Powell Industries Inc (POWL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Powell Industries third quarter earnings conference call. (Operator instructions.) This conference is being recorded today, Wednesday, August 3rd, 2011.

I would now like to turn the conference over to Karen Roan of DRG&L. please go ahead.

Karen Roan. Thank you, Genao, and good morning, everyone. We appreciate your joining us today for Powell Industries conference call to review fiscal 2011 third quarter results. We would also like to welcome our internet participants, as this is being simulcast over the web.

Before I turn over the call to Management I have the normal details to cover. If you did not receive an e-mail or the earnings release issued yesterday afternoon please call our offices at DRG&L 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 by webcast by going to the Company's website at www.powellind.com or a recorded replay will be available until August 10th, 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, August 3rd, 2011, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.

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 involves risks and uncertainties and the 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 strategy. 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 third quarter results. Following my initial comments on the quarter and current market environment Don will cover the financial details. Then I will return with some final remarks before we open the call to questions.

This quarter was similar to our second quarter with strong bookings, near $200 million and a resulting growth in backlog. Our third quarter bookings were again primarily driven by the oil and gas industry, with much of the activity occurring outside the U.S. In most of our other market segments we are receiving inquiries, issuing quotes, and receiving orders.

I would characterize these markets as active and competitive, but there is no apparent growth in activity that we can see. We are somewhat more pessimistic in the outlook for projects tied to municipal money, given the economic turmoil at the federal, state, and local levels.

We ended the third quarter with a solid backlog of $491 million, close to the level of our backlog at the beginning of 2008 and 2009, two record years for Powell in terms of backlog. This backlog positions us well going into 2012.

As we stated on our last call, we are dependent on our customers' ability to ramp-up and move projects forward. These projects are large and complex and are subject to constant review by the customer, so our ability to match customer delivery requirements is a critical part of the value we add to a project.

The capital investment projects that drive our business are quite large but our part of them is comparatively small. However, our solutions are critical to the projects' overall success, which is why the value we add by providing custom engineered and ontime solutions is so important.

So during this process the challenge for us is timing and execution, which is where our project management comes into play. Our enhanced project management capability is the key differentiator as far as the value we bring to a project and an important internal driver of our growth.

We are now seeing delivery schedules starting to firm for those projects we've booked in prior quarters. Therefore, based on these firming delivery schedules we have begun hiring and training people as we prepare for a near-term ramp-up in our business. We expect our revenue and profits to improve between now and the end of our fiscal year.

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

Thank you, Pat.

Our revenues were $142.1 million in the third quarter of fiscal 2011, an increase of $3.2 million compared to $138.9 million in the third quarter of fiscal 2010. Domestic revenues increased by 3.5% to $96.8 million, while international revenues remained comparable at $45.3 million.

Gross profit in the third quarter decreased by approximately $14.7 million to $23.5 million. This decrease resulted from the mix of projects in backlog, which were awarded in a more competitive environment than projects in process a year ago. As a result, gross profit as a percentage of revenues decreased to 16.5% in the third quarter compared to 27.5% in the third quarter of fiscal 2010. We expect continued pressure on gross margin going forward, given the overall mix of projects currently in our backlog.

Selling, general and administrative expenses decreased to 13.7% of revenues in the third quarter of fiscal 2011 compared to 15.2% of revenues in the third quarter of fiscal 2010. SG&A expenses were $19.4 million compared to $21.1 million a year ago. This decrease is primarily due to a decrease in commissions and bad debt expense, as well as lower incentive compensation expense resulting from lower earnings.

Amortization expense was $1.2 million compared to $1.1 million in the third quarter of fiscal 2010.

Net income for the third quarter of fiscal 2011 was $1.7 million or $0.14 per diluted share compared to $10.3 million or $0.88 per diluted share in the third quarter of fiscal 2010.

For the nine months ended June 30th, 2011 revenues were $392.4 million compared to $416.9 million in the same period a year ago. Domestic revenues decreased by 13% to $262 million, while international revenues increased by $15.5 million or 14% primarily as a result of our operations in Powell, Canada.

Gross margin was 19.1% for the nine month period compared to 27% a year ago. SG&A expenses were $61.9 million compared to $62.8 million in the first nine months of 2010. This reduction is due to a decrease in incentive compensation and acquisition related expenses.

Year-to-date our provision for income taxes reflects an effective tax rate on earnings before income taxes of 37.2% compared to 35.1% the first nine months of 2010. The increase in our effective tax rate is primarily due to our inability to record a tax benefit on pretax losses in Canada.

For the nine months ended June 30th, 2011 net income was $6.6 million or $0.56 per diluted share compared to $29.8 million or $2.56 per diluted share a year ago.

As of June 30th, 2011 our order backlog was $491 million compared to $437 million as of March 31st, 2011 and $310 million a year ago. New orders were $198 million in the third quarter, following a record second quarter of $217 million. In the third quarter of fiscal 2010 orders were $136 million.

For the nine months ended June 30th, 2011 cash provided to operating activities totaled $25.2 million. Investments in property, plant, and equipment totaled approximately $4.1 million. At June 30th, 2011 we had cash of $137.3 million compared to $115.4 million at September 30th, 2010. Long-term debt and capital lease obligations including current maturities totaled $5.8 million.

Looking ahead, based on the mix of projects currently scheduled for the balance of the year, as well as our short-term business outlook, we expect full year fiscal 2011 revenues to range between $545 million and $570 million and full year earnings to range between $1.05 and $1.15 per diluted share.

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

Thank you, Don. Let me make a few more comments and then we'll be happy to take your questions. I will briefly summarize our primary end markets.

The oil and gas market continues to strengthen and has been our primary source of backlog growth in this cycle. Our operations in the UK and Canada have certainly enhanced our ability to compete in the international oil and gas marketplace. Our offshore business continues to increase, primarily internationally, but there are more opportunities in offshore oil and gas production outside of the U.S.

In the utility market we are seeing some smaller projects move forward but we have not yet seen any plans for large scale power generation projects. We are well positioned to capitalize on opportunities in that segment when it begins to improve.

The municipal markets remain weak and are unlikely to significantly improve until federal and state governments get a better handle on their budgets. We are beginning to see signs of more activity in some of our smaller end markets, however, those markets remain very competitive.

We are continuously looking for additional ways of taking on more responsibility for the total solution for a project, relieving the customer of issues and concerns and providing greater value to that project.

We remain confident in the direction of the business and in the long-term prospects for Powell. Based on the current business environment, along with our near-term backlog, the current firming of delivery schedules, indications of stabilization in the oil and gas, we expect to see revenues and profits improve between now and the end of the year.

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

(Operator instructions.)

Our first question is from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, Pat and Don.

Hey, John.

I was just wondering if you guys could give us a sense of the -- of your expectations of the length of the cycle, in terms of the backlog starting to build? You certainly indicated that the near-term profit prospects look encouraging. How long would you expect this cycle turn to last?

John, boy, that's a great question. As we've been looking at our past history cycles have been in the three to four-year range. Right now I don't see much that's probably going to change that with the one exception that as Canada continues to be a bigger and bigger piece of the overall oil and gas market conditions and as our participation grows in that area, by natural way that things happen up there, those projects have a tendency to last longer than what we typically have seen down in our Gulf Region area. So I see that one maybe holding up a little bit longer, but I can't see anything that's going to tell us that the cycles aren't going to be somewhat the same as they have been in the past.

That's great news.

And, but Don had a very good point, it is very narrowly focused on the oil and gas. As I mentioned, I don't see anything that says any of our other markets are growing or are seeing growth potential activity, at all.

But the quotation activity in the oil and gas side is in line with what you'd expect at the beginning of a cycle turn?

Yes, I think so. The one thing that we have seen a lot of large projects, what we aren't seeing as much that we would like is that middle term sized project that we can use to kind of flow in and out of our factories to kind of fill-in the backlog gaps.

Okay, and I guess along those lines my second question, you have an awful lot of cash, typically you burn cash as you need it for working capital, can you give us a sense of if that's going to be the case early in the cycle turn or would that be a later cycle event, or should we be thinking about a cash neutral position? Could you just give us some color and clarity on what you think this cycle of cash burn will be like?

When you're looking at the near term, meaning the next 12 months or so, I think you're going to see clearly some build in working capital directly related to the overall size of revenue growth that we anticipate that we'll be coming into with the backlog that we currently have.

When you're looking at it statistically, when our backlog relative to -- I mean working capital relative to our revenues, I think you'll see improved performance over what we maybe would have seen at the beginning of previous cycles. So, therefore, I think that the consumption of cash will be less than we've seen in the past, but to say that we're not going to need some cash to grow our working capital with the cycle that we're beginning I don't -- I think that we will be requiring some. But order of magnitude less than in previous cycles.

Good, thanks a lot, Don. Thanks, guys.

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

Yes, good morning, Pat and Don.

Good morning.

Just looking at your guidance, it appears to imply that gross margin rebounds pretty substantially from Q3 levels, and if I'm correct in that assumption what makes the change from Q3 to Q4? I mean is it as you're ramping up on some of these bigger projects or is something else changing as we move forward?

As we go into Q4, Fred, it's -- a lot of it is the timing of these projects and when these things are working through and when we start them, and which ones are coming off. So it is just a function of the mix of the projects. Again, as we look at it we've got some very competitively priced projects in there, and we've just got to work through them to make sure that they are yielding the margins that we're anticipating right now. Part of that also has been since we have been down from where we thought we were going to be, you know, your cost base, your fixed cost base ends up being a bigger proportion and drains on your gross margin level.

We'll look at some business that -- from increased growth revenues, as well.

Okay, and then along those lines, you continued to book substantial level of projects in the most recent quarter, what was the pricing then and say now in terms of what you're booking now versus six months ago? I mean is that firming up at least in the oil and gas sector?

We see it firming. I mean there's no -- nothing that would say that prices are going to improve substantially overall, but compared to some of the other big projects we've booked, we've seen some small 100 to 200 basis points change in some of our margins that we are booking on. So I think they remain firm, they remain good for us with our customers, and it'll prove out to be good margin business for us as we turn that into revenue and EBIT performance.

Okay. Thank you very much.

Thank you. Our next question is form the line of [Craig Bell] with [Entercab Partners]. Please go ahead.

Yes, good morning. You said that you were beginning to hire and train people as your schedules firm-up there. How would you sort of quantify that? I mean are you hiring a significant number of people right now?

Significant to the overall. I mean we'll be hiring another 100 to 200 people probably over the next period of this growth area that we go through. We hired at the beginning of this year expecting the ramp to be a little sooner than what it's ended up being through the middle part of this year, we've had to kind of take that down a little bit with some attrition and other things. Now as we're looking at some of the performance that we're going to have to do in the next so many quarters we are starting to hire that level and training across the board in our facilities.

Okay, and then a couple years ago when you had the large ramp-up and you started bringing people in you guys had talked about sort of the lag between bringing people on and training them and when they were sort of at full efficiency. Are you going to have that same thing this time or are you bringing, hiring back people that had worked for you before?

We will have the same type of level of timeframe. It takes just so long to bring people back, I mean to bring people up to the speed that we want in every aspect. And, again, it varies. An engineer takes years to bring up-to-speed, and we try to make sure, that's why when we went through the down cycle we try to keep our engineers onboard as much as possible. Our skilled workforce in our facilities have a variety based on what that skill set is.

Okay, great. Thanks a lot.

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

Hi, good morning. This is Karen filling in for Brent.

Hello.

Hi. I just had a couple questions in regards to your new orders and what-not. I was just wondering how -- what percentage of your orders were international, for your international projects?

We can't really -- when we book the orders, you know, quantify whether it is international, but we would see our revenue streams have typically been in the 35% to 45% of our numbers end up being international. These are going to be a little bit higher SKU'd towards that 45% level I would imagine.

Okay, perfect. And then you kind of touched bases on this already, but as we are looking at implied guidance for Q4 does that reflect orders entirely booked from this year or is there -- are there a lot of lingering projects from last year that you're executing on?

Yes and yes. I mean, again, our backlog is always the composite of the different types of market segments that we play in, but those represent orders that we're taking throughout this entire fiscal year and those taken in prior fiscal years.

Okay, you can't really like break it down a little, just (inaudible) maybe?

I really can't. I mean our traction business has always been our longest cycle with multiple years. Our oil and gas business can be anywhere up to 18 months to 24 months cycle.

Okay, I understand. Okay, perfect. Thank you so much.

Thank you. Our next question is from the line of Tom Spiro with Spiro Capital Management. Please go ahead.

Tom Spiro, Spiro Capital. Good morning.

Good morning, Tom.

Pat, I think you've mentioned on a number of calls, perhaps this one as well, that as the mix of our business becomes a little bit more foreign and a little bit more domestic it puts some pressure on our margins. And I was curious what are our plans to address those pressures? Are there things we can do on the gross margin line to try to offset it or things we can do on the SG&A line to offset it? How will we be dealing with those pressures from the mix shift?

Tom, you're correct, whenever we go international -- again, let me make sure everybody understands -- international is, to us, outside of the United States. Then we have to break-down how much of that becomes our [ANCI] type or North American style product versus and IEC, which is the European standard. We are not nearly as a competitive position when it's an ANCI product. When it's an IEC product because of the local, when it's the IEC product that becomes a much more competitive position because of the large multinationals that are out and about in the world in very low cost regions. So that's still the kind of mix and the way we see things.

The way we are trying to address some of that competitive nature in that is again working with the end customer and the EPC to convince them of the value that we supply so that we are not totally competing on price. We have to be competitive but we still need to be above everybody else because the competitive -- the value that we believe we bring to that project. So we continue to focus more and more and higher into the organizations of our end customers, showing them how well we perform and what we bring to them that should take our margin to a little bit higher level.

I see.

Tom, in addition to that, we also are looking at more traditional approaches from a supply management standpoint, aggregating our [VAS]. As we've grown the Company and as we have put in new information systems we've been able to be very successful at driving our material costs down overall, which is somewhat independent of the competitive nature of the market, but we're working in those areas from a material standpoint, from an aggregated purchase standpoint, as well as looking at the throughput of our facilities. Our throughput at the facilities continue to grow as we work to ensure that the effectiveness of our organizations improve year-over-year.

Thanks, that's very helpful. Secondly, Powell, Canada, what are the prospects for Powell, Canada becoming profitable, and it is really strictly a question of volume or are there things that we can do internally that will bring us to profitability even if the volume takes awhile to materialize?

Tom, that was a very good question. There's no doubt we've seen successive improvements over the last three quarters in our earnings level in Powell, Canada, and we perceive that that's going to continue.

Now two things that are definitely happening in that area. More and more of our backlogs will become product orientation as would be typically Powell, as we really attack the oil patch areas up there with our customer base and our capabilities up there. And the other part of that is continuing to emphasize in the traditional service, their service type offering, what are good projects, what are profitable projects, how will we manage those? And we do better on the smaller projects up there than what we do on the larger projects, and we'll continue to work with that team up there to continue to improve their results.

Well, thanks much, and good luck.

Thank you.

(Operator instructions.)

The next question is from the line of John Braatz with Kansas City Capital. Please go ahead.

Good morning, Pat, Don.

Good morning.

As you look forward, you've indicated that your gross margins are improving and strengthening a little bit given the level of business, and but as you look forward into 2012 would you anticipate additional improvement going forward? Are we seeing improvement sort of on a month-to-month basis? Can you talk a little bit as looking forward from today?

I think the improvement that I would look at is our execution improvement. If you're talking about the market side of it I don't see any price improvement in the marketplace that's going to just fall down on this, simply because as I indicated earlier with the markets that are not doing well then that means all of our standard competitors are all trying to go after the markets that we have traditionally served. So that will continue to keep pressures on that price level, but I think we will see continued improvement as our volume ramps up in our revenue stream.

Okay. Okay. On the SG&A side, obviously, there was considerable leverage in the quarter relative to the last year. How would you look at that going forward? Would we continue to see some expense leverage there?

Yes, if you're looking at the SG&A going forward it's just it would be similar to the what we see during this -- the down cycle. We will definitely get leverage on the SG&A. The biggest variable on SG&A is going to be your selling cost.

Sure.

As business continues to grow our selling costs will be more variable, the balance of the -- our expenses will be relatively flat.

I want to go back, though, and comment on the gross margin, as well. What Pat was saying, I agree with, when you're looking at it over a period of time. But, again, I cautioned everyone that when you look at quarter-to-quarter it also is very much dependent upon the mix of projects that are being scheduled and produced in that particular quarter. So it's not the norm within our business that you will see sequential improvements each and every quarter even during a positive period of time because there's orders in our backlog that are better quality orders than others and they don't necessarily go into production in a sequential order.

Okay. Okay. When you look at the backlog and would you say that maybe six months into next year the projects that you bid on a year-and-a-half ago at lower margins will that be out of the backlog by that time?

No, I mean again we have not said that we've got a significantly lower margin in the backlog, there are some lower margined pockets. But back to what Don said exactly, if I have a particular job in the backlog at any point in time that project will be in our revenue stream for multiple months. Unless that job gets better through our execution we're going to book that at its margin level over a three-month period, and so -- or a three quarter period, and so you're not going to see margin improvement because that project comprises a big share of our revenue.

Yes, yes.

Keep in mind, when you're particularly talking about the oil and gas sector most of these large scale projects are 12 months or longer and they're sizable from order to (inaudible). Many of them that we've got in the backlog right now will be 18 months plus or minus. But the level of revenues that come from that project will vary during its lifecycle in our organization. But the orders that are in our backlog, even those that we put in the last two quarters, they will remain in our backlog for up to six to eight quarters.

Okay, all right. Thank you, Don.

Thank you. Our next question is a follow-up from the line of John Franzreb with Sidoti & Company. Please go ahead.

Pat, you alluded to the fact that some of your smaller end markets are seeing some kind of an order rebound. Could you just provide some color on what those smaller markets are and what kind of impact they have on the top line?

Well, again, they're pretty small to our overall top line, but we have seen a few commercial jobs come to us which have something we see on a rare occasion but we've had some nice little jobs come to us in that area. We've actually seen a pulp-and-paper come into our backlog. We've got some wind power into our backlog in this moment in time. And we've actually got some additional government jobs that have come up, and a couple of university jobs.

So it's a smattering of projects across everything, but it just shows that we've got our people out into the marketplace right now looking for every opportunity that we can go grab and add value to in the marketplace and show customers that what Powell can do, starting with our medium voltage equipment and our power control rooms and our systems that we're trying to deliver to them. And we're being successful on some of those. But to the overall scheme of things it's not going to change the whole mix between our oil and gas and our traction business. Those are still the biggies.

Right, right. now is the margin profile for those kind of jobs similar to the oil and gas and traction business, or?

Yes, they're all over the marketplace but they're still competitive. And I would say there's nothing that would say you would look at any of those margins and say, oh, that's something that is really strong and I'd really like to go after more of that, or that's really low. They're comparatively in the same range, but again it comes down to how much additional value we add to those projects.

Okay. Thank you very much. Appreciate it.

Thank you. (Operator instructions.)

The next question is a follow-up from the line of Fred Buonocore with CJS Securities. Please go ahead.

Yes, just in terms of trying to think about top line growth for fiscal '12, do you think that backlog could continue to grow in your fourth fiscal quarter of '11 based on the current quoting and booking trends?

Well, we're down to the last quarter, if you're asking me the question on where we're going to end up on '11 in that area. That could easily come in and go out. We've got quotations and values out there, but as we've always said, Fred, when somebody actually then places the order is highly suspect of being able to predict that. So I mean it could be flat, it could be slightly -- I mean it's going to be in that general area that we have right now and it's just going to depend on what comes in at what point in time. But we do have quotations out there that would support holding that backlog or slightly improving that backlog.

Sure. And that was what I was trying to clarify, just where we are now or where we are as of the end of June, is it a decent baseline as to where we'll be?

This level is definitely what we're trying to hold.

Okay, that sounds good. And in this most recent quarter did you have any very large like $30 million projects or some of the larger type things that you had come into backlog in the previous couple quarters?

I'm trying to think, the overall size this time was probably slightly less than in the previous two quarters, the previous two quarters we had multiple projects that were in the $35 million to $45 million range. This particular quarter I would say the largest project was in the $25 million range.

Yes.

Okay, good. And then, finally, you noted that your domestic revenues were actually up a little bit, and I know in the previous quarter they'd been down. Has something -- have you seen something change in your domestic oil and gas market from, say six months ago?

The revenues that were generated this particular quarter relative to a year ago was solely related to just the scheduling of projects.

Sure. Okay, that makes sense. Very good. Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Management for closing remarks.

Thank you very much, and thank you for joining us today. We appreciate your interest in Powell, and we definitely look forward to seeing you and talking to you again at the end of our fiscal year.

And, ladies and gentlemen, that does conclude the Powell Industries third quarter earnings conference call. If you'd like to listen to a replay of today's conference please dial 303-590-3030. The access code is 4453437 followed by the pound sign. Thank you for your participation. You may now disconnect.

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