call our offices at DRG&L, and we will get one to you. That number is 713-529-5600. Also, if you want to be on the permanent e-mail distribution list for Powell's 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 February 9, 2011. And information on how to access the replay was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, February 2, 2011, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listing.

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 of 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.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our fiscal 2011 first-quarter results.

Before I get into my standard statements that I'm going to be making, I know a lot of you are affected by the weather and the conditions across the country a lot more than what we are in Houston. As we have talked on many conference calls, we have always made the remarks that our country still does not seem to be in a position where they want to go invest in new generation that's going to be required for the future of all of us in this country.

So as a sidelight to that, I just want to make sure you're all aware, as of this morning, Houston has been notified by its energy providers that we are in a position of going into 45-minute rolling blackouts here, so that I'm sure that we can distribute power to other parts of the state and/or country as it relates to the storms that are going on.

So in the event that we happen to go down in the middle of this conference call, our moderator will be supplying to you information as to whether we will reschedule and when we will be rescheduling the call. Hopefully that won't happen, but it's for sure that if we would have more generating coming online and being supplied by Powell equipment, we probably wouldn't be having these situations that we're doing now.

So, following my initial comments on the quarter and current market environment, Don will cover the financial details, and then, as always, I will return with some final remarks.

We've been anticipating a challenging fiscal 2011. We are a backlog-driven company, and our business is driven by capital investment. Over the last two years, our customer base delayed capital projects or changed where they invested in new projects due to reasons we have discussed before -- the global economic crisis, environmental and regulatory concerns, and the short-term demand for oil and electrical energy. This led to a very competitive market.

During most of last year, we benefited from several positive developments -- a strong beginning-year backlog, favorable project closeouts as we worked down our backlog, change orders, accelerated delivery requirements, and a few cancellation peaks.

Our current backlog, which is at its lowest level since 2007, is comprised of orders obtained during last year's competitive market environment. And our first-quarter revenues and earnings reflect the relative size and competitive nature of our current backlog as compared to the previous year. We expect this to place downward pressure on our gross profit as we fulfill these orders in fiscal 2011.

Our first-quarter orders and backlog increased substantially from year-end levels, which positions us for a stronger performance in upcoming quarters. Included in our first-quarter bookings and backlog is a substantial single multimillion-dollar project to supply the packaged electrical power systems for an offshore deepwater production project.

Even leaving out this contract, our orders in the first quarter significantly exceeded the order trend of last year. This project will be a floating semisubmersible oil and gas production facility in approximately 7000 feet of water in the Gulf of Mexico. Powell will provide offshore modules containing switchgear and control systems to distribute and control the electrical power for this project.

These will be fabricated through Powell's Houston facilities and will ultimately ship by barge by the Houston Ship Channel to the location in the Gulf in the Gulf. Powell has a solid long-term relationship with this and other clients, and we are extremely pleased to be selected to support this important project. Our ability to deliver custom-engineered solutions is a perfect fit for the needs of this project.

We believe the future of oil and gas production and supply from the Gulf of Mexico will be through technology-driven solutions that have the ability to provide reliable deepwater operations.

We are seeing increasing activity in the market and are definitely making the most of the opportunities that are presented to us. This activity is encouraging, but we think it is still too soon to know whether or not this represents a sustainable shift in market direction. As we said last quarter, we believe there is a great deal of pent-up demand, and we expect to participate in much of that business as new capital investment strengthens.

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

Thank you, Pat.

Revenues were $124.7 million in the first quarter of fiscal 2011, a decrease of $11.2 million compared to the first quarter of fiscal 2010.

Gross profit for the first quarter decreased by approximately $11.9 million to $25.9 million as a result of the reduction in revenue and increased pressure on margin, as Pat discussed. In addition, gross profit in last year's first quarter benefited from the favorable execution of large projects, as well as cancellation fees and the successful negotiation of change orders on projects that were substantially completed in prior periods.

As a result, gross profit as a percentage of revenues decreased to 20.7% in the first quarter of 2011 compared to 27.8% in the first quarter of fiscal 2010.

Selling, general and administrative expenses decreased by approximately $850,000 to $20.9 million for the first quarter. The decrease is primarily due to a reduction in bad debt expense of $1 million and acquisition expenses of $1.6 million, partially offset by the inclusion of a full quarter of costs related to the operation of Powell Canada.

Selling, general and administrative expenses as a percentage of revenues increased to 16.8% in the first quarter of fiscal 2011 compared to 16% a year ago, primarily as a result of the decrease in revenues.

Amortization expense was $1.2 million, an increase of approximately $300,000 compared to the first quarter of fiscal 2010. This increase relates to the inclusion of a full quarter of amortization expense for Powell Canada.

For the first quarter of fiscal 2011, our provision for income taxes reflects an effective tax rate on earnings before income taxes of 34.3%. Net income for the first quarter of fiscal 2011 was $2.4 million or $0.21 per diluted share compared to $9.6 million or $0.83 per diluted share in the first quarter of fiscal 2010.

As of December 31, 2010, our order backlog was $344 million compared to $282 million in the previous quarter and $342 million a year ago. New orders were $186 million in the first quarter compared to $106 million in the previous quarter and $108 million in the first quarter of fiscal 2010.

For the quarter, cash provided by operating activities totaled $6.8 million, and investments in property, plant and equipment totaled approximately $750,000.

At December 31, 2010, we had cash and cash equivalents of $120.9 million compared to $115.4 million at September 30, 2010.

Long-term debt and capital lease obligations, including current maturities, totaled $6.4 million.

Looking ahead, based on current business conditions, the timing of our existing backlog, and our order outlook, we expect full-year fiscal 2011 revenues to range between $475 million and $525 million and full-year earnings to range between $1.25 and $1.75 per diluted share.

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.

Business conditions are constantly changing, and Powell has always adapted to the varying needs of our customers. We have a history of innovation and continue to adjust and improve our services and solutions.

We have and continue to apply our knowledge and design expertise to our custom-engineered products. We have solved engineering challenges as projects have grown larger and more complex and customers have required services in more demanding locations. We have provided support by servicing equipment as it aged and as regulations changed.

One of the challenges for today's complex equipment solutions is capturing and monitoring information, and we are using our expertise to develop new technology that continuously gathers operating information and replaces the practice of periodic observations and tests. So we are advancing existing smart equipment to raise the levels of operator safety and customer reliability.

Our equipment is always customized to work within each customer's specifications. Our design and integration are crucial, creating a seamless flow of critical data to the right person or location. As demand for energy increases, and sources become more diverse, we expect our specialized solutions will apply to a wider range of customers.

As a solutions provider, we solve problems. We develop and design and engineer solutions, collaborating with customers and sharing our knowledge base. Customers depend on us not only for high-quality equipment and engineering design, but for information and guidance as we take a more consultative role with our customers.

We are confident that this approach, along with our legacy of innovation and progress, will serve us well in the future as we strive to stay ahead in a rapidly changing market.

At this point, we will be happy to answer your questions.

(Operator Instructions). John Franzreb, Sidoti & Company.

I guess I want to firstly address what I think is an impressive incoming order book. You mentioned you had one large order. Typically those are about $40 million or so. Is it right to kind of peg that number around there? And if so -- because you mentioned we are above trend -- do you expect to continue to book above-trend orders selling in the near term based on what you've called pent-up demand in the quarter?

John, in consulting with our customer, I am just not at liberty to tell you what the value of that order is at this moment in time. But needless to say, it was a large order. So it's probably somewhere in that region, since we talked about large orders in that region.

As far as our order book continuing, again, we are seeing quotations. We are seeing activity. They are very competitive in nature. There's a few more large projects out there that we are working on right now, but again, they are very competitive in nature.

Where I still have my concern is the amount of -- I don't want to really call it flow business, but smaller-type quotation orders that would really gather the momentum to say that this market is turning. I am still not there yet. So we are going to still have to wait another quarter or two before I think we are going to be looking at that this market can sustain itself in a growth mode again.

Well, you mentioned "competitive" twice in that response. The gross margin profile of the business that you are currently booking, how does that compare to some of the stuff that you are currently shipping? Is it better or is it worse?

I would say it is probably about the same, and in very large projects, it probably gets slightly worse, because those things -- people go after them as bellwether deals.

Remember, there's two facets. We have the gross profit, and then what ends up in gross margin at the end of the day. Two factors hit to us -- what is the gross margin going out on the projects as we are working on them, and then where are we as it relates to our overall headcount, fabrication capability and everything else at that point in time? So that helps dilute that number a little bit.

But these are competitive. And as we've talked about on some of the last quarterly calls, we felt that our margins were going to fall back down into this range because of the amount of cancellations, change fees and job order closeouts. And we just don't have those types of things happening now in the next couple of quarters.

Right. Okay. Those were my two questions. I'll get back into queue.

Ned Borland, Hudson Securities, Inc.

Just following up on some of John's questions about the orders, I wonder if we could just -- you kind of alluded to it in your response there, Pat, but just your expectations for average order sizes going forward. I mean, it sounds like you're a little cautious on just saying, okay, this is now an improving trend, but I'm just wondering, if we strip out the large order, I mean, what is sort of the base orders that you've been getting? I mean, is there an average order size improvement that you are seeing?

No, I don't think so.

None that you could call a trend.

Yes.

Okay. And then just to follow up on that, I guess where the -- again, we know about the Gulf order, but just what markets are you starting to see some sort of improvement, either geographically or by end market?

It kind of ranges all over, Ned. We are seeing a lot of international. I would tell you we are strong and seeing what we are as a result of our Canadian acquisition. There is strong business activity in Canada. Where I see a lot of it still floundering is kind of here in the US.

We are still seeing issues in the traction power side of things. It's still a long list of projects, and our President talked about even more of that in the State of the Union address. But I just don't see a lot of that happening right now with the local-level governments not having moneys to go do these types of things. So I still see that kind of flatlined scenario right at this moment in time.

We have seen some utility work, but not by any means any growth mode of new generation or anything else going on in the utility business.

If we see short-term improvement in order activity, it is most likely going to be driven by new expenditures in the oil and gas sector.

Okay. I will get back in queue.

Fred Buonocore, CJS Securities.

So, you referenced Powell Canada, and I understand that that's a parts/service business, and also you've got some larger project opportunities there. Are we seeing some of the backlog growth, and is some potential backlog growth coming from more project-type activity in Canada?

Most assuredly, that is one of the big growths in the backlog in Canada, is in the project side of things.

Got it. And is that -- that's continually oilsands-related?

Not all oilsands, but it is oil-and-gas-related.

Okay. And then secondly, you talked about the technology you are developing, information gathering and so on. And you talked in the past about investing more in R&D. Can you give us a sense for how much you invested in R&D in the quarter versus, say, last year's first quarter, and generally what your expectations are for SG&A for the balance of the year?

Okay, you got a lot of questions in there. I don't have what the R&D spend was quarter over quarter. I don't think it was appreciably different. It is a focus. We are focusing a lot of our normal products that we have and some upgrades and benefits to that, but we are, as we look at our process control, we're looking at our total system.

And as we announced in the last quarter, our acquisition of a thermal monitoring business, we are now starting to apply that into real-time information-gathering and a whole-systems perspective. So we will be focusing a lot of our efforts in that area so that when we go to any customer and we say, what type of automation do you want for your substation, whether that be an industrial substation, a utility substation, a traction substation, we will be able to supply that with a Powell system integrated with the equipment for them to capture and monitor their information, including the heat in that system.

Very good. Thank you.

Rick Hoss, ROTH Capital Partners.

On the gross margin line, it sounds like you have your headwinds [running] as far as the competitive bidding that was -- that occurred last year, and as those revenues flow through the P&L that you have a hit there.

What about raw material inflation? And how does that affect -- does that affect '11 numbers, or is that a '12 headwind that we need to be concerned about as well? How are you looking at it?

I mean, clearly, commodity costs are something that is becoming more volatile, particularly when you are looking at the metals, copper and aluminum. It's an area that we continue to monitor and work with closely. The processes that we've put in place over the last three to five years we believe is going to help us mitigate those risks. But when you have short-term changes of significant size, it does have downward pressure, could have downward pressures on our margins.

In the current quarter, there was not a material change relative to the same period last year relative to the impact on gross margin.

Okay, so that's something we need to become concerned about as this --

With market variations, that is something that has risk to the Company when it comes to gross margins.

And, Rick, just so you are aware -- I don't know how far back you go with some of these -- we are always trying to project forward into our quotation where we think things like copper are going to be. So we always try to plan for that.

And as Don said, you can always get fooled at any point in time if there is a quick fluctuation. But even what we are quoting today, that can become worse a month from now or tomorrow, we have projected out a delivery time and tried to anticipate what the cost of that raw commodity is going to be at that point in time.

Okay. So you have fairly strong pricing power, then, and that reflects in your bidding. And then what about the reduction of material costs in the products themselves? Do you focus that as part of your R&D? Do you constantly look for ways to reduce the copper and the aluminum, etc., that are used in the products?

We constantly look for ways to improve our cost position. A lot of that is in process improvement and how we flow it. You know, in basic electrical areas, the amount of copper-conducting material required to move an amount of power has very little capability to be reduced because when you do, you generate heat. When you generate heat, you create a scenario that says that the useful life of that product is no longer as good as it used to be, or you might even get it into a position where it no longer meets its heat-rise capability.

So we are constantly balancing and trying to look at, are we in line with what we are trying to do with our product. But there are not major cost takeouts in things like copper that you can go -- you look at in a product that is as mature as ours and everybody in the industry.

Okay. And then the second question more has to do with -- I think probably somewhat addressed by your opening comments, Pat -- is, how long does it take for new generation to actually be built to -- you have the requirement, and then you are obviously forced into the requirement by blackouts. And then people say, okay, now we need new generation. And then, so you have to plan it, and then you have to engineer and you have to deliver. What kind of period? Is that two, is that three years? And I understand it depends on the type of generation, but I mean, generally speaking, after you have rolling blackouts, how long does it take to get the generating assets on the ground?

Well, I wish I could give you a complete answer, but I'm going to give you the answer that is kind of really generic.

You know, when you start doing this, the easiest thing somebody can do is start trying to put some peakers on. And that's what gas peakers are one that you can hit pretty quickly; you can put something on like that in a year's time frame. If you were looking at a coal addition to increase the capacity at a facility, you can do that in a two-year time frame.

If you are looking at doing a full-out base generating facility that is either gas or coal or some other form other than nuclear, probably four years, I would say. And if you are talking nuclear, you're talking nine to 14 years.

So we are still looking for peaker activity, which has been still slow, and really as a precursor to baseload, actual baseload, it's still several years out?

It is still several years out, my belief; I could be wrong. The issue I think we are still looking at, though, is consider I think more than 70% of our total electricity in this country is from coal-fired generation. The question is going to be, is that going to get replaced? If it is, how soon? And if it is just one for one, we didn't increase any of our generating capacity of electricity for this country.

Okay. Thanks for the insight.

Brent Thielman, D.A. Davidson & Co.

Yes, just on the process control systems business, it looks like a small loss there. Can you just explain what sort of happened there, and should we expect that going forward?

You know, again, there's always timing of projects that they have going on. And it is a service business, so we are looking to improve that. We've seen activity grow in that area. And we are focused on that heavily, and we are making some investments in that business. So when I talk about some of those systems investments, they are being made in that business, and the benefit of that will accrue to all of Powell in the future.

Okay. And then just on the offshore side, it sounds like you got an order there and maybe some more underway. Do you think you are seeing a more sustainable trend there, at least?

Again, I wish I could say that. The reality of the offshore especially -- and let's just talk Gulf of Mexico -- the reality of the offshore still is, there are very few, insignificantly -- I only believe two -- new drilling permits that have been let since the moratorium was lifted. So there still is not a big move for new exploration.

What we are working on is those wells that had already been drilled, had been cemented, that are wells that are to go into production to replace wells that are coming out of production. We work on those production platforms.

So depending on how much oil and gas is needed and required out of the Gulf, and if all the things going on in the Middle East right now says we need more out of the Gulf, then we could see more of these production platforms kind of get moving a little bit quicker here. But that's going to be a three- to four-year window. And if we aren't seeing new drilling exploration going on in the Gulf, then we are going to see a real downturn in three to four years out.

Now, exploration and production is definitely getting ready to take off down in the Brazil area, still off of the western coast of Africa. They now have finds in China and Indochina. So around the world, there's a lot of offshore production going on. How much of that we can participate will be determined by who it is, who's buying it and what type of equipment they want.

Okay. Hope the lights stay on down there. Thanks.

(Operator Instructions). Ned Borland, Hudson Securities, Inc.

Just on the large project, I'm assuming that's going to be delivered in fiscal 2012. If I'm wrong, please correct me. But also, since it is a larger project and then on historical large projects you have seen some change orders, just trying to reconcile that with your comments that larger projects are coming in at worse margins. Can you help me out with that?

Sure, Ned. Our best estimate right now is of that project, approximately maybe half of that will see revenue generation under a percentage of completion accounting methodology in '11. The balance of it will be in 2012.

There are always opportunities for change orders. But again, we try to work with our customers and clients to engineer these projects and execute them so that we don't have those. But if they come about, we will go after those types of change orders with our customers.

What I'm talking about is some of the large projects, of how competitive in nature they are at this moment in time to go secure those projects, and we've just got to be cognizant that right now everybody is looking for business to go into their facilities. They are lacking capacity also.

Okay, thank you.

Craig Bell, EnerCap Capital Partners.

Just as we are sort of sitting here today and just to kind of clarify, as you look at the orders that you already have, you don't see any -- it doesn't sound like you're real optimistic that we are going to see gross margins substantially pick up in the remainder of this year. Is that correct?

That's probably a very good characterization, Craig.

Because kind of what I'm looking at is, if that's the case, I mean, that looks to me like the top range of your earnings guidance looks like it might be fairly difficult to reach.

That guidance will be reached by orders that we're looking at or quotations that we have right now, when the flow of those quotations turn into orders, and how much of those orders are shippable in 2011 right now.

Okay, so you still -- depending on if they come through, you still see some potential there that you could get to there?

The smaller jobs, smaller jobs are always ones that we can turn a little bit quicker than some of these big, massive jobs. And that's why I keep going back to the size of the flow business. How do you balance your capacity utilization between large projects and smaller projects that typically can flow through your business quicker?

Okay, great. Thanks a lot.

(Operator Instructions). Fred Buonocore, CJS Securities.

Just another follow-up on the Powell Canada business. Can you give us a sense for the growth rate in that business on a year-over-year basis relative to the Powell core?

Fred, it depends on how you are characterizing. Are you looking at orders? Are you looking at revenues? So if you take into consideration what we were able to do in offshore, they are not exceeding our overall order intake quarter over quarter.

Keep in mind as well, is that a year ago, Powell Canada was only in the quarter for two weeks. So when you're looking at year over year, virtually 100% -- I mean, 100% of their activity is an increase over the first quarter of 2010.

But I mean based on what --

If you're looking at the general trends from an abstract standpoint, the momentum we saw picking up in the second half of last year continued into the first market from a market activity. Again, not all of that has flowed through into the revenue stream at this point in time, because it takes time to turn the backlog in that market segment just like it would here. But backlog is continuing to grow, though.

Fair enough. Thank you.

Thank you. And management, I show no further questions in queue at this time.

Again, thank you for joining us today. I am certainly happy and glad that we didn't end up with the brownout affecting this conference call with all of you. We appreciate your interest in Powell. And we most definitely look forward to talking to you again next quarter. Thanks a lot.

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 1-303-590-3030, enter the access code 4403962, followed by the pound key. The replay will be available until February 9, 2011.

Thank you for your participation. You may now disconnect.