Powell Industries Inc (POWL) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Powell Industries fourth quarter earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for your questions. (Operator Instructions) This conference is being recorded today, Wednesday, December 7 of 2011. I would now like to turn the conference over to Ms Karen Roan of DRG&L. Please go ahead ma'am.

Thank you, Lisa, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2011 fourth quarter and year end results. We would also like to welcome our internet participants, as this call 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 email of 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 email 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 December 14, 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, December 7, 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 involve risks and uncertainties and 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 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 Tom Powell, Chief Executive Officer, and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Tom.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our fiscal 2011 fourth quarter and year end results. Following my initial comments on the results and current market environment, Don will cover the financial details, and then I will return with some final remarks before we open the call to your questions. 2011 was the first annual loss for Powell in over 24 years, attributable to the acquisition of the Canadian operation and difficult market conditions. While the Company stumbled on the integration and management of the Canadian acquisition and the overall business performance suffered due to competitive pressures, there are some positives to highlight. We've learned some valuable, yet costly lessons in Canada. We've taken the necessary steps to correct the problems.

As Chairman and interim CEO, rest assured we will not make these same mistakes again. Our interest in Canada has not wavered and we will increase over the next several years. We will be a strong and viable force in the growing Canadian market. There are encouraging signs of increased activity in the oil and gas sector, and an increase in international activity, though it is still a highly competitive market. We booked just over $725 million in new orders during the year, allowing us to enter fiscal 2012 with a backlog of $443 million, which is about $160 million greater than a year ago. Our management team is highly motivated and focused on improving our performance in 2012. And we will not shy away from future potential acquisition opportunities. I'll now turn the call over to Chief Financial Officer, Don Madison.

Thank you, Tom. Revenues were $171.2 million in the fourth quarter of fiscal 2011, an increase of $37.5 million compared to the fourth quarter of fiscal 2010. Gross profit as a percentage of revenues was 16% compared to 22% in last year's fourth quarter. This decrease in gross profit margin resulted from increased market price pressures, higher commodity costs, as well as execution, related challenges on certain large projects in Powell Canada. Selling, general and administrative expenses were $23.2 million, an increase of approximately $1.6 million compared to the fourth quarter of 2010. This increase primarily relates to higher selling costs and an increase in R&D-related expenditures. Amortization expense was $1.1 million compared to $1.3 million in the fourth quarter of fiscal 2010. In the fourth quarter of fiscal 2011, we recorded an impairment charge of $7.2 million for the remaining intangible assets recorded in connection with the acquisition of Powell Canada, and a nonrecurring separation charge of $2.6 million associated with the departure of our former CEO.

In last year's fourth quarter, we recorded a goodwill impairment charge of $7.5 million, primarily due to our decision to exit a joint venture in Kazakhstan, which was part of our Powell Canada acquisition. Excluding these one-time charges, net income for the fourth quarter of fiscal 2011 was $1.9 million, or $0.16 per diluted share compared to $2.7 million, or $0.23 per diluted share in the fourth quarter of fiscal 2010. For the 12-months ended September 30, 2011, revenues were $562 million compared to $551 million in fiscal 2010. Gross profit was almost $100 million, or approximately 18% of revenues in fiscal 2011 compared to $142 million, or 26% of revenues a year ago. This decrease in gross profit resulted from increased market price pressures, higher commodity costs, as well as execution-related challenges on large projects in Powell Canada.

Selling, general and administrative expenses decreased to 15.1% of revenues compared to 15.3% of revenues in fiscal 2010. SG&A remained relatively unchanged compared to a year ago at roughly $85 million. Decreases in short-term and long-term incentive compensation were offset by an increase in depreciation expense. In addition, a separation charge of $2.6 million was recorded in 2011. Amortization expense was $4.8 million compared to $4.5 million a year ago. An impairment charge of $7.2 million was recorded in fiscal 2011 related to the impairment of intangible assets related to Powell Canada. And an impairment of goodwill of $7.5 million which was recorded in fiscal 2010, primarily related to the Company's decision to exit a joint venture, Kazakhstan. Interest expense net of interest income for 2011 decreased by $416,000 to $194,000 compared to fiscal 2010. Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 168%. This effective tax rate resulted from taxes accrued on profits in the US and UK. While we cannot use the losses in Canada to offset these taxes, we will be able to offset against future Canadian profit.

For fiscal 2011, we reported a net loss of $2.7 million, or $0.23 per share loss compared to net income of $25 million, or $2.14 per diluted share in fiscal 2010. Excluding the one-time charges previously discussed, earnings for fiscal 2011 were $6.1 million, or $0.52 per diluted share compared to $32.5 million, or $2.78 diluted share last year. A non-GAAP earnings reconciliation was included in yesterday's press release. As of September 30, 2011, order backlog was $443 million compared to $491 million at the end of our third quarter and $282 million a year ago. New orders were $125 million in the fourth quarter compared to $198 million in the third quarter and to $106 million in the fourth quarter of last year. For fiscal 2011 cash provided by operating activities totaled $15.5 million, and investment in property, plant and equipment totaled $7.3 million. At September 30, 2011, we had cash and cash equivalents of $123.5 million compared to $115.4 million at the end of fiscal 2010. Long-term debt and capital lease obligations including current maturities totaled $5.4 million compared to $6.9 million a year ago. Looking ahead, based on current business conditions and our existing backlog, we expect full year fiscal 2012 revenues to range between $625 million and $675 million, and full year earnings to range between $1.25 and $1.50 per diluted share. At this point, I'll turn the call back to Tom.

Okay, thank you, Don. I'm going to make a few quick comments and then we'll be happy to take your questions. Powell has a long history of successfully managing through the cyclicality of the markets in which we participate. It's not unusual for one market to be active while another is inactive, such as the conditions we are seeing presently. The valleys provide opportunities to prepare, while the peaks provide opportunities to perform. Over our history, we have demonstrated our ability to adapt and grow, while meeting the changing needs of the market and our customers. Regarding Canada, our vision was right, our strategy was right, our integration was poor, and our processes were inadequate. However, we have taken actions and are making necessary improvements in that operation.

We have a talented Board of Directors. We have some of the very best employees in the industry. We have a focused and highly motivated corporate staff. We've acquired additional property at our offshore facility that will expand our capabilities in that market. Our resolve for new and improved products through our expanded R&D efforts will increase our visibility in the marketplace. While I can motivate people with a little butt-kicking, pardon me, we're also refining our incentive compensation, tying it even closer to productivity and accountability. I'm happy to report that our CEO search is well under way with a number of excellent candidates, and we will keep you posted as we proceed. That was rather brief, but at this point, we'll be happy to answer your questions. Thank you.

(Operator Instructions) John Franzreb, Sidoti & Company.

I was wondering about the step-down in the incoming orders for the quarter. Is this a function of seasonality, or are you becoming more selective on the jobs you are taking? Can you just talk about that for a little bit?

John, it basically just comes down to the timing of various projects and where they are in the bid process. The overall activity we're seeing in the marketplace continues at the pace consistent with what we've seen over the last several quarters. The activity we're seeing in this coming quarter, we anticipate to be strong, and expect to see a rebound from the fourth quarter. Where we end up, obviously is still too early to tell, but we do expect to see, as we've talked in the past, that quarters will peak and valley, but overall, I don't think we've seen a substantial change in the market conditions over the last couple three quarters. Tom?

Well, that's right.

And is it fair to assume that the pricing in the jobs that you're accepting is better than the previous?

I probably wouldn't go that far, John. I think that at best, you can see within each market sector, they have stabilized. All market sectors are not the same. The larger projects and the more activity today is really coming from the international arena when it comes to the oil and gas sector specifically. And while relative to last year, it's relatively flat, it's still less than what we would expect to be able to be awarded in the domestic market.

Okay, and you had mentioned in past conference calls that you were adding personnel. Where do you stand in that process or are you fully staffed? Just quick update on that.

Overall -- that we will be doing some continued selective hires. When you're looking at the revenue expectations for this coming year, that it's not back to the crisis or the dramatic changes we saw a few years ago that we're up about employees and getting -- our work force today is about 400 up over this time last year. About 50% of those, I would consider temporary workers versus full-time employees. I think you'll still see some incremental hiring over the next couple of quarters, as we adjust our work forces to manage the demands of our customer's backlog.

Brett Thielman, DA Davidson & Co.

Tom or Don, if I take the high end of your revenue guidance for fiscal 2012, you're looking at a quarterly sales run rate slightly below what you put up in Q4. I guess, based on what you've got in terms of orders, how should we be thinking about the timing of sales with this moderate sequential decline in backlog in Q4? You think in revenues it would be a little bit more back end weighted in the year, just based on schedules and incoming order rates.

Well, right now what we're looking at from a demand standpoint, from a capacity planning is that the first quarter will be impacted by the holidays a little bit, so we're going to have some challenging here in the November-December time period from a revenue perspective. There are some holes that we're trying to deal with in our second quarter because of the order situation, but overall, I would say that you're going to see improvements in the third and fourth quarter based on what we have in the backlog today and what we anticipate getting in the near future.

That's great. Okay, and then just the pickup in orders, I think you sort of suggested you're seeing here in Q1, are these larger than usual orders, or more of your sort of typical sized orders?

It's more consistent with what we've seen in the last couple quarters. There are a couple of larger ones in there. I mean, not huge. But orders of size. And then there's just the normal order flow that we've been seeing over the last couple quarters. Nothing -- there's no single order in there that's going to make or break the fourth quarter, or first quarter.

Noelle Dilts, Stifel Nicolaus.

I'm hoping just to get a little bit of a better sense of some of the factors impacting your profitability looking out to 2012 versus 2011. So, I would kind of like to you talk about three things. First, is just looking at Powell Canada and what you're expecting next year in terms of profitability or losses as it relates to this year and also if you could comment on how losses have kind of tracked through 2011. The second would be just getting a better sense of what you're expecting in 2012 in terms of your core business. Just looking at the margin trends and some of the better price work you have in your backlog and the lower price work and kind of on average what you're expecting. And then the third thing is you mentioned commodity impacts in the fourth quarter. I was hoping -- I'm assuming that relates to some of the copper wiring. And if you could just go into some of the impact in the fourth quarter and what you have baked into your expectations for next year.

Okay. Let's see if I can --

So it's essentially Powell Canada, core business, then commodities, just breaking out those three elements of your profits.

From a Powell Canada perspective, clearly, our objective, and we think that we have appropriate plans in place to be successful and profitable in Canada in the coming year. That is on a full-year basis. Each and every quarter will not necessarily be of the same strength. Our first quarter will -- we expect it to be the weakest quarter as we continue to wrap up some of the projects that are currently in place that have given us some challenges over this past fourth quarter, will carry over into the first quarter. But we do not see those projects going substantially beyond the -- it will have a minor impact into the second quarter as well, but not to the same degree as the first quarter. So when you're looking at the Canadian operations we expect to see successive improvements in each of the quarters as we go forward. As we complete the projects in place and we get the plans fully implemented that we're working towards from an improvement standpoint. Okay. Now, I've lost the second. The second thought you had --

The second is just your core business outside of Canada, you've talked before about having a pretty wide range of margins with the projects that you've been in your backlog. So just overall, your thoughts on how the margins that your core business are going to compare to this quarter?

The core business net year over year, we will see modest improvements. We are, again, as I've described it in the past, we're at the beginning of an investment cycle, where you're getting more projects started than you are completed. So you don't get the same benefit from a ramp-up in business growth and profitability of projects as you do when you start having projects wind down. So I would again kind of relate to where we are in the core business to back to where we were in 2007, 2008 when you are looking at the last investment cycle, and that's kind of where I would anticipate the balance of the business to be in the coming year. When it comes to commodity costs -- I'm sorry.

Go ahead.

In commodity costs, what you're seeing today is just general inflationary pressures. Yes, it is in some of the raw metals, copper specifically, but it's really, I would say as much as an overall general inflationary pressures, that we're getting more pressure today than anticipated in price announcements, price increases from our suppliers than we have seen over the last couple of years. We're factoring that in, into our proposal and in our margin projections. But still, I would just say the general pressures that we're seeing there are greater today than they were this time last year.

Okay, and then can you, given kind of your reevaluation of the second and third quarters, can you give us a sense of what you think the total losses of Powell Canada were in this fiscal year?

Well, they were substantial. Basically, I think the easiest way to look at it, as you can see in our tax provisions that we had to accrue a little over $4 million in valuation adjustments and that gives you an impact of the overall profitability.

Brad Evans, Heartland Advisors.

Yes, thanks for taking the questions. Thank you for giving guidance by the way, for 2012.

Hopefully it will be beneficial to you.

Okay. Don, just within the backlog, are you still feeling comfortable about the problematic portion of that backlog in terms of missed bids is about $10 million? Is that still a good ball park?

What we're seeing is that the existing backlog in this subset of the business in Canada should pretty much turn between now and the mid of our second quarter. About 50% of the backlog is in the Canadian operations is what I would consider subject to question and it doesn't mean that it's all bad. It's just that when you've missed something in the quotation process, sometimes it's late into the process and the execution of it before you realize that there was an error in the preparation of the estimate up front. So that's why I'm having to hedge our thoughts as to what might pop out in the next couple of months, as we complete these projects. At this point in time, anything that we'd know of that is a loss project has been fully accrued at the end of our 2011 year, but for those items that we do not have visibility on, that risk level is pretty much on the backlog that will turn in the next three or four months.

And I would assume the biggest impact would be on the first quarter, correct?

Well, clearly. There will be more activity on the first quarter than the second quarter. But that does not mean that a big gotcha could pop out in the January, February timeframe. Not that we're anticipating it, I'm just trying to be realistic and cautious relative to the short-term outlook.

Okay. Appreciate the color on the order trends. Sounds like November has continued to be as strong as October. The -- can you just give us a qualitative sense of what the pipeline looks like in terms of work on the board? Things you're bidding, is it growing on a year over year basis in terms of the stuff you're bidding on at this point?

At this point in time, I think the best way to characterize what we view the market conditions are, is that we would anticipate walking out of 2012 with a backlog roughly equivalent to where we are starting the year. I don't think you're going to see market growth in the next 12 months, but I hope that we don't see market deterioration. The strength clearly is in the oil and gas sector and at this point in time, we're being very cautious on other industries as to what we're going to see from a growth perspective or a shrink perspective year over year change in 2012.

I'm a little more optimistic than that.

You've got two perspectives.

Yes, it would seem so -- to Don's point then, so you're expecting that the oil and gas markets continue to be very robust and everything else just continues to plod along?

From a big picture perspective, that's my viewpoint.

Okay. Any update on the CEO search? Are you still expecting hopefully somebody to be named in early 2012? Is that still a good time line?

I'll let Tom add to it, but that is the message that the search committee is sharing with the management team, is that things are on track and that based on the current pace, we should be having the CEO on board here early in the calendar year 2012.

Okay.

Let me rephrase that. I'm not speaking January. I'm speaking in the next three to four months.

The target was -- we targeted April to have somebody on board.

Okay, good. The last question for me is just, I realize Canada has been -- I think Canada is going to probably hopefully pay long-term dividends. It's been kind of painful out of the gates and we spent some time talking about Kazakhstan today, too. You mentioned, Tom, that you're reaffirming your M&A strategy, but I would assume that it would make sense to keep that on hold until we name a new CEO, as that person comes on and maybe formulates their strategy? Is that a good way to think about it?

Yes, that's a good way to think about it, but we're not losing our focus. We are examining some opportunities as we go forward. But certainly the new CEO, when he's on board, will need to be able to weigh in on that. So probably toward the fourth quarter or sometime next year we may make an acquisition or two.

(Operator Instructions) Jon Braatz, Kansas City Capital.

Two questions. Number one, I was speaking to a smaller company the other day and they were, they serve the oil and gas industry. And they were talking a little bit more optimistically about offshore oil and gas activity, domestically. What are you seeing on that front?

Well, certainly there are some opportunities out there going forward and I do think it's going to increase, but maybe more internationally than just domestically in the Gulf.

Okay, all right.

We're pretty encouraged.

And then the second question is, we've spoken a lot about the profitability up in Canada. When you acquired Powell Canada, I they were maybe at the time doing $50 million, $60 million in revenues on an annual basis. What can you tell us about the revenues currently, sort of the annual run rate and maybe an expectation as to how that business can grow going forward on the revenue side?

John, the revenues in the current year are in line with the previous years. They are not materially different. If you're looking at our strategy going forward, what you're going to see is in the historical lines of business that are not in Powell's product portfolio in other areas, I would see them being more in a stable mode looking at how we can create synergies and depth within our key clients and maybe trimming some of those that would not be considered strategic accounts from a Powell perspective. The growth will come in the product and systems area, where we have strength and where we will redeploy the product portfolio that we've had here in the US, actually stronger into the Canadian marketplace there in our Edmonton location. To summarize, I think you're going to see the growth come from products and systems where Powell has a strong presence in the oil and gas market overall and then you're going to see a more strategic focus on other lines of business.

Okay. Will you expect then -- maybe this is a little bit too detailed, too specific. But would you expect revenues to grow this year in Powell Canada?

I think overall Powell Canada this year we're expecting very modest growth, a little bit of trimming from non strategic accounts, and a little bit of growth in our strategic and product portfolio area.

Okay, okay.

As far as revenues go, as far as bookings go, we're pretty optimistic about what we're seeing. We're covered up with inquiries and opportunities right now. So from a booking standpoint, I expect to be much healthier than it was last year.

Backlog has grown substantially in 2011 and we expect the backlog to continue to grow at a pace faster than the rest of the Company in 2012.

(Operator Instructions) Noelle Dilts, Stifel Nicolaus.

I was hoping you could just provide a little bit of -- we talked a lot about the oil and gas market, but if you could comment on the trends you're seeing in utility and in industrial.

Transit.

Overall, I would consider most other markets very spotty and very sluggish. Very little changeover year over year. When you're looking at specifically in the most recent period, there has been a small flurry of transportation, public works-type projects come out. Whether that will continue through the balance of the year, I think it's a little bit too early to say because of a funding concern, but we have seen a pickup here in the fourth quarter and early into our first quarter of projects coming out and we'll just have to continue to monitor that to see if it continues on for the balance of the year.

Beth Lilly, GAMCO Investors.

I have a question, just so, I got on the call a little bit late, but I want to just be clear about this. Powell Canada, do you expect the business to be profitable this year?

Yes.

Yes.

At this point in time, the plans that we have in place, we fully expect that we will be able to be profitable in our Canadian operations in the fiscal year 2012, although early in the year, we will still have to be dealing with some of the challenges that are in the backlog that we've also experienced in this previous year. So what I would expect to see is improvements with the first quarter probably being the most challenging, and in the third and fourth quarters of next year, we will start seeing some real improvement.

Okay, great. And the business lost how much money this year, Powell Canada?

We have not reported the specific numbers, but needless to say, it was significant. Overall, you can look at our effective tax rate and see that we had to put up a valuation allowance on the Canadian losses of roughly a little over $4 million.

Okay, great. And I was just wondering if you would comment on -- your early comments were about just in terms of Canada, it's the right place to be and everything. But as you look back on the acquisition, do you think you paid too much? Do you think you didn't run the business correctly? What kind of insights can you give, now that you've had some time to look at business a little more objectively or whatever word you want to choose?

Clearly, when you look back at it with what we know today, I don't think there's anyone that would disagree that we overpaid for the acquisition. We put too much emphasis on non strategic locations, specifically the joint venture in Kazakhstan, which fell apart very quickly. When you're looking at it from a diligence standpoint, that's probably the biggest failure that we had. From a valuation and from not fully understanding what we were getting. When you're looking at the balance of it, I think it really boiled down to predominantly ineffective integration, where we did not dedicate the time, the resources, and the day-to-day involvement of learning that business and the pieces of it that we did not have first-hand knowledge of from other parts of our business, as quickly and as diligently as we should have.

And so would you say now all those problems have been addressed and you're comfortable with where the business is headed and who is running it?

From a strategic direction, clearly we're very comfortable with it. To say that we have all of the operational improvements fully effective that we would like to see, that's what we're still working on.

Okay, and who is running the Powell Canada operation now for you?

Basically we have a person that was a part of the previous business that we have elevated to being the head of the Canadian organization, but there's strong involvement from various functional organizations from here in Houston.

And we've added some talent to that pool.

(Operator Instructions) Brad Evans, Heartland Advisors.

Don, CapEx this year should be about $8 million, is that about right?

When you're looking at the normal CapEx, maintenance CapEx as we've talked about in the past, I would agree, $7 million to $8 million. It should be in line with prior years. However, Tom mentioned earlier in the call that this year we had the opportunity to acquire some available land, land that became available on the ship channel next to our offshore. The capacity constraints that we had there, we thought this was a strategic move that we needed to make to increase that, given what we're seeing in the offshore area. So that purchase, alone was $6.5 million that would be incremental to our normal maintenance CapEx. There are a couple other leased facilities that are coming up toward the end of their lease that we will be going through an evaluation as to whether we should continue leasings, whether we should relocate, or whether we should look at acquiring properties. Those decisions would be outside of the normal CapEx at this point in time.

So $15 million is probably a good place to start?

That's probably more -- mid teens, given the purchase of offshore property, that would be correct.

Okay. Working capital, do you expect it to be a major use or source of cash from the end of the year?

Overall, I would expect -- continue to see cash provided from operating activities in the coming year. So I see positive cash from operations, partially offset with an offset of mid teens in CapEx.

So we could think about $30 million of free cash flow as maybe a good place to start?

That's one perspective. I think you're on the high side, Brad. I think there will be some working capital changes and depending on the final outcome on CapEx as to where our cash position ends at the end of the year, but at this point, I think it still will end up in a growth perspective of the current year.

So maybe $20 million to $25 million would be a bit more realistic?

I would be even a little bit more -- but I'm a cautious person. I'm conservative.

I'm not.

So it depends on who you want to talk to.

Okay. Free cash flow positive, yes?

Yes.

So this raises an interesting dynamic. Your stock today, even though it's up today, so congratulations on that, you're being valued at about 5.5 times enterprise value to EBITDA and consolidation multiples are going off at 8 to 12 times or higher. I just wonder why a share buyback doesn't make sense? You've got lots of liquidity, lots of cash. You can acquire yourself a lot more cheaply than what the private market is. Frankly you're in a bit of a penalty box as far as acquisitions goes. It would seem to me a strong show of confidence to deploy some of your excess funds into a share buyback. Thanks.

Thank you, and I show no further questions at this time. Management, please continue.

Thank you for joining us today. We appreciate your interest in Powell and we look forward to talking to you again next quarter. I would also like to take the opportunity at this time to wish you an enjoyable Holiday season and a happy and successful New Year. Have a good day, folks.

Ladies and gentlemen, that concludes our call for today. If you would like to listen to a replay of today's conference, you may dial 1-800-406-7325, and enter the ID of 4490781. Thank you very much for your participation. You may now disconnect.