Powell Industries Inc (POWL) 2013 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 open for questions. This conference is being recorded today, Wednesday, February 6, 2013. I would now like to turn the conference over to Ms. Karen Roan with DRG&L. Please go ahead.

Thank you Camille. Good morning everyone. We appreciate your joining us today for Powell Industries conference call to review fiscal 2013 first quarter results. We would also like to welcome our internet participants listening to the call simulcast live over the web.

Before I turn the call over to managements, 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 call, 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 February 13, 2013. 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 6, 2013, 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 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 2013 first quarter results. I will make some opening comments, then I turn the call over to Don to discuss the details.

We began our new fiscal year with another solid quarterly performance. The order rate for the quarter of $272 million was is a new record for Powell, including a large project that the sales team had been pursuing for some time. Even without this one large offshore project our underlying record rate was robust due to the closing of many projects that had been in process for a number of months. Backlog at the end of the quarter reached a record $554 million, surpassing the previous record achieved in 2008.

While first quarter revenues were essentially flat compared to a year ago, we were able to deliver much better than expected earnings. That speaks directly to the strength of our organization and our people. Let me just quickly personally thank the Powell teams from around world, for all of your hard work, dedication, and support.

Strength in the US and Canadian oil and gas markets continues to be the major contributor to our business, and we anticipate strong order activity through the rest of this year, and into 2014. Engineering resources across the industry continue to be a constraint, impacting both project award timing and customer scheduling. New investments in petrochemical projects are expected to begin generating inquiry activity later in this year. However, we don't anticipate any significant order volume before next year.

While we are seeing a limited number of utility projects, and still believe there is pent-up demand in this sector, it is yet to be realized in the marketplace. Overall we are optimistic but remain watchful, and we are focused on executing the projects we have in our current backlog.

I will now turn the call over to Don to discuss the financial details.

Thank you, Mike. Revenues were $154 million in the first quarter, compared to $157 million in last year's first quarter. We saw lower domestic activity compared to a year ago, but revenues outside of the United States were relatively unchanged. Gross profit as a percentage of revenues was 22% in the first quarter, compared to 13% in the first quarter of fiscal 2012. This increase in gross profit is the result of favorable operation execution across the Company. Improvements in Canada were also a large contributor to these results.

Selling, General & Administrative expenses increased by $2.6 million to $22 million. This increase is primarily related to increased personnel costs, incentive compensation resulting from higher levels of operating performance, and an increase in sales commissions associated with the mix of orders received. SG&A expenses as a percentage of revenues increased to 14.5% in the first quarter, compared to 13% a year ago. Amortization expense was $415,000, a decrease of $288,000 compared to the first quarter of fiscal 2012,as certain intangible assets have become fully amortized. Our provision for income taxes in the first quarter of fiscal 2013 reflects an effective tax rate of 32.6%. Our provisions below statutory rate is due to the utilization of loss carry-forwards on Canadian income.

Net income for the first quarter of fiscal 2013 was $7.4 million, or $0.62 per share, compared to a net loss of $1.7 million, or $0.15 per share in the first quarter of fiscal 2012.

New orders in the first quarter were a record $272 million, resulting in a record backlog of $554 million, compared to a backlog of $437 million at the end of the previous quarter, and $474 million a year ago. For the three months ended December 31, 2012, cash provided by operating activities was $21 million. Investments in Property, Plant, & Equipment totaled approximately $13 million, which included $8 million investment in our facility expansions. At December 31, 2012 we had cash of $97 million, compared to $90 million at September 30, 2012. Long-term debt and capital lease obligations including current maturities totaled $4 million.

Looking ahead. Based on our backlog and current business conditions, we are raising the low end of our previous guidance for revenues and earnings,and now expect full year fiscal 2013 revenues to range between $700 million and $725 million, and full year earnings to range between $2.25 and $2.50 per share. Included in our earnings outlook is an estimate of $0.25 per share for one-time costs associated with the startup of two new facilities.

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

Thank you, Don. Just a couple of comments before we open Q&A. The two facility expansion projects we have in Houston and in Edmonton are still on schedule, with operational dates planned for late summer 2013. We are excited about both these facilities and the expanded capabilities they will provide us to better serve our customers.

With another quarter under my belt I am even more are enthusiastic about the opportunities for Powell. The main strengths of our Company continue to be project execution, our technical expertise and ability, and the customer-centric attitude at all levels of the organization. There is little doubt in my mind we will succeed regardless of the challenges of the marketplace.

At this point, we will be happy to open it up for your questions.

Thank you, sir. (Operator Instructions). Our first question is from the line of Brent Thielman with D.A. Davidson.

Hi, good morning.

Good morning, Brent.

I was just wondering if you could elaborate a little bit more on what you are seeing on the utility side of things, and also whether you saw, or are seeing any potential impacts from Hurricane Sandy?

On the utility front, there are isolated projects. I would view them as minor projects, maintenance oriented. Nothing that I would consider major new investments from a broad-based perspective. There is no single concentration within one particular geographic area or one utility. When it comes to the impact in the Northeast, we did see, we reported last time about $1 million to $2 million of initial wave of replacement parts. We do have several tenders out at this point in time, in which we expect that we will be doing some more substantial replacement work over the next 12 to 18 months. That could easily be as much as $5 million to $10 million.

Okay. And then just on the offshore side it sounds like you got a nice order there. Are you still seeing a pretty good pipeline of opportunity from that end?

The pipeline in the offshore market is fairly strong, but you need to put it in the context that is also a long cycle market. Many things that we are working on today will not turn to orders in the current fiscal year.

Okay. Thanks, guys.

Thank you. Our next question is from the line of John Tanwanteng with CJS Securities. Please go ahead.

Hey guys. Congratulations on the record backlog in the quarter. Two questions for you. Was this strength there due to at least some relief of engineering constraints experienced by your customers, and second, maybe given the magnitude of the increase in the backlog, why just take up the lower end of your guidance? You did $717 million last year in revenues on $474 million in backlog,are you expecting relatively less orders through the year, or is it just an issue of timing and projects?

First question. Yes, many of the jobs that we were able to book in the quarter were jobs that we have known about, have tendered or placed in our proposal process many months ago and have been following them, and it was as much a coincidence as anything else that they all fell in the same quarter. Yes, I would say the reason that we had the delay continues to be because of constraints across the industry of engineering resources.

That same constraint will affect the execution of projects. Much of the work that we booked in the first quarter we will be working through a lot of these same engineering firms, and clients going through the detail engineering documentation, engineering approvals, and while we do anticipate some of this work converting to revenues with our percentage of completion, recognition of revenues much of this will, actually the bulk of this will actually fall into next year.

Okay. Got it. And then nice job on the EPS and margins as well. Can you give a little more detail on the components of that, and how sustainable are they going forward?

Clearly as we have talked in the past, we work to improve our operating performance. This is a situation where it is no one order, no one project, no one change order that dramatically impacted our results. I would consider the results in the current quarter a very, very favorable mix, but nonetheless true operating performance of the Company. When you are looking at going forward, we have talked about it at the last call, reiterated this time, the second quarter will continue to be a challenge. It will not surprise me if we see a reduction in gross margin as a percentage of revenues in the next 90-day period, but then the second half of the year I expect it to bounce back, and at this point in time I would anticipate it to be north of 20%.

Great. Thanks very much. Congratulations again.

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

Good morning.

Good morning.

Just a little bit about the pricing environment and the margin profile of the new orders. Would you call it better than the most recent six months? Are you taking maybe some jobs at a lower margin because you have excess capacity coming on? Give us a little color on what your thinking is on new order additions, especially considering how high the number is?

Well first to answer the question, we are not taking on low margin business to fill facilities. We are market pricing, and we are trying to improve and raise market prices with each of our tenders. The overall market today I would view it as slightly better, continuing the trend that we have talked about the last quarter,that I would not call it step function changes. But I still feel that the trend of improved price levels is we are realizing those in the marketplace, and that the concern that I have though, when you are looking out beyond a year from now, is that how much of this may be absorbed with inflationary pressures. That is something we are trying to keep our eye on, we are trying to make sure that we factor in the best foresight that we see in materials, but that continues to at this point in time appears to be more of a risk than it may have been at this time last year.

Got it. Got it. If I remember correctly, the original tooling of the new facilities was about to be about 50%, correct me if I am wrong. Is that still the case? Have you changed how much you want to increase or decrease on the production side?

I mean I don't remember the 50% number, so I won't speak to that specifically. But clearly as we have gone through the process we have looked at our backlog, we are looking at the market. We have made some minor change orders on the facilities that we think are prudent, based on what we are expecting in the next 12 to 24 months of work. Have we gone out and made major changes, no. We have just basically taken the information that we have, evaluating our bottlenecks within our existing facilities, and trying to make sure that we are taking it, correcting those to the degree that makes sense with this process.

So you are essentially saying that you are adding a little bit more capacity than you originally planned?

That is correct.

Thank you very much, guys. Good job.

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

Good morning, Don.

Good morning, Jon.

You mentioned about the tightening of engineering resources, and at the same time bidding activity is improving, and you mentioned the petrochemical opportunities maybe later this year. From a personnel standpoint, engineering standpoint, is this constricting your ability to bid on projects at all?

It is not an internal constraint. I am not saying that we are not tight, and that we are not recruiting as well. But at this point in time we are not restricting our tender process as to trying to cherry pick which work we are going to pursue. We are trying to follow the market and take advantage of this wave of opportunities in front of us.

The constriction or the constraint is really more in the outside of our organization with finalizing the specifications, and working through the final configurations of these facilities, because you really cannot configure the electrical power requirements until you have defined all of the processes that are going to need to be managed, and so that the process of finalizing the engineering, even to a point that you could have a realistic tender process, and then the process of going through the final detailed engineering documentation, and getting engineering approval to begin our actual project execution from a manufacturing standpoint, we are seeing that elongate due to constraints within the industry.

Okay. When you look at the petrochemical opportunities that you referenced, maybe compared to prior cycles and so on, how significant might that be from a historical perspective?

Well again, there has not been a major spin in petrochem in the US in probably 20 years. My analogy is looking at it more to the wave of refinery spending that we saw about five or six years ago. At this point in time the indications are from the projects that have been discussed, the ones that already within the engineering firms that they are beginning to work on. If these all go forward it will be every bit as big as the refining investment that went into the Gulf Coast back in 2007 and 2008.

Thank you. One last question. Can you give us a sense of how sizeable that one large contract, offshore contract was?

It was just north of $50 million.

Thank you.

Our next question is from the line of Beth Lilly with Gabelli. Please go ahead.

Good morning, Mike and Don. How are you?

Good morning.

Good, thank you.

I wanted to ask about Canada. You had a fair amount of challenges there, and I am guessing based on your results that the problems in Canada are cleaned up. First question is, how are things up there? And then secondly, was Canada profitable in the quarter?

Canada was profitable. It has been profitable for every quarter since the third quarter of last year. And we are continuing to improve operating results. Right now we have continued to, the backlog is growing. We are increasing our resources to respond to the backlog and all facets of the business, because there are about 3 to 4 different sub-units or product lines that we focus on there, and each one of those are profitable. So have we turned the corner? Yes, I am confident that we he have turned the corner.

Are we to the profitability levels that and the capacity? I don't anticipate that we are going to get to our goals and objectives until probably we get the new facility in place, and then have a few months to actually iron out the kinks that will occur with that transition. I think we will be optimized probably sometime in 2014. But to answer your question, we are pleased with where we are. The team up there has done a great job of getting the business cleaned up. We have got a good group of folks, and they are meeting our expectations.

And the new facility being in place, how will that help you with your goals and objectives? Is there just such a backlog of work and you don't have the capabilities to do the work?

Right now what we have with our existing facility is predominantly in assembly and test operation. We are having to rely on our fabrication facilities in the US, basically here in Houston, so that when you are looking at trying to manage projects and ship a significant amount of your metal work from Houston to Edmonton, there are complexities in the process, and there are costs associated with it as well.

With the new facility that is currently under construction and the equipment that we have on order, we will have basically the same capabilities that we have in our Houston Mosley facility. We will have the ability to do all of our own sheet metal, the paint finishing, all of the mechanical assembly, as well as the electrical wiring and test, in delivering the project from our Canadian facility with complete, with the new capabilities. They will not have the same capacity as Mosley, but it will have the same capabilities, and that is what we really need to finalize our efforts to reach our long-term objectives.

Okay. Okay. And Don, we have spent a lot of time in the past talking about your gross margins and then historical operating margins, and getting back to the high-single digits. So gross margins of 22% if in the past when you have hit those margins, it has mainly been because of one-time items or some closeouts, and make-ups in the quarter. The 22%, did you generate that strictly from just sound business practices, or were there one-time items in that?

There were no one-time items of any material amount. When you go back and look through the closeout variances, the change orders, at this point, this particular quarter I would view them as all offsetting, which you would want in the ideal situation in the 22%, with the mix of business that we in the quarter was the true operating results of the business.

Okay. Okay, good. And then I just wanted to make sure, so there is $97 million in cash on the balance sheet, and there is $4 million in debt, did you say?

Yes, that basically relates to the industrial revenue bond we had since 2000-2001.

Okay, terrific. Thanks so much.

Thank you. Our next question from the line of Noelle Dilts with Stifel Nicolaus. Please go ahead.

This is actually [Stephen] on for Noelle. How are you guys doing?

We are doing fine, thank you.

Ex-that $50 million one-time large project, still some pretty good strength in the quarter. Where is this being driven from specifically within the oil and gas segment? Is it coming from pickup in downstream, or is it also other offshore work?

There is some offshore work in there, but I would characterize it as leaning towards production both onshore and offshore. A lot of what we are doing up in the Canadian oil sands would be viewed as production type work, but there is some refining as well. At this point in time, petrochem is still very, very minor in isolated projects of a very small nature. Nothing as far as what we have been talking about as far as major investments.

Okay, great. Thanks. Then on the process control systems, another nice sequential pickup in backlog after a really large increase last quarter. Is that still coming from the toll road financing, or what is driving that? And do you expect that segment to be profitable over the back half of 2013?

Clearly with the growth, the type of work that we are being awarded today is consistent what we talked about is heavily driven from private financing. There is some municipal work in there. There is some public works and some transit work in there, but when you look at the growth it has skewed towards the private financing.

The backlog growth is giving us a very solid base now to work on. Much of that will actually come into what you would consider the heavy execution phases of the projects as we approach the second half of the year. And yes, we do expect to see operational improvements as we start working through that backlog.

Great. Thank you.

Our next question is from the line of Alex Yaggy with Cortina Asset Management. Please go ahead.

Good morning everyone. I have a couple of questions on the capacity expansions just for clarification. The $0.25 that you have put in, first of all, did any of that go through this quarter? And where are is that actually going show up in the income statements as you report that? And then secondly, as you go into 2013, or to the next fiscal year, what does that number become?

I am not sure I got all of the questions. But the answer to the question, there was a very minor amount of that has gone through in the first quarter. I would say clearly less than $100,000, so it is insignificant at this point in time. There may be another small amount of similar size in the second quarter. The vast majority of that $0.25 impact will be when we start the actual production transfers from one facility to another in gearing up the startup of the new facilities. That will predominantly be in the fourth quarter. If I had to guess, probably two-thirds in the fourth quarter, one-third in the third quarter.

Okay. And then the next fiscal year--

The second question.

Into the next fiscal quarter, or the next fiscal year the $0.25 what would you you expect that to be? Is there ongoing expense after everything is up and running, or will it be much cleaner?

It will be clearly much cleaner. The $0.25 is the estimated cost of the two relocations and startups of production. Our goal is to have that all incurred in the current year. There could be some late costs that come in that would, because of just the timing of the access to the facilities that could roll into our first quarter. But the number should be the same. So if we ended up with a nickel, $0.20 in the current year , there could be $0.05 that would roll into the first quarter. It would not be incremental, based on our estimates.

Okay. And then just finally as those facilities are up and running, have you put any clarification as to what kind of revenue opportunity that would lead to?

Short-term is going to be from the Canadian facility going to be more profit improvement. Clearly the market up there is very strong. And we will probably be able to ramp up that facility even faster than what we would have given the market situation. With the ramping up of our new facility here in Houston, a lot of that is going to be dependent upon what we see with the market, and potentially the petrochem projects coming at us in 2014 and 2015. But no, we have not tried to quantify that at this point this time. It is all going to be driven based on the market opportunities.

Okay, thank you.

Our next question is from the line of Kevin Leary with Spitfire Capital. Please go ahead.

Hi guys, good morning. A couple of questions. First on gross margins. They have been running at the 22-ish percent range for the last three quarters now. I know you said they might dip a bit and then go back up above 20 in the second half. It has been pretty consistent. I am wondering, what has to happen from here either internally at the Company or in the marketplace for gross margins to expand from where you have been running?

It is incremental steps. We have got to continue to pursue our operational improvements and cost reductions that are planned in the current year. We have got to realize some benefit in the price improvements that we are seeing in the marketplace. We need to make sure that we manage the containment of materials cost inflation. But I would view most all of what we are talking about doing is what you consider basic business processes that we have got to continue to manage.

As the backlog goes through, and the better that we can plan and execute schedule, the more we can minimize changes in our production plan as it relates to our clients overall project schedules, the better off we are going to be. Clearly I would, I am trying to characterize that the 22% that we saw in the last quarter was a more solid 22% than the previous quarters. The two previous quarters clearly had some back end loaded project improvements that benefited both the third and the fourth quarter. We did not see that in the first quarter.

Okay. That is helpful. And then just generally speaking about end markets, we are hearing a little bit about petrochem maybe picking up further out, utilities still a ways out. Generally speaking, are there any significant gross margin differences among the various end markets?

From a Powell perspective, the better projects are the more complex projects. They fit our business processes, and allow us to generate better margins on basically the same market price level. So from a Powell perspective, it is complexity. The more value add that we can provide from an engineering project management perspective, the more sophisticated the electrical scheme is, then the better it fits who we are, and the profits we are able to derive from that project.

Okay. Thanks. And then last question, obviously the big ramp in backlog, working capital was an obvious use of cash last year. Does the big ramp sort of change your outlook about either source or use of working capital for 2013? Thanks.

When you are looking at it from the macro perspective, no. Our business processes are such that we are able to minimize the growth in working capital relative to revenue. Does it put some additional pressure on it, yes. The big issue is always going to be with our working capital is the timing of a particular project, because even if you are able to obtain milestone buildings that are very favorable up front, there is always is some retention that most every client wants to hold back towards the end of a project. And so on any one given day where we stand on those relative to starting new projects could impact working capital. But to answer your question, I would expect some additional pressures, but no material changes from our previous thinking.

That is helpful. Thank you.

(Operator Instructions). Our next question is a follow-up from the line of John Franzreb. Please go ahead.

Mike in last night's press release, you said you anticipated strong activity through this year and into 2014. I wonder if you could tell us what you would consider a good incoming order book, or strong incoming order book?

I think you will see it continue. Of course, this record of $272 million, we won't continue at that pace. I think if you go back over the last three or four quarters it ought to come in at that level. For the year, as you recall last year we had our second best bookings year ever last year. I think this year will be at or above that, and probably close to another record on the bookings side.

Great. And you had a settlement benefit or potential settlement benefit from your dispute in Canada we were talking about at this time last year. What is the status of that, Don?

I will answer that one. Basically the process is continuing. It is going through the claim process as defined in the contract. As with any type of claim process, when you start going through mediation, arbitration, it always seems to take longer than you would think it would. At this point in time, I don't expect final resolutions before late this year. Whether or not we can get it resolved before the end of September or not, I am not sure. But we are still view our position as very favorable. We clearly expect to recover some of the costs that we incurred that brought down our first quarter of last year. But as far as whether that will benefit the current fiscal year or benefit fiscal 2014, at this point in time it is too hard to tell.

Okay. Thanks a lot, guys. Great quarter.

Our next question is a follow-up from the line of Beth Lilly. Please go ahead.

I wanted to, Don, you made some interesting comments about the gross margin, and I just wanted to go back to that, so the 22% is a better quality this quarter than it has been in the past. Are we to imply from your comments that there is an opportunity down the line to expand that 22% higher?

Clearly that is our objective. We have talked about this over the years. Our objective is always to outperform where we have been in the past. We have been at 22% in the past, so our goal is to outperform it. Are we working hard to accomplish those objectives? Yes. Do I think we will be successful, I think we will be able to continue to improve gross margins, but not necessarily on a sequential quarter-by-quarter basis.

In these new facilities that are coming up, are they going to help you in terms of expanding that 22%?

I think the net impact will be positive. Clearly there will be bumps in the road as you start them up, but if the market is as strong as we envision it for the next the couple of years, and we can get those facilities and can get rid of some of the inefficient costs that we currently have, we are very positive on the impact of what these facilities will provide to both Powell and to our clients.

Okay. And then I wanted to follow-up just on John's question in terms of the claims process with the customer. So you are done, you finished doing the work for them a couple of months ago, correct?

Several quarters ago. We have demobilized and we are completely offsite, I believe in the second quarter of last year.

Okay. And you received to the extent, did you receive any money from them for the work that you did?

Yes, yes. Basically we have received the majority of the original contract, up to when we started negotiating getting a more contentious on change orders. The process broke down in the final few months, and basically, our client we know are pursuing claims with the owner, as well as we are pursuing claims with our customer. So it is a process that is going through and that the majority of the funds of the base contract have been paid, but not 100%. There is still a couple million dollars of the base contract that was never collected.

The real issue is the contention between the extra work that occurred because of scope changes, as well as the extra costs incurred because of incomplete engineering data, and availability of the site for us to actually do our job. There was a lot of customer provided material on this job. This was a complex job that you will not be able to explain in a five minute conversation, but the bottom line is that most of it evolves around defining scope changes, and the delayed costs, and what we are entitled to under the basis of our contract.

Okay. And have you quantified what those change orders are that they didn't pay you for?

No, we have not.

Okay. Great. And were there a lot of legal costs in the quarter?

Clearly there are some legal costs. We anticipate that we will probably incur in the current fiscal year a few hundred thousand dollars. It is material, but it is not going to change the outcome of the year.

Okay. Terrific. Thanks so much.

(Operator Instructions). I am showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

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 Industries. Goodbye everyone.

Ladies and gentlemen, this concludes the Powell Industries first quarter earnings conference call. If you would like to listen to a replay to today's conference, please dial 1-303-590-3030 with the access code of 4592331. ACT would like to thank you for your participation, you may now disconnect.