Powell Industries Inc (POWL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries fourth-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. This conference is being recorded today, Wednesday, December 5, 2012.

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

Thank you, Camille, and good morning, everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2012 fourth-quarter and full-year 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, and would like one, 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 Powellind.com, or a recorded replay will be available until December 12, 2012, 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 5, 2012, 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 expectation of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures; sensitivity to general economic and industry conditions; international, political and economic risks; availability and price of raw materials; and execution of business strategies. For further information, please refer to the Company's filings with the Securities and Exchange Commission.

Now, with me this morning are Mike Lucas, 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 Mike.

Thank you, Karen. Good morning, everyone. Thank you for joining us today to review our fiscal 2012 fourth-quarter results. It's my pleasure to join you this morning for my first Powell earnings call. I'm very excited to be part of the Powell team. During my first 100 days on the job, I've been meeting and talking to our teams and our customers, visiting our facilities, and gaining a better understanding of the various successes and challenges of our business. I also look forward to meeting those of you in the investment community at some point.

Let me make a few opening comments, and then I'll turn the call over to Don to discuss the financial details. It's certainly a pleasure to report to you this morning solid financial performance from Q4. It was an excellent quarter, and a positive way to end the fiscal year and to begin fiscal '13.

Strength in the oil and gas market's been a significant contributor to our record revenue and solid earnings performance this year. And we continue to see the majority of our activity in this sector. Orders for this past year were $711 million, the second-best year in the history of the Company, and only $14 million short of the all-time record of $725 million in bookings from fiscal '11. I would like to thank Tom Powell for his leadership this past year, as he returned to the role of CEO in 2012.

And I would also like to thank all of our teams around the world and in all of our businesses for their dedication in delivering these results. It's very much appreciated. Order rates for the first two months of fiscal '13 have continued at a pace consistent with the past two years. But customer engineering resource constraints across the oil and gas sector make the timing of awards very difficult to predict.

We're also watchful as to the impact of global economic pressures could have on the business. It's clear that economies here and around the world are being affected by financial issues, which are also likely to impact our customers' investments and project timing. Our challenge here at Powell is to stay focused on operational execution, stay focused on financial execution during this environment.

One final note before I turn it over to Don. We're also supporting our customers in the northeast, as they continue to restore normal operations and repair electrical systems following the devastation of Hurricane Sandy. To date, we have provided approximately $2 million of repair parts and services to customers in the region. We are continuing a number of discussions with utility and transit authorities in the region, in particular. It's likely we'll see additional work as mid-term remediation plans are enacted.

I'll now turn the call over to Don to discuss the financial details. Don?

Thank you, Mike. Revenues were $184 million in the fourth quarter, compared to $171 million in the fourth quarter of last year. Gross profit as a percentage of revenues was 22.5% in the fourth quarter, compared to 16% in the fourth quarter of fiscal '11. This increase in gross profit is primarily from higher production volumes and reduced cost on projects due to operational efficiencies. Operational improvements in Canada were a large contributor to these results.

Selling, general, and administrative expenses as a percentage of revenues decreased to 12% in the fourth quarter compared to 14% in the fourth quarter a year ago, primarily due to higher revenues. SG&A expenses were $23 million, unchanged from last year's fourth quarter.

Amortization expense was $488,000, a decrease of $606,000 compared to the fourth quarter of fiscal '11. This decrease is a result of a lower balance intangible assets following the impairment charge recorded last year. Our provision for income taxes in the fourth quarter of fiscal '12 reflects an effective tax rate of 34.5%.

Net income for the fourth quarter of fiscal '12 was $12 million or $0.99 per share. This compares to the fourth quarter of fiscal '11 adjusted net income of $1.9 million or $0.16 per share, which excludes charges incurred in the fourth quarter of fiscal '11. A non-GAAP earnings reconciliation was included in our earnings release.

For the 12 months ended September 30, 2012, revenues increased by nearly 28% or $155 million, to a record $717 million compared to revenues of $562 million in fiscal '11. Domestic revenues increased by 9% to $413 million, while international revenues increased by $121 million or 66%, primarily due to the size and the number of international projects in the oil and gas sector.

Gross profit increased by 40% or $40 million, to $140 million in fiscal '12. Gross profit as a percentage of revenues increased to 19.5% compared to 17.8% in fiscal '11, primarily the result of project management, favorable operation execution on certain large projects that were completed or near completion at year end. The increase in business activity in fiscal '12 also improved our ability to leverage operating costs.

Selling, general, and administrative expenses were $90 million in fiscal '12 compared to $85 million last year. This increase is primarily related to increased personnel costs and variable compensation resulting from higher levels of operating performance. As a percentage of revenues, SG&A expenses decreased to 12.4% from 15.1% in fiscal '11.

Amortization of intangible assets decreased to $2.6 million in fiscal '12 compared to $4.8 million in fiscal '11. This decrease resulted from the impairment of intangible assets recorded in fiscal '11.

Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 38.5% compared to 168% in fiscal '11. The effective tax rate for both fiscal '12 and '11 were negatively impacted by our inability to record the tax benefit related to pretax losses in Canada.

For the 12 months ended September 30, 2012, net income was $29.7 million or $2.49 per share compared to adjusted net income of $6.1 million or $0.52 per share last year. We generated new orders for the fourth quarter of $186 million, resulting in a healthy year-end backlog of $437 million. This compares to $433 million at the end of the third quarter, and $443 million a year ago.

For the 12 months ended September 30, 2012, cash used by operating activities was $6 million, and investments in plant, property, and equipment totaled approximately $29 million. At September 30, 2012, we had cash of $90 million compared to $124 million at September 30, 2011. Long-term debt and capital lease obligations, including current maturities, totaled $4 million.

Looking ahead -- based on our backlog and current business conditions, we expect full-year fiscal '13 revenues to range between $675 million and $725 million, and full-year earnings to range between $2 and $2.50 per share. Included in our earnings outlook is an estimate of $0.25 per share for one-time costs related to the start-up of two new manufacturing facilities.

Now let me turn the call back to Mike for a few final comments.

Thank you, Don. As a leading company in the custom design, manufacture, and service of electrical solutions, with a long history of innovation, I'm very excited about our future opportunities. We have the ability to respond to short-term customer demands, and we're also focused on the longer term, making strategic investments to prepare and position ourselves to support growth in our markets.

In support of the long term, we have two significant facility expansion projects under way, one in Houston, Texas, and one in Edmonton, Canada that will further strengthen our capability to support the needs of our customers. Both of these projects are on track, with operational dates scheduled for late summer of 2013.

With only about 100 days in this role, it's a bit too early for me to have any significant comments on the future initiatives of the Company. I can tell you, however, that any initiatives will be oriented toward building on the solid Powell foundation and successes, rather than any dramatic changes in direction.

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

(Operator Instructions)

John Franzreb with Sidoti & Co.

I guess the first question is regarding the fourth quarter. Two consecutive quarters now of impressive gross margins, certainly seems higher than you were pointing to, Don, when we talked a quarter or so ago. What's going on in the gross margin profile in the fourth quarter that has it at this 22% and change level?

Fourth quarter we saw a lot of benefit from our operational cost on the handful of projects as they neared completion. We had two or three projects, large scale projects that went through our facilities with -- very smoothly, very efficiently. We clearly always from a planning standpoint say that once we go through our [ring-out] testing that there will be some things that we will have to go back and rectify. Those costs were very nominal in these jobs and as a result, we were able to report a very favorable margins in the quarter.

Then I guess as the natural follow-up with your improved manufacturing efficiency with a backlog that's essentially flat year-over-year in sequentially and a sequentially better incoming order book of 186 versus 183, why the generally [tepid] guidance number for the year ahead?

There's two issues there. One is the -- when we're looking at the margin realization in projects in our backlog, we have to do it from a perspective that there won't be the extreme favorable anomalies to when it comes to the end of a job. The second issue that we have, and I think we talked about this a little bit at the last call, is that with the orders in the third quarter, we are looking at some challenging months in the first half of the year as far as consistent flow of product through our facilities, based on the delivery requirements of certain projects.

So between concerns in the December-January time period, plus just looking at our projects in the backlog from a prudent perspective on estimating the costs to perform these jobs, is the way that we derive the guidance that we have in the press release.

Thank you very much, Don.

Jon Tanwanteng with CJS Securities.

Congrats on the quarter.

Thank you, Jon.

Regarding the margin improvement, just a little more detail, if you can. Could you tell us what portion of that was due to timing of the projects that were being completed, as well as what was the execution, and were there any recoveries in Canada during the quarter?

First off, there were no recoveries from the project that we've talked about in the past in Canada. Those efforts are still ongoing and nothing in our outlook related to that recovery. Regarding the -- I'm sorry. The first part of the question again was the timing of --

Timing versus the execution.

Timing was, I would say, of revenues in the quarter were not materially different than what we expected. The key projects that were planned for the quarter were the ones that we executed to. I think we did make some good progress of not having a few projects carry over because of the efficiencies of getting them through the organization. The vast majority of it, though, was related to lower costs than expected on the final execution of these projects.

And then on the guidance, even though your revenue line it seems to be a little bit flat to down, it seems you're expecting some of this margin improvement to continue. What part of that is recurring or nonrecurring, I guess?

Well, again, when you're looking at a project, it's not like an operational efficiency that you would have in repetitive manufacturing. Clearly, when we're looking at the margins in our backlog and the margins of projects, we have seen improvement year-over-year and we expect to see year-over-year improvements again in '13.

Okay. Thank you.

Brent Thielman with DA Davidson.

Don or Mike, on the backlog, how much is scheduled to be delivered in fiscal '13? And then how much is into sort of '14 and beyond?

When you're looking at the rollover into '14, I don't have it here in front of me. It is probably about $50 million to $75 million that will roll over into fiscal '14. Big part of that is going to be the backlog related to our public works sector and typically there you're going to have a two to three-year cycle as far as completing the work.

So it is -- that's normal subset that does extend out that I'm speaking to. That is slightly higher than where we were this time last year. I would say it's probably up $25 million to $35 million.

And then in terms of orders in the oil and gas sector, any new areas within that market you're beginning to benefit from that maybe you hadn't experienced before?

Again, that's a mature industry and mature sector. We have long-term relationships. So I don't think there's anything that I would consider out of ordinary, out of line with what we've talked about in the past.

Okay. Thanks.

(Operator Instructions)

John Franzreb with Sidoti & Company.

Backlog picked up in the process control business in the quarter rather substantially sequentially. Two parts. One, is the new business going to be profitable? I know that's been essentially running at break-even for quite some time. And two, where is it coming from? A little more color would be great.

Basically, the profitability clearly in that segment has to do with the volume, to a great extent, making sure that we can cover the overheads in that segment. That segment has struggled the last year or two because of the funding available. We have a couple of projects that have come into the backlog this year. That is part of the growth in the backlog year-over-year that we spoke about a minute ago.

And actually, what it is, it's coming some from P3. It's the public financing of toll roads and so we're actually getting some private money going into traffic management and we've been successful in capturing some of that business so that while the municipalities, the public sector, can't necessarily fund it upfront, we'll be paying for it through our tolls over the coming years.

So is it like a revenue rate on or above $9 million, Don, that gets you significant contribution from that business? Is that the way to think about it on a quarterly basis?

The contribution will improve in '13 relative to the prior years, yes.

You said that was some of the utility and municipal spending that you referenced in your prepared remarks was PCS. So is it all PCS or is there other spending on E&I that's going into utility and municipal spending?

John, I'm sorry, you lost me. Ask the question again.

Yes, in your prepared remarks, you mentioned that there's been improved utility and municipal spending, some of it related to Sandy, some of it's from other sources.

Basically, no. Let me answer that question first. At this point in time, I'll have to go back and look at the prepared comments, but there has been not any significant improvement in non oil and gas spending in recent, the recent period. For the fourth quarter, the utility spend, the public sector spend, with exception of this P3-type project I spoke about, which is technically not public, it's a public sector project, but not financed by municipal funds, there has been very flat.

We did pick up $2 million of work so far related to the Northeast, helping restore operations on the electrical infrastructure. We are still in conversations and there is clearly salt water damage to equipment in the area that we are working with several of the agencies in the area that we expect will convert to some projects for us over the next 12 months. But they are trying to -- still going through the short-term remediation efforts at this point in time.

You actually answered both questions I was looking for, Don. That was great. And one last question. It sounded like, Mike, that you said that both facilities will be completed at the end of next summer. Is that a change in the initial time line? I thought one was going to be done midsummer and the other one was going to be done closer to end of September, early October.

They are not materially changed. They are both, I would say, running two to four weeks behind where we would have liked to have seen them, but they are both still scheduled to be in our fourth fiscal quarter.

Okay. Great. Thank you very much, guys. Keep up the good work.

Thank you. Jon Braatz with Kansas City Capital.

Don, could you talk a little bit more specifically about the Canadian operations and the relative profitability there and where it might stand in relationship to where it was last year and where you think it could go?

Well, we'll talk to some of that. First off, the Canadian operations was profitable for the second half of the year, but we did -- we're not able to completely overcome the hold that we position ourself for with this one large project in the first quarter, so that we have recovered from an operational perspective some of those costs that we incurred in the first half of the year. But when you're looking at the full year, it still ended up in a loss position for fiscal '12. The improvement that we've seen in the second half of the year, we fully expect to continue to grow upon that in fiscal '13. Fiscal '13 will, we are projecting and expecting it to perform better than it did in the second half of '12.

Keep in mind that part of the one-time costs that we are looking at in our outlook is going to be incurred in Canada disproportionate to that in the US. The costs expected to move into the new facility up there are expected to be somewhat higher than here, a little over the 50% mark, not including that. But even including that in my thinking, Canada next year will be profitable.

How much in your two capacity facility expansions, how much capacity are you adding? Is there a way to quantify that?

Well, when you're looking at square footage in Canada, it is probably going to be in the neighborhood of somewhere in the neighborhood of three times what we currently have. Keep in mind that from an operational perspective, though, we're backstopping a lot of the efforts and needs to supply product with operations in the US, particularly here out of Houston. So, that we could not be delivering today what we are delivering in Canada if we weren't paying for the premiums of shipping it from the US, both parts and some finished product. So from a revenue perspective, the Canadian operations will grow year-over-year in '14, but a lot of it will also come to the improved profitability because of the incremental costs we're having to incur to support that area from a revenue standpoint.

When you're looking at the US, the expansion, what we have done is that we are in the process of exiting some of the leases we have here in the US. The facility that we have is intended to allow us to grow over the next three to five years, but initially, what we will do is some of it will be for short-term growth, but it will also reduce our lease costs that we have here in the greater Houston area.

Don, any thoughts on how significant those incremental costs are that you spoke of in the Canadian operations by having the product produced in the US? Is it a meaningful amount that would move the needle in, let's say, 2014?

Well, it would make a meaningful number from a Canadian perspective. When you're looking at the weighted average of the entire Company, it would probably be nominal, particularly in '13. Well, I'm thinking even '14, because keep in mind, this facility will be in true operations for a very short period during fiscal, our fiscal '13, which ends in September.

John Reilly with ACK Asset Partners.

Wow, you just cut the former questioner off quickly.

I would say you must have a lot of weight, John.

I must have pressed the right button. Just a follow-up to what he was asking, then. So, we know Canada's three times the size. You're shipping out of Houston. We're going to reduce some lease expenses. Is there an incremental revenue contribution in '14 from these two facilities we can think about?

The incremental revenue will come from the market, not the facilities. At this point in time, we are seeing strong investments in the oil and gas. We fully expect that will continue into '14. But to sit here and say that the facilities are going to create revenues, we got to keep things in perspective. The market will create the revenues.

So talk about, then, on the oil and gas. I was surprised to see booking -- a book to bill of 1, which was pretty darn good. And I know oil and gas is carrying you. Just talk about what you're seeing, what you're bidding on right now in the offshore platforms and what you're kind of seeing in that end market.

When you're looking at the inquiry rate, the request for quotations, the dialogue that's going on in the planning stage, it is consistent with what we've seen over the last couple of years in the oil and gas sector. It continues to be strong and robust and there's a lot of bullish attitude regarding investments that are going to be made in the future.

The challenge that we have is the fact that we are still seeing delays in information coming to us on particular details to finalize quotes, to make awards and, again, we're -- our interpretation of it from the information that we do have, it's the engineering constraints that we've seen in the marketplace and the industry sector that we've talked about in the last couple of calls that -- So, the timing of these awards is still very difficult and so I expect that we'll still see lumpy orders as we go into fiscal '13, but when you're looking at the overall strength of the activity, I would say we're not seeing any softening in the oil and gas sector.

And then just when I look at the petro-chem spend that they are talking about in the Houston area and I know there's a number of large projects, when do you think that the quotation activity and award activity for that, for those facilities would potentially come for switchgear?

So I say, keep in mind that when you're looking at the electrical infrastructure, it's going to be one of the last major packages bid. So based on what we think will happen, we don't think that we'll be bidding those projects until the second half of '13. And most likely would not significantly impact revenues before fiscal '14.

Got it. Thanks a lot. Congratulations for joining the company and great quarter. Thanks.

Thanks, John.

Jon Tanwanteng with CJS Securities.

Actually, most of my questions are answered. Thank you.

(Operator Instructions)

Brent Thielman with DA Davidson.

Don, for modeling purposes, when should we expect to sort of think about the bulk of the startup costs to show up in fiscal '13?

There will be a little bit of that will be incurred in the first half, but -- I mean, 75%, 80% of it will be in the second half of the year. Our third and fourth fiscal quarter.

And then just the tax rate you're assuming for fiscal '13 then?

Well, that one is the more difficult one. When you're looking at the non-Canadian earnings, it's going to be more in the 34.5% to 35%. Given the fact that there is no tax effect on earnings in Canada, that can skew that number relatively dramatically. So it's even hard for us to estimate the timing and the impact on a quarterly basis from an earnings perspective there.

Okay. Thank you.

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Well, thank you, everyone, for joining us today. We look forward to talking to you next quarter. And as always, we very much appreciate your interest in Powell. Have a happy and safe holiday season, everyone. Bye-bye.

Ladies and gentlemen, this concludes Powell Industries' fourth quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-303-590-3030, with the access code of 4578177. ACT would like to thank you for your participation. You may now disconnect.