Powell Industries Inc (POWL) 2014 Q1 法說會逐字稿

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. (Operator Instructions). This conference is being recorded today, February 5, 2014. I would now like to turn the conference over to Karen Roan. Please go ahead.

Thank you, Douglas, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2014 first-quarter results. We'd 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 Powellinv.com, or a recorded replay will be available until February 12, 2014 and information on how to access the replay was provided in yesterday's earnings release.

Please not that information reported on this call speaks only as of today, February 5, 2014, 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 material; and execution of business strategy.

For further information please refer to the Company's filings with the Securities and Exchange Commission. Now with me this morning are 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 for our fiscal 2014 first-quarter results. I will make a few opening comments and then I'll turn the call over to Don with the details.

We began 2014 with a solid quarter and a good start to the year with bookings continuing at the pace of recent quarters and revenues and profits in line with our expectations. Our key markets in North America are healthy and are expected to remain strong.

In Canada the strength in the oil sands market brings us excellent opportunities and our new facility has been very well received by the market; demand is ahead of expectations. This is the only facility of its kind in Canada with the capability to manufacture, fabricate and integrate all the necessary electrical equipment at a single location.

In the US we have booked a number of smaller petrochemical projects this quarter and see capital investment beginning to move forward in this portion of the North American oil and gas market. Liquid pipeline activity also continues to be strong.

The forecast for offshore activity is healthy as projects continue to advance through the planning and development stages and we still expect to see orders in the next phase of offshore development coming in 2015. All of our operations continue to perform well and we have seen continued gains across the board in process and efficiency improvement.

During the last few weeks we completed two significant transactions and I'd like to provide you a few more details on these.

First, in December we amended our supply agreement with GE. As background information, in 2006 we purchased the Power/Vac product line from GE and entered into a 15-year supply agreement which required them to purchase all their medium voltage ANSI switchgear requirements from Powell.

Last year in fiscal 2013 revenues from Power/Vac were less than 10% of our total. Of that revenue approximately 75% of the Power/Vac revenue came through GE and the remainder came through other direct sales channels. Over the past four years revenues through the GE channel have steadily declined. At the same time we've continued to grow our business through our direct and alternative sales channels.

We've had numerous discussions of various options and growth plans with GE over the past several months, but we differed in the amount and form of investment needed in this product line. After much discussion the supply agreement, the contract was amended to allow them to design, manufacture and sell their own line of medium voltage switchgear or purchase switchgear from others beginning in 2015 in exchange for a fee of $17 million.

We believe this decision provided Powell the best long-term outcome rather than continuing the status quo. Powell still retains full ownership of the Power/Vac product line, the brand and all associated intellectual property. Under this revised four-year agreement both parties remain committed to the Power/Vac product line and GE continues to be an important channel partner for Power/Vac and our relationship remains strong.

Power/Vac has a very strong brand and a long history. The product gives us access to an extensive installed base and provides operational economies of scale with our PowlVac product line. We plan to continue to sell, service and support the Power/Vac product line to both new and existing customers through GE as well as our own direct and alternative sales channels.

We expect to accelerate development of alternative sales channels to the market as we have been doing successfully over the past few years. We do not expect any significant changes in profit contribution from this product line.

Second, we made the decision to sell our wholly-owned subsidiary, Transdyn, which comprised the majority of our Process Control Systems business segment. Transdyn is a leader in intelligent transportation systems and advanced traffic management solutions. This market has over the past several years required a broader product offering with greater capabilities in traffic control and electronic toll collection.

For Powell this was a non-core investment that we did not want to make. As a result, on January 15, 2014 we sold the subsidiary for $16 million to Kapsch TrafficCom, a global provider of electronic toll collection systems for which the business was a good strategic fit.

We retained certain key strategic operations from our Process Control Systems segment that are focused on electrical power management and other industrial control solutions. These remaining operations will be integrated into our Electrical Power Products business segment.

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

Thank you, Mike. First, as Mike just noted, in December we amended our supply agreement with GE, this amendment resulted in a deferred gain of $8.1 million, the amount of which the proceeds exceeded the unamortized balance of our intangible assets from the original supply agreement.

This deferred gain will be amortized over the four year life of the amended agreement which began on January 1, 2014. The amended supply agreement had no impact on our results from operations for the first quarter of fiscal 2014.

In yesterday's press release we reclassified the assets and liabilities of Transdyn as held for sale on our balance sheet both as of December 31, 2013 and September 30, 2013, and we presented the results of Transdyn as income from discontinued operations net of tax.

In today's call, unless noted otherwise, I will be reviewing our results from continuing operations which excludes the results of Transdyn in both the current quarter as well as in prior periods.

Now for a review of the quarter. Revenues increased 17% or $25 million to $172 million in the first quarter compared to the first quarter of fiscal 2013. Domestic revenues increased by $2 million or 2.3% to $89 million and international revenues increased by $23 million or 38% to $83 million.

The increase in international revenues was primarily driven by the expansion of our Canadian operations and the timing of oil and gas construction projects.

Gross profit for the quarter increased by nearly $3 million to $35 million compared to the first quarter of fiscal 2013. Gross profit as a percentage of revenues decreased to 20.5% in the first quarter of fiscal 2014 compared to 22.1% in the first quarter a year ago, primarily due to the cost and inefficiencies associated with the expansion and ramp up of our new Canadian facility.

Selling, general and administrative expenses as a percentage of revenues decreased slightly to 12.6% in the first quarter compared to 13.4% in the first quarter of fiscal 2013 due to increase in revenues. SG&A expenses increased by nearly $2 million during the first quarter of fiscal 2014 compared to the first quarter last year, primarily due to increased personnel costs and administrative expenses associated with increased volumes.

The effective tax rate for the first quarter of fiscal 2014 was 35.1% compared to an effective tax rate of 32.5% in the first quarter of fiscal 2013. The first quarter last year was favorably impacted by the utilization of loss carry forwards on Canadian income.

Net income from continuing operations for the first quarter of fiscal 2014 was $7.3 million or $0.60 per share compared to $7.1 million or $0.60 per share in the first quarter of fiscal 2013. New orders for the first quarter were $192 million resulting in a backlog of $455 million. Compared to a backlog of $438 million at the end of the previous quarter and $469 million a year ago.

For the first three months ended December 31, 2013, cash provided by operating activities was $5 million. Investments in property, plant and equipment totaled approximately $6 million, of which included $4 million investments as we closed out our facility projects.

At December 31, 2013 we had cash of $103 million compared to $107 million at September 30, 2013. Long-term debt and capital lease obligations, including current maturities totaled $3 million.

Looking ahead, based on our backlog and current business conditions we expect full-year fiscal 2014 revenues from continuing operations to range between $700 million and $750 million, unchanged from our previous guidance. And we are raising our guidance for earnings to include nine months of the deferred gain from our amended supply agreement.

We now expect full-year fiscal 2014 earnings to range between $2.85 and $3.35 per share. Our guidance excludes the discontinued operations of Transdyn and the associated gains from the sale of the business which will be recorded in the second quarter. At this point Mike and I will be happy to answer your questions.

(Operator Instructions). John Tanwanteng, CJS Securities.

Can you just clarify what the revenues from Transdyn would've looked like in the quarter and what the overall gross margin would have been including that?

The best way to discuss it would be looking at last year. Last year the revenues for Transdyn contributed $32 million for the year and it was a fairly straight line business. This year we expected the revenues to be up slightly because of the size of the backlog they had.

We entered the year or closed out the prior year with about $78 million of backlog and that would have pushed revenues up a little bit. But no, I don't have in front of me the exact final revenues for the Transdyn business through the first quarter.

Okay, that is fine. And then, I know it might be a bit early, but do you have any idea what the revenue impact of the GE deal might be in fiscal 2015? I know you said you don't expect to have an impact in the short term.

At this point in time our viewpoint is that the contribution of that business will not materially be impacted, the result of a change in channels. The market will drive the volume and the market outlook for that product line remains constant. We may require some additional investments in SG&A as we develop our sales channels, but at this point in time we even believe that will be relatively modest.

Okay, great. And then I guess what are GE's options and how long do you think it will take for them to get to market with either a third-party replacement or their own channel design?

Well, John, that is probably a question you need to ask GE. But just talking about it from an industry experience standpoint, introducing a new product line would normally take several years. The question mark is as to how much work have they already done, and that is something we don't have or are not privy to.

Okay, and then one last one. Traditionally cash generation for you guys usually comes later in the cycle. I am just wondering what that timeline looks like now that you are in the middle of an oil and gas line and you have a new petrochem cycle coming.

I'm sorry, the question again, John?

Usually you have cash generation later in a cycle. I am just wondering what that timeline looks like now that you are in the middle of an oil and gas cycle and a new petrochemical cycle is coming.

What you are really asking is when is the end of the cycle. At this point in time the end of the cycle is beyond the current planning horizon, we think that the market remains very -- we are very confident in the market for the next couple of years. So we are not looking at anything that would be coming to the back end of the cycle in the current planning horizon.

Brent Thielman, D.A. Davidson.

You guys talked about sort of petrochem offshore and oil sands awards, appreciate some color there. Anything developing on the domestic refining front? And also, are you seeing an acceleration investment in maybe some of the other areas like pipelines, LNG or is that a little bit more steady?

A lot in there. Let me take it apart into some pieces. First, I think you asked about oil sands in Canada. That continues to be very healthy for us. We are ahead of our expectations in order rates in Canada and the pipeline is very healthy up there. It is still a lot of oil production, tank farms and the associated liquid pipelines that is driving a lot of the Canadian business.

Petrochem here in the US this past quarter, the one we are reporting on, we did book a handful of small projects. By small I mean in the $5 million to $10 million range. Some of those are small projects, some of that is early phase work for projects that will have much more potential down the road.

Short term on petrochem we are starting to see some movement on that. We have two or three projects that could book in the next couple of quarters, medium-sized projects in the $10 million to $20 million range. So that has been holding pretty steady and we are starting to see some early activity in petrochem.

Okay, and sorry the last part of that was anything developing on the domestic refining front in terms of opportunities?

It is a lot of small -- we booked several small- and medium-sized projects again this quarter, nothing over $10 million. That seems to be pretty steady. We don't see any big ones on the horizon, but there is some good bread-and-butter business in that $5 million to $10 million range that's holding steady.

Okay, that is great. And then just to follow up, anything new developing on the utility front? I think in recent quarters you said you might be seeing some bottoming out there at least.

We've built in a modest year-over-year increase, but it is pretty modest and it has tended to be more the environmental side of the utilities, which drives a lot of power. So we don't have high expectations for utilities this year.

Okay, great. Thanks, guys.

Jon Braatz, Kansas City Capital.

Don, Canada has been very strong. Can you give us sort of a relative importance of Canada to your operations maybe in terms of revenue and operating margins compared to your domestic operations?

Well, when you are looking, clearly the Canadian business is still much smaller than what our US domestic businesses are. But clearly it is growing and we expect it to continue to grow and become much more material in the coming years. Much of the upstart opportunity we are seeing in the current year, which has allowed us to hold our guidance from the overall revenue perspective, is coming from growth in Canada as opposed to other parts of the world.

Margin wise, they are still transitioning and ramping up the business. Clearly it is in line with our expectations that they would be bringing -- I mean you've got to bring people in, you have got to train them and then there are inefficiencies during those early stages as you ramp employees up. We have talked about this in the past, a few years ago when we were ramping up our [Curlin] facility with the transfer of the Power/Vac product line.

We are going through that same step today except it is just in organic growth. Those costs will be somewhat lumpy, but we are still on track and we expect that we will have that facility operating very smoothly before the end of the year. At that point in time I would expect us to see for the same market segment, realizing that projects vary and market segments vary, that they will be producing margins very similar to what we produce here in Houston.

Okay, are they I guess substantially lower -- I'm trying to get a sense of maybe what kind of lift we could have in margins as we transition to that more mature base, if you want to call it.

Listen, I guess the way to look at it at this point in time, I would say that the current quarter was burdened by probably plus or minus $2 million of ramp-up cost. That gives you an order of magnitude of the opportunity. Now that is not going to go away overnight, that will trend downward over the balance of the year.

Okay, all right. Don, thank you very much.

(Operator Instructions). Noelle Dilts, Stifel.

Mike, I just wanted to follow up on your comments on the petrochemical side. It sounded like you said there were some kind of medium size projects that you think could be awarded over the next few quarters. In the press release you referenced some larger opportunities. So could you just talk a little bit more about the timing on the really large petrochem opportunities?

Yes, they are still working their way through large -- we kind of tagged at that plus $25 million range. There are still 10 or a dozen projects tracking in the queue. Some of these will be busted up into phases, so we may not see it all at once, it might be some this year, some next. But as I said, we've got a handful of small projects this quarter, there are a medium ones expected in the next couple of quarters and there's some large ones late in the year and early next year.

Okay. And then, Don, I guess my question was really when you look at the guidance obviously you raised the core guidance pretty substantially, Don, in your comment just now it sounded like you are attributing a lot of the higher expectations for the quarter to Canada. But how much is this petrochemical activity playing into the guidance increase?

At this point in time I would say the revenue lift to offset the revenues lost by the Transdyn business are coming predominantly from our -- the change in our expectations in Canada. As Mike mentioned earlier on in his comments that demand there is clearly -- is running ahead of expectations.

In fact, it is creating a good opportunity for us to try to figure out how to ramp business up even faster than would be planned on. When you are looking at the activity along the Gulf Coast, I would say it is still what you would categorize as in line with our expectations overall.

Okay, can you touch on -- in the past you've talked about the challenges associated with finding skilled labor in Canada. Is that something that -- where you have seen some relief or is that going to kind of be a factor that limits your growth in Canada?

I wouldn't say that we expect it to limit our growth, but it is a challenge and it will continue to be a challenge.

But I think we mentioned on the last call, one of the big pluses that we have seen is actually the new facility that has been a recruiting tool and a retention tool as well bringing people in and the work environment there is good, particularly for that part of the country.

And that working inside a factory environment versus in a construction yard particularly this time of year has helped us out a great deal.

So I mean not to say to diminish the challenge in front of us, we are still probably looking to bring on 100 or more employees between now and the end of the year. But our success so far as we've tried to ramp up at a controlled rate that we can absorb within the organization, I would say we have hit basically all the targets that we have set internally plus or -2 or three employees at the end of each period.

Okay, and one last question if I can squeeze it in. Can you just touch on the activity you are seeing in the offshore market in the Gulf of Mexico?

Yes, offshore is still -- it has been steady as it goes, we have got two or three very nice projects in the $20 million to $70 million range that we could see some of that activity late this year. It is going to be a timing question, just which quarter. It will either be late 2014 or early 2015. But it is good projects and there is activity going on, if they are not stalled they are just farther out before the bookings will occur.

Great, thank you.

Brent Thielman, D.A. Davidson.

Don, just a quick follow-up. Depreciation and amortization at $3 million is that a good kind of run rate going forward?

Yes. It will probably ramp up a little bit in the latter part of the year as we complete the capitalizations of some of the current projects. But at this point in time for your planning purposes I think that is not an unrealistic number.

Perfect, thank you.

(Operator Instructions). Peter van Roden, Spitfire Capital.

Just talking about your guidance a little bit, the EPS range seems to imply some pretty wide expectations around what you guys think margins will be for the year. How do you think about that and what are the guideposts that you are trying to hit to end up in one camp or the other?

There are two fundamental issues that we are dealing with in the current year. One is the historical issue of a project business is the mix of projects during the period. What slides out of the year, what slides into the year. You have a large profitable project that moves from September to December it can impact the year.

The movement and projects, as we have talked about in the past, can also create some temporary holes that we will have to deal with. Right now there is a few in the current quarter that we are working to fill but nothing that I would say is alarming.

The other issue, which is unique to the current year, is the ramp up in Canada. As I spoke earlier, we probably have conservatively a couple million dollars which we would consider inefficiency costs associated with ramping up that business in the first quarter. We have plans of diminishing it over the year. But that is a fairly sizable headwind that we are dealing with as we ramp that business up.

And from experience we know that there will be bumps along the road. So how we deal with those and how quickly we can get that facility where we want it to be from a cost and an operating perspective is the unusual issue that we are dealing with in the current year.

Got it. And then on the cash balance side, does the 12-31 cash balance include the GE settlement?

It includes the first payment, if you looked at the 8-K I believe we disclosed it there there was $10 million paid upon signing and that the balance of $7 million was spread over the next three years.

Okay. And then so you are starting to push up against this fairly sizable cash balance. What is the plan to sort of go out and think about allocating that?

Clearly our top priority with that is to use it for growth. There is a couple of things we are doing in there. One is we would like to accelerate some of the organic internal product development efforts.

We have just recently created a new position and hired a person to be Vice President of Product Management in our organization to take a fresh look at our product roadmaps and our development plans. So we would like to accelerate internal organic product development efforts.

Acquisitions is certainly part of that plan. We have identified five strategic areas that we would like to accelerate or work in acquisitions. Frankly the funnel is a bit stale so we are trying to refresh that, we have got some targets we are looking at but nothing I think that will impact 2014.

Those are the two big areas for growth, organic product development, acquisitions. We also are looking at accelerating some capital spend inside the factories, particularly projects that will drive cost savings, efficiency or productivity improvements. And we have identified a few of those, they are relatively small but they've got quick paybacks on them. So we are also looking at that as the third area.

Okay. And then a final question, was there any one-time items in SG&A this quarter from either Transdyn or the GE stuff?

No, there is nothing that I would call unusual in our cost structure in the current year that was outlined that would warrant changes in your model.

Okay, thanks.

(Operator Instructions). John Tanwanteng, CJS Securities.

My question was answered already, thank you.

And at this time I am showing no further questions in queue. I would like to turn the call back over to management for closing remarks.

Well, I appreciate everyone's interest in dialing in today. We always value your interest in Powell. Thank you for your time today. And bye for now.

Thank you, ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference you can dial in the US 303-590-3030 and in the UK can dial plus 44-207-154-2833 and enter the access code 466-3343. We would like to thank you for your participation. And you may now disconnect.