Powell Industries Inc (POWL) 2013 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.

(Operator Instructions)

This conference is being recorded, today, December 4, 2013. I would now like to turn the conference over to Ms. Karen Roan. 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 2013 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 email of the news release issued yesterday afternoon and would like one, please call our offices 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 powellind.com, or a recorded replay will be available until December 11, 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, December 4, 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 fourth-quarter results. I would like to make a few opening comments, and then I will turn the call over to Don to discuss the financial details. We are pleased with our strong fiscal 2013 finish. Not only did we realize record-level bookings, but we also posted our second-best year ever, for both revenues and year-end backlog. This provides solid momentum going into 2014.

We also realized a number of other accomplishments this past year. We have completed our new 180,000 square-foot facility in Edmonton, Canada, which became fully operational this past July. We now have the only facility of its kind in western Canada, with the capability to manufacture switchgear and motor control, fabricate e-houses, and integrate all of the electrical equipment, all at a single site location. The oil sands development in Canada represents tremendous potential for us, and we intend to play a significant role in this market.

We also completed a new 300,000 square-foot facility here in Houston, which became fully operational in October. This provides not only much-needed manufacturing and office space, but also increased capability in product design and development. We completed construction and relocation into both of these facilities with no impact on our customer commitments. With these capacity additions, we are now very well suited to meet the expanding opportunities and needs of the North American market.

We have also continued investment into development and testing of new business systems and productivity tools, which we expect to have fully implemented this coming spring. Even with these extra demands on our teams, we were able to deliver solid financial results for the year. I am very proud of all of our teams around the world for all of their efforts, dedication, and commitment. I will now turn the call over to Don to discuss the financial details.

Thank you, Mike. Revenues were $187 million in the fourth quarter, compared to $184 million in the fourth quarter of fiscal 2012. Gross profit was $42.9 million, or 22.9% of revenues in the fourth quarter, compared to $41.5 million, or 22.5% of revenues in the fourth quarter of last year. Both revenue and gross profit were favorably impacted by the recovery of $3.8 million, related to the claim on a large Canadian industrial project. This project experienced significant delays and cost overruns in the first half of fiscal 2012.

Selling, general and administrative expenses decreased by $1.1 million, to $19.6 million, compared to the fourth quarter a year ago, primarily due to lower sales commissions and depreciation expense. Research and development expenses were $2.2 million, compared to $2.1 million a year ago. We incurred $2.2 million restructuring and relocation expenses in the fourth quarter of fiscal 2013, related to our two new facilities. These costs relate to the fiscal relocation of operations, a loss on our Canadian sublease, and the abandonment of leasehold improvements.

In the fourth quarter of fiscal 2013, we recorded an income tax benefit of $208,000, primarily due to the release of the valuation allowance recorded to offset prior years' Canadian pre-tax losses. Net income for the fourth quarter of fiscal 2013 was $18.6 million, or $1.54 per share. Adjusted for the Canadian project claim recovery, restructuring and relocation expenses, and the release of our tax-valuation allowance, net income in the fourth quarter of fiscal 2013 was $10.3 million, or $0.86 per share. A non-GAAP net-income reconciliation was included in our earnings release.

For the 12 months ended September 30, 2013, revenues were $675 million, compared to last year's record revenues of $717 million. Domestic revenues decreased by 2% to $405 million, and international revenues decreased by $35 million, or 11%. Gross profit increased by $6.9 million on lower revenues. Gross profit, as a percentage of revenues, was 21.8% in fiscal 2013, compared to 19.5% of revenues in fiscal 2012. Excluding the favorable impact from the recovery on our Canadian project claim discussed earlier, gross profit, as a percentage of revenues, was 21.3% in fiscal 2013. This increase in gross profit is primarily due to the margins associated with the mix of projects in process during the year, as well as the increased focus on cost-saving activity.

Selling, general and administrative expenses increased $2.2 million to $83.5 million in fiscal 2013. This increase is primarily related to personnel costs and long-term incentive compensations, resulting from higher levels of operating performance, partially offset by the lower depreciation and the capitalization of certain personnel who were temporarily reassigned to the development and implementation of our new business system. Amortization of intangible assets decreased to $1.7 million in fiscal 2013, compared to $2.6 million in fiscal 2012, as certain intangible assets have become fully amortized.

Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 17.1% in fiscal 2013, compared to 38.5% in fiscal 2012. Our effective tax rate was favorably impacted by the release of a $7 million valuation allowance recorded as an offset to prior years' Canadian pre-tax losses. We believe that it is more likely than not that market conditions and our operating results going forward will allow us to realize the deferred tax assets associated with prior-year losses in Canada. The rate for fiscal 2013 was also favorably impacted by the federal research and development tax credit and the utilization of certain foreign tax credits. For fiscal 2014, we anticipate an effective tax rate of approximately 34%.

For the 12 months ended September 30, 2013, net income was $42.1 million, or $3.51 per share. Excluding certain fourth-quarter items discussed earlier and a settlement received in the second quarter, net income for fiscal 2013 was $33.8 million, or $2.82 per share, compared to $29.7 million, or $2.49 per share, last year. We generated new orders in the fourth quarter of $207 million, resulting in a strong year-end backlog of $517 million, compared to $496 million at the end of the third quarter, and $437 million a year ago.

For the 12 months ended September 30, 2013, cash provided by operating activities was $92 million. Investments in property, plant and equipment totaled $74 million. At September 30, 2013, we had cash of $108 million, compared to $90 million at September 30, 2012, and long-term debt and capital lease obligations, including current maturities, totaled $4 million.

Looking ahead, based on our backlog and business conditions, we expect full-year fiscal 2014 revenues to range between $700 million and $750 million, and full-year earnings to range between $2.75 and $3.25 per share. Included in our outlook are incremental investments in product investment, sales and marketing, support for Canadian growth, and depreciation of our new business system.

In total, we anticipate SG&A, including R&D, to increase by approximately $10 million year over year. In addition, we are planning for a higher effective tax rate in fiscal 2014. Now, let me turn the call back to Mike for a few final comments.

Thank you, Don. It was just over one year ago that I first joined you for the fourth-quarter conference call. Now having been with the Company for 15 months, I am even more optimistic about our future. Powell is a solid company with unique capabilities and expertise to design and deliver complex custom-engineered solutions with a sharp focus on the customer. Our major facility investments are complete, and we are quickly approaching the implementation of new business systems and productivity tools. Our core markets are healthy and expected to remain strong for the next few years.

We recently announced our first-ever quarterly cash dividend. Over the past two years, we generated sufficient cash to complete substantial investments into these two new facilities, which will enhance our position for future growth, all while maintaining a cash balance in excess of $100 million. Our strong balance sheet provides adequate resources to support the quarterly dividend to our shareholders as well as to continue our growth plans. We expect our core North American market to continue to grow, and we are very well positioned to support our customers' requirements.

In the near term, we see continued strength in oil and gas, specifically in Canada, US petrochemical, LNG terminal facilities, and deepwater production platforms. As we look out mid term, our focus will be on acceleration of product development, international growth, operating efficiencies, and gross margin improvement.

To help drive these strategic areas, we announced the addition of Neil Dial to our leadership team, as of December 1, as Senior Vice President and Chief Operating Officer. He brings over 30 years of management experience, with particular expertise in manufacturing businesses, and a background in electrical products. Neil will help me and the rest of the leadership team to drive operational excellence, productivity improvements, and margin expansion.

We believe our core values of customer first, respect for employees, a can-do attitude, and a commitment to improve clearly differentiate Powell from our competitors. Our conviction to these values will be equally as critical in driving our future success. At this point, we will be happy to take your questions.

(Operator Instructions)

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

Good morning, guys, very nice quarter.

Good morning, John.

Ex items, results are still very strong. Can we expect a similar kind of run rate going forward, especially on the gross margins?

Clearly, our goal is to continue to try to expand our gross margin, and built into our outlook is margin expansion year over year. This coming year, as we have talked in the past, is that we will have some headwind as a result of the two new facilities as we ramp up in Canada and we work to fully utilize the airport facility here in Houston. But even in spite of those head winds, we do expect margin improvement year over year.

Okay. And then, obviously, you did really well on the SG&A, but you're forecasting about $10 million year-over-year increase in 2014, you know, that averages to about [$26 million] a quarter. I guess you include R&D. Does that mean the performance for Q4 was just a one off?

Q4 was strictly timing. It was just the lumpiness of timing of expenses coming in. First off, depreciation expense as some assets became fully depreciated, and sales commissions is clearly a timing issue.

Got it. And then, finally, now that the facilities are done, what is your expected use of cash, acquisitions -- you have the new dividend, are you thinking about buybacks at all?

At this point in time, our focus is to support the dividend program that we have recently announced, as well as continue to work to grow the organization and the Company.

Any traction at all in large Gulf Coast orders, or are those larger projects included in your fiscal 2014 guidance at all?

There is some -- we expect offshore to strengthen in the last half of the year. And, there is some, but not any really big projects, but there are some decent-sized projects planned for the second half of the year.

These will impact orders more so than revenues. We anticipate those building our backlog, predominantly driving revenues in 2015.

Okay. Thank you very much, guys.

(Operator Instructions)

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

Thanks, good morning.

Good morning.

First, kind of expanding on that last question, orders were obviously very strong in the quarter, can you talk about if there were any large project orders, or if it came mostly from small- to medium-sized projects?

It was one large order in there, which there was a press release on the Dulles project in our traction power business, was about $40 million. The rest of it were all small- to medium-sized projects. I don't think we had anything over $12 million to $15 million in there, just the one $40 million, everything else was small and medium sized.

Okay. And then, you've kind of sized the opportunity of some of the petrochemical activity in the past on the large project side is about 10-plus projects at $30 million or more a piece. Is that still kind of what you are thinking?

It is, still very optimistic about that. We have pushed those expectations out a little bit probably from the last couple of quarters. We do -- we have won some small orders in the $5 million to $15 million range, not the really big ones yet. But, we do expect to see some order activity on those late in the year now.

Okay. And then, can you just give us an update on the IEC market? In the past, you have talked about seeing some increased competition. Has there been any change there? Are you seeing pricing get competitive? Are you thinking about taking any actions in terms of restructuring this year? Just some thoughts on that?

No, we're done with the restructuring there. We have completed that now. We resized that business. We exited some product lines that were not profitable.

We have seen pricing stabilize now over the last quarter or so. We have not seen additional pricing pressure, and we started to win some nice-sized jobs. They were not in the fourth-quarter numbers, which we just released, but already this first quarter, we have won a couple of nice projects in the UK. We have made a lot of operational improvements on lead time and delivery, and that's starting to pay off now for us. So we think we will be okay in the UK this year.

Okay. Great. And then, you talked about some under utilization in Canada and Houston as you ramp up these new facilities. I guess when you I first looked at your margin guidance, I thought it looked a little bit low for 2014. So, is there any way you can talk about sizing that headwind that you think you are facing in 2014 as you ramp up those plants? I am trying to get a sense of some of the components going into your margin guidance.

There's a couple or three components, and all of them are variable. But when you're looking at -- let's [talk them] individually, when Canada specifically, we're still of the opinion that with the market growth and the order growth that we're continuing to experience that we will have that facility operating at a practical capacity, a full first shift, well into a second shift operation by the end of calendar year 2014. But during the year, we've got a long, steady growth plan of ramping up the business. So, you are going to be hiring people each and every month; you are going to be training people each and every month.

There is the ramp-up inefficiencies associated with hiring and training people at a fairly substantial clip, in addition to the headwinds of just a larger facility with more overhead. To quantify those numbers, we do know what the operating costs of the new facilities are. That is a sizable number relative to the small lease facility that we had in the past. It is a seven-digit number, but then the inefficiencies associating with the ramp up of the organization is the more difficult one to get your hands around. So, that one is one that I would be less -- more hesitant to quantify.

The same thing with the airport facility, there, we're looking at a little bit more long term. I think we have talked about that. We will have the incremental costs there probably for the next two to three years. A lot of that will depend on the ramp up of business along the Gulf Coast as well as export [ENC] products. But there, it is basically just a change in our overall fixed-cost base that we have factored into our guidance as well.

And, where would you say you're running in terms of capacity in the Canadian facility right now?

As far as the facility today, less than 50%. Probably a little less than 50%, very subjectively.

All right.

We're looking at bringing on over 100 people between now and the end of the fiscal year.

Thank you.

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

Good morning, gentlemen.

Good morning, Jon.

A couple of questions. Over the last couple weeks, we have seen some, I guess you want to call it, production, and maybe even some drilling companies report some disappointing earnings and some disappointing outlooks. You had remarked about your offshore oil, offshore deepwater production activity being pretty strong. Are you seeing any pushback, or any stretching out of some anticipated projects that have been sort of on the drawing board? Are you seeing any stretching out at all?

Probably not any different than what we have seen, Jon. It tends to be the bigger projects are the ones we see sliding to the right. We have tried to take those estimates into consideration for our guidance for next year. So, we do, as Don said, we expect some order activity to pick up in the second half of the year for offshore. We have not seen it any worse or better the last couple of quarters than what we have been seeing.

Okay. As you look out ahead, could we see a change in the mix of the orders more, let's say, more oil and gas, more petrochemical? And if that's the case, is there any margin difference between the source of orders or the markets served? Is the margin pretty much the same across the board?

Jon, you're speaking between oil and gas -- is that what the question was?

Yes.

Basically, when you're looking at margin, it really goes back into complexity. The complexity can be, particularly if you're talking a large LNG terminal can be a very complex order, very similar that you would see in complexity to an offshore production platform, but yet, when you're talking about a pipeline, it is going to be much less complex and smaller in size. What I would tend to -- [gas] that point. What I would tend to say is that the variability of complexity between the two markets are, you can see both simple, as well as complex projects, but they tend to be, as on average, larger in the oil side than they are on the gas side. Gas tends not to use as much power in the processing as oil does.

Okay. And then, lastly, Don, you were talking about the additional costs associated with the two new facilities. What do you anticipate the level of D&A will be next year?

Good question, Jon. Let me come back to that in a second because I don't have it off the top of my head.

Okay, thank you much.

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

Good morning, Mike and Don.

Good morning.

Good morning, Beth.

I have several questions. Am I to interpret from the $2.9 million settlement in the quarter of that Canadian issue, that whole project that was plaguing you is now put to bed?

Basically, all of the issues that we have talked about over the last couple of years are now behind us.

Are you happy with the settlement that you received?

Whenever you're into any type of negotiated settlement, everybody walks out of the room unhappy (laughter).

Okay, so it is all put behind you and you recovered some of your costs, but not probably as much as you wanted?

I think that's a fair picture, yes.

You talked about, in your formal comments, about focusing on margin expansion going forward. Historically, in the past, there was a feeling of [20] -- and this probably predated Mike joining the Company, but 22% gross margins, and I just want to get a sense now, with the addition of Neil and with the new facilities up and running, do you think that 22% that you historically have achieved can go higher? And if so, what is the number that you would be comfortable telling us?

Yes, I do think it can go higher. Probably wouldn't put the number out there just yet, but let's go back to comparisons year over year, 2013 over last year. So operationally, if you exclude those one-time items we talked about on this call, we were up about 180 basis points on gross margin, so somewhere between 1 and 2 points of gross margin improvement a year. Now, we've got some headwinds we talked about, so we will be at the lower end of that range, but I think the expectation, our goal, our plan would be to try to drive that gross margin 1 point-plus a year.

Okay. Great. Terrific. This is more of a qualitative question, which is, we have -- you have benefited from tremendous spending in the international oil and gas markets, but I'm wondering about just what your domestic customers are telling you? Are you seeing more inquiries? Are you seeing more requests for proposals? What -- on a qualitative level, are you seeing a pick up in business?

I would say it is relatively consistent, but it is healthy. For the last few quarters, it has been very healthy rate, the pipeline quotation activity is good. It is all of those small- and medium-sized projects, which most of 2013 was. We have not seen any change in rate or activity on that. It is still very healthy.

Okay. Would you say it is more healthy than it was a year ago?

I would say for the last two or three quarters, we have been pretty consistent.

Okay. But, it is not -- it is healthy, but you haven't seen a slowdown, but you haven't seen a noticeable pick up?

When you're looking at the North American side, let's just talk about that first, because that's where we're seeing most of the activity, and I think that is the basis of your question --

Yes.

I think we have seen increased response as a result of the facilities that we built in Canada. I don't think it is a market issue. I think it is a response to our positioning in that market that is benefiting us from an order perspective in Canada.

When you are looking at the US, the Gulf Coast, I would say that the market activity is relatively consistent, but it fluctuates up and down in dollar based on when the larger projects actually go into the bid phase. But, when you're looking at the activity that we're seeing going on in the EPC firms and the market, particularly the oil and gas in general, I agree with what Mike has been saying, is that the activity is not materially different than our picture of the activity the last three, four quarters.

Okay. So, in the Gulf Coast -- and so the Canadian business is benefiting from the perception that you now have the capacity to meet the demand, is that what you're saying?

Yes --

The capacity and the capability.

Yes, that's correct.

Okay. Great. And then, my last question has to do with the addition of Neil Dial. Can you just spend a few more minutes and talk about what his capability is and what he brings for the Organization that Powell doesn't have?

Well, I think it is to supplement what we have, first of all. It is just to help me and to help our businesses continue to accelerate some of our operational improvements: lead time, cycle times, lean activities, productivity improvements, gross margin expansion, supply chain design and development. So, it is a lot around operating efficiencies and those kinds of activities. He's got a lot of strength there. We had some of the background in his press release, but coming from manufacturing-based companies, a lot of international experience, so he will be working with me and the entire leadership team on those kinds of activities.

Okay. Terrific. Thank you so much.

Beth, I did want to go back. I want to add one more comment to your gross margin question, just as a reminder for everyone as you're working on your models. We do have that goal of significantly improving our gross margins, but project mix can sometimes drive that significantly, too. So if mix remains consistent, there is certainly -- our goal is certainly to improve that gross margin, but mix can change that as well, project mix.

As the projects get bigger, will the -- does that mean margins are higher, or do you earn a better margin on the smaller projects?

As Don said, and what we relatively consistently have seen is the more complex the projects, the more -- the margins tend to be better. It is more market mix between utility, transit, oil and gas. It is kind of a market mix of those projects.

Okay. Terrific. Really helpful. Thank you very much.

Before we take the next question, let me follow up on the one that Jon had here a second ago. This past year, we closed out D&A of around $10 million, next year we are looking at the neighborhood of $14 million, about a $4 million increase in depreciation and amortization year over year. All of this basically coming from the new business systems and the two new facilities that we have been talking about.

(Operator Instructions)

Our next question is a follow up from the line of Noelle Dilts. Please go ahead.

Thanks. Mike, I think you alluded to some of these actions that you're looking at taking when you were discussing bringing Neil on, but you mentioned in your comments that you are looking at cost saving and productivity actions that you will have in place by the spring. Could you just expand on that, you know, talk about some of the things that you're doing, and where you see some of the low-hanging fruit in the business?

The comment I made about having things ready in the spring was more about tools and software packages. So, in the spring, we anticipate doing a business system upgrade, and around that are several different packages and tools we will implement in manufacturing, engineering, project management, really with the intent of driving productivity of our teams -- core productivity, more output with the same number of resources. So, we do anticipate, as revenues grow, we won't have to grow SG&A as fast with these productivity tools. A lot of those tools will be implemented and will go live this spring.

Beyond just the tools, the focus areas are, and there are several, just execution of projects, material-containment actions, design of supply chain, lean activities, and other productivity tools in our shop and operations. Those are the kinds of focus areas we got great traction this year on those, and we've got a lot of that built into the plan, again, this year, and we think we can keep that going for a while. So, we want to just continue to drive those operating efficiencies.

Great. 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, just want to say thank you, everyone, for joining us today. We look forward to talking to you next quarter, and we really appreciate your interest in Powell Industries. Goodbye, everyone.

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 4650589. ACT would like to thank you for your participation. You may now disconnect.