Powell Industries Inc (POWL) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Powell Industries second-quarter earnings conference call. (Operator Instructions) This conference is being recorded today, Wednesday, May 7th, 2014.

I would now like to turn the conference over to Karen Roan. Please go ahead.

Thank you, George, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2014 second-quarter results. We'd also like to welcome our internet participants.

Before I turn over the call to Management, I have the normal details to cover. If you did not receive an e-mail of the news release issued yesterday afternoon and would like one please call our offices and we will get one to you. That number is 713-529-6600. Also, if you want to be on the permanent e-mail distribution list for Powell news releases please relay that information to us.

There will be a replay of today's call and it will be available by webcast by going to the Company's website at powellind.com, or a recorded replay will be available until May 14th, 2014 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 7th, 2014 and, therefore, you're 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 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 2014 second-quarter results. I'll make a few opening comments, and then I'll turn the call over to Don to review the financial details.

We had a solid second quarter with good year-over-year improvements and ended the period with one of the strongest backlogs in the last five years from continuing operations. We saw benefits from our process improvements and our cost savings activities, which continued to drive margins. However, this margin improvement was partially offset by challenges in two areas.

First, we continue to work efficiency and utilization issues in Canada as we ramp up our manufacturing operation. The hiring phase is going well, as we are able to bring in both the talent and the number of employees required. However, the integration and productivity of such a large number of new employees has temporarily impacted our operational efficiency. Today well over two-thirds of our employees in our production business have been with the Company one year or less. Good progress is consistently being made, and we expect to see improvement quarter over quarter. Despite this, we're getting the work delivered on time and are meeting our customer delivery commitments.

The Canadian market continues to be very strong and our facility investments are certainly strengthening our position there. Our projections for Powell Canada are increasing, and we expect to be a major player in this important region.

Secondly, at the request of customers we've had to reschedule shipments on a few large active US projects, resulting in some revenues moving into subsequent quarters. This is a normal timing issue, which is not uncommon in a project-based business. We are working to obtain some shorter-cycle projects to fill the near-term capacity gap, but because of these rescheduled shipments we've seen at least $15 million to $20 million of revenues slide into next year.

Overall our core North American oil and gas markets remain strong, with healthy quotation activity. Our outlook remains consistent with last quarter.

Projects in the US petrochemical market continue to move forward. Within this segment customers appear to have adopted the approach of awarding orders in phases rather than a single large order. The size and scope of the project opportunities have not changed, but they are being executed in phases. We continue to be optimistic about this segment of the oil and gas market.

Pipeline projects have been strong for the past several quarters, and we anticipate more investment in this area through 2014 and well into next year.

Regarding offshore, we continue to anticipate a pickup of activity late this year and into 2015 as customers are cautiously evaluating their commitment to these multibillion dollar projects.

LNG projects continue to work through the early engineering and regulatory approval phases at a slow pace, but have significant potential for Powell over the next few years. We anticipate increasing activity in both the US and Canada.

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

Thank you, Mike.

Revenues increased 11%, or $16 million, to $162 million in the second quarter compared to the second quarter of fiscal 2013. Domestic revenues increased by $2.6 million, or 3%, to $92 million in the second quarter compared to the second quarter of fiscal 2013.

International revenues increased significantly by $13.7 million, or 24%, to $70 million. The increase in international revenues was driven primarily by the expansion of our operations in Canada and the timing of oil and gas construction projects.

Gross profit as a percentage of revenues increased to 21.5% in the second quarter of fiscal 2014 compared to 20.2% in the second quarter of fiscal 2013. This increase in gross profit was primarily driven by margins associated with the mix of projects in process and operational improvements, partially offset by the ramp-up of our Canadian operations.

Selling, general and administrative expenses increased by $1.1 million to $22 million in the second quarter compared to the second quarter of fiscal 2013, primarily due to the increased personnel costs, administrative costs associated with the increased volume, as well as the growth of our Canadian business. SG&A expenses as a percentage of revenues decreased to 13.6% during the second quarter compared to 14.4% in the second quarter a year ago.

We recorded other income of $500,000 in the second quarter, which was the amortization of the deferred gain from our amended supply agreement, compared to other income of $1.7 million in the second quarter of fiscal 2013, which resulted from a settlement of a lawsuit in Canada.

Net income from continuing operations for the second quarter of fiscal 2014 was $7 million, or $0.58 per share, compared to $6.2 million, or $0.52 per share, in the second quarter of fiscal 2013.

For the six months ended March 31st, 2014 revenues increased 14%, or $41 million, to $334 million compared to the same period a year ago, primarily due to the expansion and the ramp-up of our Canadian operations.

Gross profit as a percentage of revenues was 21%, unchanged from the first six months of fiscal 2013.

Selling, general and administrative expenses increased by $3 million to $43.7 million compared to the first six months of fiscal 2013, primarily due to increased personnel costs, incentive compensation, and administrative expenses associated with increased volume, as well as the growth in Canada.

We recorded other income of $500,000 in the first six months of 2014 compared to other income of $1.7 million in the first six months of fiscal 2013.

Our provision for income taxes reflects an effective tax rate of 35.9% for the first six months of fiscal 2014, which approximates the combined US federal and state statutory rates as the majority of our income was US.

For the six months ended March 31st, 2014 net income from continuing operations was $14.2 million, or $1.18 per diluted share, compared to $13.3 million, or $1.11 per diluted share, a year ago.

New orders for the second quarter were $163 million, resulting in a backlog of $452 million, only $3 million less than the backlog of $455 million as of December 31st, 2013.

For the six months ended March 31st, 2014 cash used by operating activities totaled $7 million. Investments in property, plant and equipment totaled approximately $8.5 million.

At March 31st, 2014 we had cash of $101 million compared to $107 million at September 30th, 2013, and 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 expect earnings from continuing operations to range between $2.85 and $3.35, also unchanged from our previous guidance. Our guidance excludes the discontinued operations and associated gain on the sale of our Transdyn business.

At this point, Mike and I will be happy to answer your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)

And our first question is from the line of John Tanwanteng with CJS Securities.

Good morning. Thanks for taking my questions.

Good morning, John.

Regarding the rescheduling of projects, are the push-outs all going into next year or is some of that expected to fall into the current quarter? And then, also, have you seen any more reschedulings in April or May?

John, this is Mike. And so far we had in this quarter about $15 million to $20 million of rescheduled that just had a domino effect. So we had some slide out of Q2 into Q3, Q3 to Q4, Q4 to Q1, so it was a bit of a domino effect. So we saw about a $15 million to $20 million impact this quarter, and we believe it's about the same number for the full year. It was two or three US projects.

Last quarter we talked about we thought we had seen some stabilization in that project slip and we did. But it's kind of back to these, I wouldn't say abnormal, they're pretty typical, normal reschedules. So I think we've got it all dialed in now, but it is always a variable.

I think that the majority of the impact is from the same orders, it's just an elongated schedule versus a compressed schedule that we previously were working to.

Okay, got it. And then given that the guidance range stayed the same despite pushing those projects out, is that due to the strength in Canada or is something else going into that?

I think what the issue there is, the schedule changes are relatively fluid. I think there's still enough time in the year for us to work to backfill some of that work, plus there is a lot of variability in the opportunities that we see up in Canada as we work through the efficiency issue. So at this point in time we're comfortable with the range, of staying in that range, but clearly at this moment in time there's a little more headwind than we had 90 days ago.

Okay, great. And then maybe one more. Gross margins were still very strong despite the scheduling issues. Can we expect a step function as you normalize the Canadian operations and larger projects start shipping towards the end of the year?

Clearly we expect quarter-over-quarter improvements in the operating efficiencies of Canada, which should drive quarter-over-quarter improvements in the aggregated results.

Great, thank you very much.

Thank you. And our next question comes from the line of [John Franzreb] with Sidoti.

Yes, just sticking with the Canada theme, if I recall last quarter was about $2 million of inefficiency cost that you had called out. Is that still the current run rate or has it moved north or south from that?

I think that the number is approximately the same number. It's not deteriorating. And it's stabilized given the fact of the increase of new employees coming into the business. We've brought in a lot of employees over the last six to nine months, and we're just working through that training, integration, and operational effectiveness of bringing on the new employees.

When you're looking at it in overall aggregate, we're stepping back and looking at it. At this point in time it is a little more than we had planned. But when you're looking at it from another perspective of what we're trying to accomplish we're not -- we're pleased with where we are. There's still a lot of hard work to get through. When you're looking at the six-months' impact I would say we're looking at somewhere probably a little bit north of 100 basis point impact on our aggregated consolidated results.

Got it. And, Mike, I guess from your commentary it seems to me maybe the incoming order book is going to start flat lining a little more than I expected. I originally thought maybe the second half of the year there might be, call it, a greater wave of incoming orders. But now with the new jobs in petrochem being parceled out in smaller phases is it more likely that we're going to see more of a steady stream or a more constant order book in coming quarters than maybe a big jump, certainly in the next year or so?

No, John, in fact, we expect to see orders much stronger in the second half even if it's been parsed into smaller bite-size pieces. In fact, if it's not record, we expect near record bookings levels for the full year.

Okay, okay, so that's still the case. Okay, that's great. And one last question, you hired a guy to maybe relook at the M&A pipeline recently. Can you update us on his progress in identifying some new targets and/or new product development? I know that was also part of his job title.

Still working it. We're putting a framework together for a little bit more strategic evaluation of those. We're building up the funnel. There's a lot of possibilities in there, still a lot more vetting to do, but nothing M&A.

Okay, thank you, guys.

Thank you. And our next question is from the line of Brent Thielman with D.A. Davidson.

Yes, good morning, guys. The issues at the Canadian facility, Don or Mike, how long before you think profitability gets to kind of desired or targeted levels there?

We are looking to probably bring on another 75 to 100 employees between now and the end of the calendar year. As long as we're continuing to bring on employees of that magnitude there's going to be some headwind that the Organization will be dealing with as they integrate the employees.

So when you're saying when are we going to peak, it's probably going to be sometime next year. But when you're looking at where we expect it to be at year end, I think we're going to be pretty close that we'll have enough -- that the scale will tilt here as we get more and more employees that have a foundation in our business that can help assimilate the new employees.

Right now the scale is a little bit against us. As Mike mentioned earlier, about two-thirds or more of the employees have less than a year of seniority. As we get that to where two-thirds have a year plus of experience with our company and we're bringing in 25% to 30% new employees you'll gain momentum. So the long answer is it's probably going to be sometime in mid 2015 before you could say we're there, but I think it will have a nominal impact on the business beyond the first quarter.

Okay, very helpful. And then you talked about the LNG opportunity, I know it's still a ways out, but does this look like it has the potential to be as sizable as the petrochem market looks to be for Powell in terms of overall opportunity?

It does. We've got a very healthy list of projects. We don't anticipate they will all be licensed nor funded, but they are sizable projects and I would, yes, I'd put it kind of equivalent at that petrochem spend that we see.

Got you. And sorry, Don, I missed this, but did you give the cash balance at the end of the quarter?

Cash balance was $101 million.

Great, thanks, guys.

Thank you. And our next question is from the line of Noelle Dilts with Stifel.

Hi, thanks. Good morning.

Morning, Noelle.

One more question on Canada here. You talked a lot about the employee situation, but can you talk about where you stand in terms of shifting production from Houston to Canada, if there's still more room to go on that front?

It's been a transition process as we have integrated the employees. Today there is still support coming out of Houston for projects that are in process in Canada. And we've talked about it. That's something that will happen probably on an ongoing basis when these get peak loads. The facility in Canada is smaller than what we have here in Houston and it will always use Houston as a backup for peak periods of time. But relative to our operating plan that we're working to right now, I would say we're over halfway through it, but there is still work being done here on an ongoing basis.

Okay, thanks. And then can you just comment on the offshore market, what you're seeing in terms of activity and potential opportunity there in the pipeline?

Yes, some very good opportunities. I think consistent with what we said last quarter, there's two or three shorter-term projects that we could see book late this year or early next year, ranging from $20 million to $70 million. I think we'll get at least one of those here in the next, you know, before year end. But there's two or three that are fairly close and then some that could happen late in 2015. But a nice pipeline, two, three projects in the $20 million to $70 million range.

Great, thanks. That's helpful.

Thank you. And our next question is from the line of Cezary Nadecki with [Schroders].

Good morning, gentlemen.

Good morning.

Just a follow-up on your comments a little bit, maybe, the three projects that got pushed out. Can you give us some qualitative description of those projects in maybe a little bit more detail?

And then the second question, as we look at the end of the year and I think you called out four areas of growth -- oil and gas pipelines, petrochem and LNG -- specifically to orders for the rest of the year could you kind of rank them or kind of qualitatively describe where a majority of your optimism is and kind of how they fall out in order?

Okay, sorry, what was your first question?

My first question is on the three projects that got pushed out a little bit. Could you describe -- I'm assuming they're all petrochem, but I'm not sure.

Yes, they're all petrochem, they're all US. About half of it was in the offshore business, the other half was in our electrical products business. And it was just a reschedule of milestones by the customers, not atypical, but what we'd typically see in this project business.

Okay.

Sorry, did you say petrochem? They were oil and gas, they were not petrochem, offshore in oil and gas.

Okay, they were all oil and gas, okay.

So market-wise, trying to take a piece at a time here, so on the petrochem side we are seeing that unfold as we thought. We had about $60 million or so in bookings this quarter. We're probably about $80 million to $90 million in bookings for petrochem year to date. There's still some more projects that we'd expect to see close this year and into next year.

Pipeline has been very healthy for the last several quarters. So that's continuing on, and there's -- we think that's still a growing market into 2015.

LNG is a lot farther out, as we said. We've got one small order in the $20 million, midsized order in the $20 million range so far from LNG, but most of those are going to be mid to late next year.

And then offshore, again, I think I quantified that best we can. There's two or three projects we think will book late this year or early next year, highly likely to get at least one of those into this year. They'll be in the $20 million to $70 million range.

Just as one follow-up on that oil and gas. If you were to book those projects could you give us some kind of sense of growth in those orders year over year for the second half, kind of what are we looking at for oil and gas specifically?

I think I'll stick with the other comments we said. If it unfolds as we expect we'll have record bookings for the Company, or certainly near record bookings for this year, primarily driven by North American oil and gas.

Because if we think about oil and gas should we think about as number of rigs as the driver here? Is that how we should think about it or is there some other way of thinking about it?

No, we've never really been able to correlate rig count to our volume, so I think it's best to think of these four various segments -- the onshore pipeline, LNG, petrochem, offshore, those four or five segments, so.

[Keep in mind] we're late cycle. Most of the projects that we are bidding and/or working on, our projects are one of the last specifications to come out for bid and one of the last major projects to be delivered. So most of the work that we will be working on, be having opportunities on over the next six months, are projects that are being processed within the engineering firms.

Okay, okay, thank you so much.

(Operator Instructions)

Our next question is from the line of Tom Spiro with Spiro Capital.

Tom Spiro, Spiro Capital, good morning.

Good morning, Tom, how are you today?

I'm doing okay, thank you. Just a follow-up on Canada. And, given that we have so many relatively inexperienced new staff up there, are we intensifying our quality control efforts up there? And, Don, are we adjusting warranty reserves, at all?

Absolutely. We are -- clearly in our business everything is inspected by the Company before it's shipped, and the vast majority of our projects are actually witness-tested by the client. So the majority of the issues that we encounter during a startup, like we are speaking of with the relatively new employees, occur in incremental cost in the efforts of rework as opposed to field issues. But, yes, we are very diligent from a inspection and test standpoint, and additionally that we're providing even more resources from an oversight and support standpoint from our Houston organization to help in the training of that area, specifically, as well as the balance of the business.

And warranty reserves?

Warranty reserves, we are conservative. But to say that we expect significant increases as a result of product being shipped out of Canada, we really don't because of the level of testing that we do prior to ship.

Well, that's great. Thanks much, and good luck.

Thank you, Tom.

Thank you. (Operator Instructions)

We have a follow-up question from the line of Cezary Nadecki.

Thank you for taking the time. Just as a follow-up on oil and gas, can you just describe a little bit where the growth is? Is it downstream? Is it upstream? Kind of -- because I was a little thrown off by your comment that you're so late in the cycle.

Well, I think what Don meant is late in a project cycle. So they'll do the process design first and, of course, they have to nail down how many pumps and what the electrical demands are going to be before we can [size] our equipment -- so not late in the economic cycle, late in the project cycle.

Okay, but it's still related to drilling, right, or am I off on that?

No, we really don't do much on the exploration side, so on the drilling side. It's after the wells are drilled and they're put into production, we have some applications on that upstream side on the gathering. So the smaller pipelines, the gathering systems, the tank farms where that would be gathered, so that's really where we pick up. So it is late after the exploration side. We don't do much on exploration; it's the production piece.

Okay, and then we've heard from the big E&P companies kind of mixed messages about the offshore project. Is that affecting you in any way? Should we think about that longer term?

You have read over the last year a couple of Gulf projects being canceled, but we still are optimistic about it. They may not be all these projects get funded, but there is front-end engineering work going on, and we're expecting to see orders still this year on those.

Relative to business volume that we've been able to obtain the last two years, we're looking at the next two years of being an up period relative to where we are.

Okay, thank you so much. Good luck.

Thanks.

(Operator Instructions)

We have another follow-up from Noelle Dilts.

Thanks. Just a little bit more color on the petrochem orders. I'm curious if the $80 million to $90 million in bookings you've seen year to date, what you would say the kind of average order size is, and if -- I understand you're expecting these to come in in smaller pieces, but if you expect any change in that order size.

I'd still stick with what we've talked about. These have the potential to be large orders for us, which would be well north of $25 million to $30 million. The $60 million we got this quarter, almost all of that was in two orders, so they averaged $25 million to $30 million. The first quarter we had $20 million, $25 million or so in bookings. Those were smaller phases. So I would say they were $5 million to $10 million orders first quarter, $20 million to $25 million orders the second quarter. I don't think we're going to see $50 million orders. They're going to be more in that range.

Okay, great. And then just a little bit of -- a couple of questions on some of your smaller markets. But can you talk about what you're seeing in IEC product and then, also, if there's been any acceleration in the distribution market on the utility side?

Okay, first the IEC market, our IEC business this year is going to show some very nice growth. We don't think that's market related. We have won a couple of nice projects in our IEC business. We still see that market as flat at best, maybe slight growth, but it's going to be more in the zero to 2% range, basically flat and probably not much change in that over the next year.

Your second area was utility. Utility we got a little very modest growth in our business this year, but we're also planning for that to be a flat market, as well, at least in the US over the next few quarters. A lot of pent-up demand, but we just don't see it in our space on the distribution side being cut loose yet.

We're seeing a few projects, but most of them are relatively small, $1 million to $3 million range.

Okay, and then just back on IEC, are there any geographies that are showing particular strength?

It's the oil and gas areas, so Mid East and Central and Eastern, a little bit in Eastern Europe.

Eastern Europe, okay, great. Thanks.

Thank you. And I'm showing no further questions. I'll turn the call back to Management for closing comments.

Well, thank you, everyone. And just before we conclude the call I'd like to just briefly summarize what I think are some of the key points from the quarter.

Despite some revenue shifting into next year as a result of some of these customer-driven schedule changes, we are at near record level backlogs and we've got a very strong bookings outlook for the second half of the year. And we're confident we're going to be able to deliver the revenues in a backend-loaded year.

We continue to work our margin improvements from operational process improvements and cost savings activities. We're getting great traction there. It will be partially offset with some of the short-term efficiency issues in Canada.

We're still very optimistic about our core North American oil and gas markets. Our outlook remains robust near term, driven by pipeline and petrochemical, and longer term by offshore and LNG.

And we're really pleased about how we're positioned today -- strong market outlooks, our new capacity and facilities online, and I think uniquely positioned with some capabilities to engineer, manufacture and manage some very complex projects.

So we feel good about the future of Powell. We appreciate you joining us this morning for this call and this update, and we'll talk to you next quarter. Good-bye, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.