Powell Industries Inc (POWL) 2013 Q2 法說會逐字稿

Welcome to Powell Industries second quarter earnings call. (Operator Instructions). This conference is being recorded today, May 8, 2013. I would now like to turn the conference over to Karen Roan with Dennard-Lascar Associates. Please go ahead.

Thank you, Ian. And good morning, everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2013 second quarter results. We would also like to welcome our internet participants listening to the call simulcast live over the internet. Before I turn over the call to management, I have the normal details to cover. If you do not receive an email of the news release issued yesterday afternoon and would like one, please call our offices at Dennard-Lascar Associates and we will get one to you. That number is 713-529-6600.

Also, if you would like 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 be available by web cast by going to the Company's website at www.powellind.com or a recorded replay will be available until May 15, 2013, 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 May 8, 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 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 second quarter results. I will make a few opening comments then I will turn the call over to Don to review the financial details. And when Don is finished we'll go directly to your questions. Revenue for the quarter was consistent with our first quarter and in line with our expectations.

Orders for the quarter were a modest $124 million following our record setting first quarter bookings level. Orders for the first half of the 2013 remain healthy and are slightly ahead of last year's levels. Outside of North America competitive pressures are growing. Economic conditions in Europe and in other parts of the world make a portion of our international projects, especially those projects that specify IEC

products, make them challenging for our UK based business resulting in fewer projects and very competitive price levels. In North America forecasting and scheduling our projects continues to be a challenge due to customer resource constraints across the industry, especially in the areas of project management, engineering and construction trades. Some projects planned for fourth quarter production have some risk, which is considered in our updated revenue guidance and may push some revenue out of the fourth quarter and into 2014. Quotation activity remains very strong for the US and Canada.

The strength in the US and Canadian oil and gas market is still the major contributor to our current business activity. Along with continued strong investment in production and pipeline construction the next significant phase of capital investment in the oil and gas segment is expected to be in petrochemical facilities. We should begin to see this inquiry activity later this year, which will translate into orders in 2014.

Overall for the entire business order activity should remain strong through the balance of this year and into 2014. As you recall, we are making significant investments in our operational footprint for the expected future growth over the next few years. Our facility expansion projects, both here in Houston and in Edmonton Canada, are well on their way towards completion. We are on schedule to complete construction and begin startup in our fiscal fourth quarter.

Significant time and effort are going into the equipment relocation and startup of these facilities to ensure that these transitions have no impact to our customers' schedules, deliveries or promises. With that, I'll now turn the call over to Don to discuss the financial details. Don?

Thank you, Mike. Revenues were $153.9 million in the second quarter of fiscal 2013compared to $181.5 million in the second quarter of fiscal 2012. This decrease in revenue is a result of project timing. Overall our backlog has strengthened year-over-year, but project timing is dependent upon our clients' construction schedules.

Gross profit as a percentage of revenue was 21% in the second quarter of fiscal 2013 compared to 19% in the second quarter of fiscal 2012. This increase in gross profit is a result of available operational execution across the Company as well as improvements in Canada which also contributed to a higher gross profits. Selling, general and administrative expenses were $24 million compared to $21.5 million a year ago.

This increase is primarily related to higher personnel costs, sales commissions associated with orders received as well as long-term incentive compensation resulting from higher levels of operating performance over the three year performance period. These increases were partially offset by lower depreciation costs in the current year. Amortization expense was $413,000, a decrease of $291,000 compared to the second quarter of fiscal 2012. In March 2013 we received a settlement from the previous owners of our Canadian business in the amount of $1.7 million, which is recorded as other income.

We reported net income of $6.8 million or $0.57 per diluted share for the second quarter of fiscal 2013 compared to $7.4 million or $0.63 per share in the second quarter of fiscal 2012. For the six months ended the March 31, 2013 revenues were $308 million compared to $339 million in the same period a year ago.

Domestic revenues decreased by $13 million to $190 million in the first half of fiscal 2013 and international revenues decreased by $18 million,primarily due to the completion of several complex domestic and international oil and gas projects that were in process during fiscal 2012. Gross profit as a percentage of revenues was 21% for the six month period compared to 16% a year ago. Year-over-year operating improvements from our Canadian operations as well as general operational improvements across the Company contribute to this increase in gross profit.

Selling, general and administrative expenses were $46.4 million compared to $41.3 million for the first six months of fiscal 2012. The details pertaining to year-to-date increases were similar to the second quarter, increased personnel costs, sales commissions and long-term incentive compensation expense partially offset by lower depreciation costs in the current year. For the six months of fiscal 2013 amortization expense was $828,000 compared to $1.4 million in the first half of fiscal 2012.

As noted earlier, a $1.7 million settlement was recorded as other income. Our provision for income taxes reflects an effective tax rate of 29% for the first six months of fiscal 2013. This rate is below statutory rate primarily due to the availability of the federal research and development tax credits in fiscal 2013 and the utilization of loss carry-forwards on Canadian income.

For the six months ended March 31, 2013 net income was $14.2 million or $1.18 per diluted sharecompared to $5.7 million or $0.48 per diluted share a year-ago. As of March 31, 2012, our order backlog was $522 million compared to $554 million as of December 31, 2012 and $497 million a year ago.

New orders were $124 million in the second quarter compared to a record $272 million in the first quarterand $203 million in the second quarter of fiscal 2012. New orders placed in the first half of fiscal 2013 totalled $396 million compared to $392 million last year. For six months ended March 31, 2013, cash provided by (inaudible) activities totalled $57 million. Investments in property, plant and equipment totalled approximately $33 million,which included a $27 million investment in our new facility.

At March 31, 2013, we had cash of $114 million compared to $90 million at September 30, 2012. Long-term debt and capital lease obligations, including current maturities, totalled $4 million. Looking ahead. Based on our backlog, current business conditions as well as possible customer schedule changes we have reduced our expected full year fiscal 2013 revenues to range between $675 million and $700 million.

And we have raised our expected full year earnings to range between $2.30 and $2.55 per diluted share. Included in our earnings outlook is an estimate of $0.25 per diluted share for one-time cost related to the startup of the two new manufacturing facilities later this year. Now, at this point in time, Mike and I would be happy to answer your questions.

Operator?

Sorry. My line was muted. (Operator Instructions). And our first question is from the line of John Tanwanteng with CJS Securities. Please go ahead.

Hi, guys. Good morning.

Morning, John.

Morning, John.

Gross margins were very good again. Last time you reported I think you expected them to be under 20% in the quarter and then rebounding to maybe a 21 or 22 again in Q3. What drove the out performance there? Do you expect Q3 to actually be higher now?

Clearly, when you're looking at the current quarter, we use -- the mix of project are clearly impacts the quarter and that we -- relative to -- we were able to maintain a 20% plus gross margin in the quarter. When you're looking at the balance of the year, we're still optimistic. We still view opportunities to improve gross margins and we remain confident that we're going to be above 20% and, hopefully, we will see first half -- excuse me, an improvement over the first half.

Okay. Got it. And then I guess on the -- on the petrochemical opportunities there, how many plants do you think are really out there and what is the revenue margin opportunity for each one, maybe an average project?

When you're looking at the petrochem this is new, relative to recent history. There are a lot of projects, the number probably north of ten, that we know of that are in the engineering firms. How many of these will come out of the preliminary engineering analysis and will go forward in the near-term remains a big question.

When you're looking at our opportunity, the size of these projects are significant, I would view the opportunity of each of these projects to be what we would consider a large project. A large project if you're -- from our perspective is something that's going to be north of $35 million.

Okay. Great. Thank you. And then can you talk a little bit more about the depressions in the IECmarket, what's going on there, are your competitors taking a hit on the margin and what percent of your revenue is that actually?

Yes. The IECbusiness product line, which is mainly manufactured and managed out of our UK business, there was a couple of orders we had in the plan for the first half that did not materialize. We see some slowing in the activity and a little more competitive price pressures.

So we have taken down our outlook for the IEC product line for the rest of the year. That product line is still probably less than 10% of our revenue.

Okay. And then, I guess, given the reduction in your revenue guidance which portion was attributable to IECand what more projects are being pushed out in other businesses?

It's roughly about two thirds attributed to the IECproduct line and about a third in customer push outs.

Okay. Great. And one last one. How have orders trended through April? Have you gotten any read yet?

For April, no. No outlook yet. We'll have that at the end of the week.

Okay. Great. Thank you very much, guys.

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

Good morning.

Good morning, Brent.

Question just on construction costs. Can you give us a number how much you absorbed here year-to-date?

I'm sorry. You're talking about the new facilities?

That's right. Yes.

The new facilities, year-to-date we have spent about $27 million. Project-to-date we have spent just under $40 million.

Okay. Great. Then can you talk a little bit about what you're seeing, I guess, on the order front or inquiry front on the offshore side of the business?

It's been very healthy right now and we're expecting it to actually continue to get stronger into 2014. It's healthy now.

Okay. And then just one last one, if I could sneak it in. On the SG&A side, a decent year-over-year growth. Don, would you expect that to accelerate from here? Can you kind of give us a sense of the trends you're seeing ? Obviously, some help there would be -- would be--

At this point in time our best view on what the balance of the year holds is probably relatively flat to what we recorded in our second quarter this year. We are seeing a much heavier mix of projects that are coming in through channels that would -- that support third-party sales commissionsin addition to our internal costs. We have looked at how we're going to be growing the business over the -- in 2014 and beyond and we are adding people into the sales side of the business and we're still looking to hire a couple of more between now and the end of the year.

And that the third item that is impacting the year-over-year changes are in (inaudible) compensation costs, which in our Company, the long-term is over a three year period and we've got to be doing estimates not only for the current year but future years that do impact those accruals. But the bottom line is I would look at the balance of the year being roughly flat with the second quarter.

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

Good morning,Mike and Don.

Good morning.

Could you talk a little bit about the variability in the incoming order book from quarter to quarter and what's driving that?

Well, I think what you saw in the first half -- as you know, we had record levels in the first quarter including a very large project in those numbers. It was north of $50 million. It's kind of the lumpiness of the project business. Some timing that came in in the first quarter that we had anticipated in the second quarter. So the second quarter was pretty modest but it's up over last year and we're expecting the second half to be stronger than the first half.

Mike, what do you define as strong order activity?

For the second half?

In general. In your -- in the press release you mentioned you're confident in strong order activity. Now what would you consider a strong order book from quarter to quarter?

Well, this will continue to grow in the second half. Like I said, I think the second half will -- second half orders will be stronger than the -- than this quarter, obviously, was a low water mark. But the quotation activity is very healthy. The funnel, when you look at the number of opportunities coming in, the number of quotes we're doing, has been running very steady for about four, five, six months now. And we're expecting those orders to pop in the second half.

Okay. And could you just talk a little bit about last quarter? You said the orders being pushed from Q2 into Q3. Is that -- are we still looking at a bulge in the revenue picture in the June quarter or has there been a shift again in the timing of deliveries?

Sorry. Maybe I wasn't clear on that. When I talk about the timing shift it was actually Q2 orders that we pulled into Q1. That was part of setting that record level volume in Q1. So it was really timing Q2 orders coming in slightly earlier than we had anticipated to set that record in Q1.

As far as revenue?

No. I thought you said orders.

No. I meant revenue.

When you're looking at revenues we still view our third quarter as a -- probably could end up being the strongest quarter of the year.

Okay.

Third quarter is still a scheduling that appears to be firming up. The schedule shifts that we've alluded to in the -- is -- are basically projects that we had anticipated being active on -- in the fourth quarter that now, it appears, that they're slipping and probably won't get started until the first quarter of our fiscal 2014.

Okay. And one last question. Of the $0.25 of costs associated to new facilities, how much have we absorbed so far?

Year-to-date we have incurred a few hundred thousand dollars. The exact number, I don't have but I would say it's in the plus or minus $400,000 year-to-date. The vast majority of that will be incurred in our fourth quarter. Some in the -- will probably -- could hit early in -- late in the third but the vast majority of that is going to be a fourth quarter occurrence.

Okay. Great. Thank you very much, Don.

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

Thanks. Good morning. Could you comment on the trends that you're seeing in the utility market? Are you starting to see any sort of acceleration in that piece of the business?

It's really remaining pretty flat. What we do see now is a lot of peaker plant additions just for capacity -- for the spike in capacity loads. But, right now, we're still looking at that as generally flat through this year and probably into 2014. We're not seeing it yet.

Okay. And then on the -- on the pipeline side you mentioned pipelines is a strength. Could you just go into a little bit more detail on where you see that opportunity, talk a little bit about the type of opportunity that you see from pump stations and then how much exposure do you have to that type of work today?

It's a growing piece of the business. If you look at the industry numbers that are published, pipeline construction is about triple this year over the past couple of years in capital spending pipelines. We think that's going to remain healthy at those levels for the next few quarters so I can't give you a percentage of our total business that is pipeline construction, but we are seeing very healthy activity in that level and will continue for a few more quarters.

Okay. Great. Thanks.

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

Good morning, gentlemen. Couple questions. Or at least one question. You talk about the resource constraints across the industry and yet, at the same time, the order flow is very strong. When you look ahead at some of these petrochemical plants are released per bid and business continues to be pretty good else where, how will that manifest itself? Can that manifest itself in your margins and -- or more project delays? What kind of impact can these resource constraints have on your business as you look ahead over the next year or so?

The most challenging part of it right now is trying to -- is trying to predict the month to month and quarter to quarter revenues. We lay out schedules. There seems to be milestones missed along the way. The main impact we're seeing is the predictability of when the milestones will occur and, thus, the revenues occur.

Some of these projects are also getting more complex because they're pulling in international engineering firms to do some of the work so the chain of communication and coordination and approvals is more complex. Sometimes that's adding delays to the schedule. But the most significant impact we see is timing of the revenue.

So really not necessarily an impact on the margins?

No. Not that I can see directly, no.

Okay. Alright.

Jon, let me qualify that. When you're looking at the actual project margins, I would agree with what Mike says. But when you're dealing with shift in schedules in our factories there is the risk of inefficiencies which do put downward pressures on our margins. Overall, I think Powell is very good at managing that and minimizing that but that downward pressure is real and is a risk.

Alright. Thank you, Don.

Thank you. (Operator Instructions). Our next question is from the line of Julian Allen with Spitfire Capital. Please go ahead.

Hi. Good morning. I just have a quick follow-up on the $0.25 charge for later this year. To what extent does that reflect unabsorbed overhead in the new facilities you ramp up utilization versus below the gross margin line expenses incurred as you complete the facility?

I don't have a good split on that, but a portion of it is the hiring and the training of people that will have to be ahead of the actual production. So if you want to call that advanced hiring and training of personnel under absorption that portion of -- is a significant amount of the $0.25. So you will see a sizeable amount of that in depressed margins, particularly in the fourth quarter, as we push hard to ramp up the personnel and will be focusing on bringing in many of them.

That's what the tailings will be late in the third quarter as that effort actually gets started. But that -- the people side of it is the bigger piece as opposed to the physical moving of equipment.

And, Don, how do you trade off the additional capacity that the new facility gives you versus the speed at which you think you can fill that? And which segments out there do you think will help you get that utilization up to a level that you hope to achieve in the next year or so? Thank you.

Well, clearly the hottest market in the area where we think we will be able to reach what you would consider a practical or plan capacity is going to be in the Edmonton Canadian facility. The market up there is very strong that we are having to backfill production with work out of Houston. We're having to outsource more activities than we would like to. All of those will allow us to bring business in, part of it to increase top line but also part of it will be to improve margins because of bringing that into a more cost effective environment.

So that when you're looking at the revenue dollars in Canada today versus tomorrow they will not grow as rapidly as what we hope to see in the bottom line because of the displacement of outsourced operations and the displacement of having to do work. Basically today all sheet metal parts are being manufactured here in Houston and we're having to ship them 2,000, 3,000 miles north for virtually every project that we're manufacturing today. Those costs eliminations are a big part of our short-term strategy.

When you're looking at the Houston facility that we're expanding here, clearly, that probably has a slightly longer time (inaudible) before we would reach a level that we would hope in that facility. Again, a big part at that, from a timing perspective, is going to be what we see on the Gulf Coast. A lot of that is going to be there to support (inaudible) spend.

Got it. Thanks so much.

Thank you. (Operator Instructions). We do have a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Don, you may have addressed some of this in most recent comments but I was wondering a little bit about capacity utilization company wide. How much flexibility do you have in moving projects around to satisfy the current order book? Are you essentially maxed out?

Well, today, we're running at a slightly lower level than we were last year. When you were looking at our peak mid last year, we were extremely compressed and the flexibility that we had was relatively limited. The knowledge that that was coming in front of us is what -- one of the key reasons that we said that it's time to expand our footprint because we can't continue to have -- to support organic growth with our current footprint.

When you're looking at what we have done the first six months of this year, our footprint has not been the key constraints. We have been able to support all the projects. We've been able to bring in the engineering project management resources we need. That we have not hindered our revenue growth. Our revenue growth this year, year-over-year change, is strictly driven to a customer (inaudible) the projects.

Okay. And can you give us a quick update on the settlement gain or potential that you had from Powell Canada, that project, is there any update on that?

About the only thing I can say is that we had and asset purchase agreement to acquire the business. There were various reps and warranties in that asset purchase agreement which we pursued. Most obvious there are going to be some bad debts, some [excess] and obsolete, some other financial evaluations that were provided that we used in our analysis. At the end of the day, some of them were very easy and clear cut bad debt.

Some of them were a little more difficult to document in detail but, basically, we were able to sit down with the prior owners and we had a settlement where, as you would expect, in most -- all situations we both walked away feeling that we were disadvantaged. But, at the end of the day, it was the right thing to do to cut our costs from a legal and project perspective and settle that.

We settled it for approximately $1.7 million gross. When you're looking at the costs in the current year, we probably incurred about $200,000 of costs in the current year to pursue this claim. So the net impact is on the year is in order of magnitude of plus or minus $1.5 million.

Don, just to clarify, I guess what I was really asking about was the project settlement from the job you were doing just over a year ago, I guess, now.

Okay. You're talking about the project settlement?That is still ongoing.

That's what I was asking about.

You're looking at the project that created the hole for us in the first half of last year?

Correct.

That project -- excuse me,that claim is still ongoing. We have had active dialogue with the -- our client and trying to settle this before going to arbitration but we are still pursuing the legal recourse as well. Currently, if things go to the end, we have a bonding arbitration that is currently scheduled for November of this year.

Okay.

But we're still reasonably -- Well, put it this way,we're still pursuing every opportunity we can to reach a fair and equitable settlement without having to go to the November arbitration.

Okay. Thank you very much, Don.

Thank you. Our next question is a follow-up -- actually, our next question is from the line of Beth Lilly with GAMCO Investors. Please go ahead.

Good morning.

Good morning, Beth.

I wanted to just spend a minute and talk about -- in your prepared comments you talked about your gross margin at 20% and your -- and you believe that there's room to expand that. Would you talk a little bit more about where you're seeing the opportunities in the gross margin line?

There's probably two pieces to that. One is just operational improvements and that is a key internal focus area for is. That's been kind of the typical levers and material containment actions, costs reduction programs, productivity improvement. We're working a lot of levers on the operational improvements and a little bit on price.

Mainly making sure we get the inflationary costs passed through properly and there's no leakage on that. Those would be the two gross margin improvements.

And do you see those flowing through in the next year or so or is this going to be something that we'll start to see two years from now? And then the second question is are you willing to talk about where you think you can drive them to?

Yes. It's a little too early to talk that far out. I think you see a little bit of that even in today's results, but it will continue to improve, quarter-over-quarter, over the next few quarters. It's not two years out. It's kind of incremental improvement quarter-over-quarter. I think you're even seeing a little bit of that today.

Okay. Great. Okay. Perfect. And then I just wanted to follow up on that contract of a year ago. So you're negotiating but, eventually, it may go to arbitration in November. Is that what I am to understand?

That is correct. We're still in dialogue, or have been in dialogue, with our client. We've had meetings that's taken place in the last 90 days. Unsuccessful to-date but, at the end of the day, we're pursuing further terms of the contract, binding arbitration, which is currently scheduled for November.

Okay. Don, would you remind us -- so you've collected on the money that -- for the project itself but there's cost overruns and things like that that are still owed to you? Is that the situation?

There's two issues there. First off, of the contract had multiple change orders that were approved and then towards the latter part of the project we got directed changes that never got priced and, therefore, never got an approved purchase order or change order to support the extra work that we were directed to do. In addition to the directed scope change, clearly, there were a lot of impact changes as a result of -- We were dependent upon material from the client, we were dependent upon engineering drawings from the client, we were dependent upon a lot of information to complete our activities.

And those activities did not occur in a timely manner as one would expect in the execution of a project so, therefore, we had inefficiencies and incremental costs associated with that. So there's two issues there. One is the directed change orders of scope changed. The other is the impact of the information and materials being provided by the client.

From a collections standpoint we have collected what has been invoiced. But there was a retention element. The retention element is still on the balance sheet. That, I think we note in our filings, at approximately $1.4 million.

Okay. And you -- and they still, obviously, owe you more money?

That is correct. That's our view point. Yes.

Okay. So I just want to be clear. So you've collected what you've invoiced?

Less the retention.

Except for all the change orders and that -- In essence, that, and the materials, is the essence of the dispute?

That's the -- the major issue is the value of the scope changed and the impact associated with our execution of the project that was created by the client and/or other (inaudible) outside of our control.

Okay. Great. Very, very helpful. Thank you very much. Those are all my questions.

Thank you, Beth.

Thank you. Our next question is a follow-up from the line of Noelle Dilts with Stifel Nicolaus. Please go ahead.

Thanks. Just a quick question. I was wondering if you could tell us, year-to-date, what percentage of your sales have come from the offshore market?

We don't have that specifically. But when you're looking at that as market that is growing,in the order of magnitude, in a good year it can reach around 10% of our business. This year it could actually be slightly over 10%.

Okay. Great. Thanks. That's helpful.

Thank you. And we have no further questions at this time. I'll turn it back to management for any closing remarks.

Well, I just want to thank you all again for joining us today. As always, we very much appreciate your interest in Powell Industries and we'll talk to you next quarter. Bye-bye.

Ladies and gentlemen, this concludes Powell Industries second quarter earnings call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 with the access code of 4614375. We would like to thank you for your participation. You may now disconnect.