Powell Industries Inc (POWL) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Powell Industries fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Karen Roan. Thank you, Ms. Roan. You may now begin.

Thank you, Manny, and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review FY14 fourth-quarter results. We would also like to welcome our internet participants listening to the call simulcast live over the web.

Before I turn over the call to the 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 office 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 relate that information to us.

There will be a replay of today's call, and it will be available via webcast by going to the Company's website at PowellInd.com. Or a recorded replay will be available until December 10, 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, December 3, 2014. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

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 for a review of our FY14 fourth-quarter and full-year results. I'll make a few opening comments, and then I'll turn the call over to Don to discuss the financial details.

As you may recall, at the time of our operations update call in late September, we had our July and August results. Subsequently, our fourth-quarter results came in better than we anticipated, primarily due to strong service revenues and better-than-expected costs on certain large projects in September. Also, our fourth-quarter orders were strong, totaling just under $200 million, and resulting in record orders for the full year of $726 million from continuing operations.

I'd like to provide you an update on the two operational topics we discussed on our September conference call. First, regarding our business systems re-implementation and efforts to improve some inefficiencies we encountered, those results came in as expected for September, and we continue to see positive progress moving forward into this first quarter.

As a reminder, earlier this year we made a strategic investment into our business systems in a suite of new software tools designed to standardize best practices, drive efficiencies and increase productivity across the Company, as well as provide us with processes and tools to help scale for future growth.

As new project work began to flow through the new system, we encountered some process issues that caused operational inefficiencies, with the greatest impacts seen at our largest manufacturing facilities. We've been aggressive in our recovery actions and are now meeting revised schedules and revenue plans. We still expect to have these issues mostly resolved within the next few weeks.

Secondly, our Canadian business also delivered results in line with our outlook, as discussed in the September call. We continue to work closely with our customers to meet and hold delivery schedules. And we are continuing to deploy internal resources to leverage the knowledge of our most experienced employees, utilizing them for in-process training at our Canadian facility.

We continue to meet the revised production schedules that we established in the third quarter, although the cost of doing so continues to impact our results. We anticipate steady progress over the next couple of quarters, but we will continue to see higher costs to hold our customer commitments and schedules.

The demand for products and services in Canada has been strong, and our investment in facilities has been well-received and is unmatched by our competition. With the construction of our new Canadian facility a little more than a year ago, our objective was to replicate our US project integration model and have the full capability to design, fabricate, integrate and test complete e-houses in Canada, where previously we only had a final assembly operation.

We continue to see strong demand for our solutions in this market. In light of this demand, as well as a positive future market outlook, we are investing an additional $33 million to expand our manufacturing capacity in Canada. Our Canadian manufacturing operation is strategic to our ability to serve our customers, and we continue to believe that the oil and gas activity in Canada will be an important long-term growth market. This investment only further solidifies our long-term commitment to the region.

Regarding our core energy markets, we continue to monitor and make ongoing adjustments to our outlook. In the oil and gas segment, there's obvious concern about the recent decline in oil prices and its impact on pending project awards.

At this point, we anticipate that new orders in the energy segment will be a little tougher in fiscal 2015 if depressed oil prices persist, as our customers' cash flows and capital spending plans may be reduced or delayed. Given our healthy beginning backlog and the fact that many of our active projects are already well-underway, we anticipate that any potential delays in capital spending will have a greater impact on our FY16 revenues than on the current fiscal year.

In the offshore production market, we're seeing some large projects being pushed into subsequent quarters. At this point, we anticipate some smaller offshore projects booked this fiscal year, but we do not expect any major offshore project rewards until FY16.

Regarding the US petrochemical business, we had another very strong bookings quarter this past quarter. For FY14, we won almost $200 million in new petrochemical awards. We anticipate additional opportunities in this segment through the middle of calendar 2015. However, we believe we've passed a high point of the electrical equipment awards for the first cycle of investment in petrochemicals. There has been some talk about a second wave of investments, but these projects have not yet been fully sanctioned.

We continue to see strong and active pipeline markets, and expect more of these projects will move from the preliminary engineering phase into award during 2015, both in the US and in Canada. Pipeline represents a significant volume opportunity, and we maintain a strong outlook for this market. Even with the lower price of oil, we expect this segment to remain healthy.

With the price of natural gas in the US, LNG export facilities continue to represent a substantial opportunity. We see the LNG export market still in its early phase, with numerous projects in North America in various stages of permitting and engineering design. We continue to believe the LNG export market represents a significant opportunity, and we remain optimistic about the long-term potential of this market.

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

Thank you, Mike. Revenues from continuing operations were $163 million in the fourth quarter of FY14, compared to $176 million in the fourth quarter last year. Gross profit was $26 million or 15.8% of revenues in the fourth quarter, compared to $40 million or 22.7% of revenues in the fourth quarter of FY13.

In the fourth quarter of FY14, both revenues and gross profit were negatively impacted by inefficiency curve following the re-implementation of our business systems, and as we increased production volume in Canada. Additionally, in FY13 both revenues and gross profit were favorably impacted by the recovery of $3.8 million related to cost overruns on our large industrial project.

Selling, general and administrative expenses increased by $2 million to $21 million compared to the fourth quarter a year ago, primarily due to higher personnel costs and depreciation expense. Income from continuing operations in the fourth quarter of FY14 was $2.4 million or $0.20 per share, compared to $17.3 million or $1.44 per share in the fourth quarter of FY13, including special items.

Excluding special items, income from continuing operations in the fourth quarter of FY13 was $9.1 million or $0.75 per share. A reconciliation of this non-GAAP financial measure was included in yesterday's press release.

Revenues increased by $7 million to $648 million for the 12 months ended September 30, 2014. Domestic revenues decreased by 2% or $9 million to $365 million. And international revenues increased by 6% or $16 million to $283 million. The growth in our Canadian business contributed to the increase in revenues compared to last year.

Revenues from industrial customers increased $19 million to $474 million, while revenues from utilities decreased $12 million to $127 million. Revenues from transit projects were $46 million, unchanged from a year ago.

Gross profit decreased by 9% or $13 million to $125 million in FY14. Gross profit as a percentage of revenues decreased to 19.4%, compared to 21.6% in FY13. The decrease in gross profit was primarily due to higher costs of whole customer schedules, inefficiencies in the production ramp in Canada, and process inefficiencies following the re-implementation of our business systems.

Our [lease] higher costs were partially offset by supply change and productivity initiatives. Additionally, gross revenue and gross profit in FY13 were favorably impacted by a $3.8 million project claim recovery, as noted earlier.

Selling, general and administrative expenses increased to $88 million in FY14, primarily due to increase of personnel costs and administrative expenses. SG&A expenses as a percentage of revenues increased to 13.5% in FY14, compared to 12.4% last year.

This increase was partially offset by a decrease in depreciation expense as our existing business systems became fully depreciated in FY13, and a favorable impact of the capitalization of certain personnel costs associated with the development and re-implementation of our new business system. However, going forward, a favorable impact of depreciation expense and a capitalization of personnel will no longer be realized.

Research and Development expenses were $7.6 million, unchanged from a year ago. Amortization of intangible assets decreased to $779,000 in FY14, compared to $1.7 million in FY13, primarily due to an amended supply agreement. Additionally, we recorded other income of $1.5 million in FY14, which represents the amortization of a deferred gain from the same amended supply agreement.

Our effective tax rate in FY14 was 36.1%, which approximates the combined US federal and state statutory rates, as a majority of our income was attributable to the US. Additionally, the federal research and development tax credit expired on December 31, 2013.

For the 12 months ended September 30, 2014, income from continuing operations was $19.6 million or $1.62 per share. We generated new orders in the fourth quarter of $199 million, resulting in a year-end backlog of $507 million, compared to a backlog of $477 million at the end of the third quarter and $438 million a year ago.

For the 12 months ended September 30, 2014, cash provided by operating activities was $9 million, and investments in property, plant and equipment totaled approximately $16 million. At September 30, 2014, we had cash of $103 million, compared to $107 million at September 30, 2013. Long-term debt and capital lease obligations totaled $3 million.

Looking ahead, based on our backlog and current business conditions, we expect full-year FY15 revenues to range between $650 million and $710 million, and full-year earnings to range between $1.75 and $2.30 per share. At this point, Mike and I will be happy to answer your questions.

Thank you.

(Operator Instructions)

The first question is from John Tanwanteng of CJS Securities.

Good morning guys, happy Thanksgiving. Nice job on the quarter.

Thanks, John. Good morning.

Had a couple questions regarding your outlook and where energy prices are. First of all, how much have you factored into your guidance for 2015 specifically as a result of customers pushing out or reducing capital budgets?

And second, do you view lower oil prices more of a FY16 issue, given that the backlog and our long lead times?

Take your second question first, and I'd say that yes, coming into the year with a pretty healthy backlog and a pretty strong fourth-quarter bookings number that sets us up pretty nicely going into 2015. At this point, if we believe that those oil prices -- I think as everyone has been talking about -- if they persist at those lower levels, there's certainly some risk. Projects could be delayed or pushed out.

At this point we've seen no impact of that yet on any projects that are underway or being pursued. And if there are delays, we anticipate it to be more of a second-half bookings issue and a 2016 revenue issue.

I know some people have expressed concern -- is there a risk of cancellation? And we think that's very low risk in our backlog. By the time the electrical portion of many of these projects are issued, they're already significantly underway with the process side of that investment. We rarely see cancellations. So I think the risk of cancellation in things that are in the backlog is very low.

Okay, got it. And then just in terms of the FY15 guidance, there's not much in there?

When you're looking at the FY15 guidance, clearly we have taken a more conservative look than we might have taken three or four months ago. The near-term risk is more related to the small projects and any fill-in work that we would need to fill out the balance of our backlog requirements for revenue in the current year. Again, it will be more of a second-half risk than a first-half risk, and we have taken a little bit more conservative view as a result of recent activities in oil and gas prices.

Okay, great. And then, can you talk about geographically how you expect the trends to play out, just because of the different cost production in different regions?

We still see most of it -- well, most of our volume adds in 2014 and we expect in 2015 still going to be North American-based, so we don't see much change in that year over year. It will be our US-based customers in Western Canada.

When you're looking at -- John, follow-up on that -- the risk, from a project standpoint, will probably be much more greater from a risk standpoint on production-related capital spending projects which are looking at increasing capacity. Those projects will probably come under more scrutiny. And at the risk of delays, they're probably more prevalent there.

That would impact the Canada probably more so than in the US, from our recent activity. But again, Canada is heavily influenced on pipelines, so we still see strong opportunities in -- at least in the near term -- in the Canadian market as well.

Okay, thanks. And then just real quick, did you pull in any business from the December quarter at all? Especially in services?

No. The services piece was a lot of after-market parts we got caught up on in the factory as a result of some of the inefficiencies we had. So that was all in backlog at the time. I'd say there was no pull-in from Q1 into Q4.

Okay, great. I'll jump back into queue, thanks.

The next question is from John Franzreb of Sidoti.

Good morning, guys.

Good morning, John.

I'd like to talk about the $33 million expansion in Canada. Could you just give us a little bit more color what you're doing, the timeline for doing it and why you're not concerned that you might be adding capacity as we're peaking out in the region?

Good questions. First of all, what is it? It's an expansion of the manufacturing footprint primarily, more space on the factory floor. There's a little bit more office going in with that because we have basically filled up the office space now.

When we put together our projections for the original building, I think we mentioned in some earlier calls, we were probably running 18-24 months ahead of our original justification for the construction of the original building. And we're just running out of some floor space right now.

We do need some of that space to deliver 2015 commitments. However, this was not a 2015 investment; this is a longer-term investment. Even if there's some short-term blips here, we still think the Canadian marketplace has a lot of runway left in it, and this is an investment for the long-term. So we hope to have that facility -- to be able to fully occupy that by late second quarter or early third quarter -- fiscal quarter.

Okay. And Mike, you've mentioned that you were thinking 25-50 people in Canada, as far as staffing-wise. I think it was by the end of the year; it might have been by the first quarter. Is that still a good number, or are you going to have to add more on top of that number?

No, that's a pretty good number. In fact, I would say to-date we are probably nearing peak employment. We're essentially through that accelerated ramp-up hiring where we were needing people in every functional area. We're essentially through that. I'd say we're a little bit more stabilizing now on the employment and hiring.

Of course, there will always be a few adjustments, given volume and demand and shift structure, both on the professional and the skilled labor side. But essentially, we are nearing peak employment in Canada.

And the expansion we don't think is going to require that many more people. It's mainly a floor space issue, if anything. A lot of these e-houses we're building up there turned out to be a lot bigger footprints than we anticipated. So it's as much of a floor space issue as anything.

One more reminder, I think. When we ramped initially with the new building, we put a lot of new processes in that facility, things we had not done up there before; structural steel design, fabrication of the base, and a paint line and a bus marker production and a coating area. Those processes are now all very well-established, so this is mostly a space expansion need.

Okay. And one last question -- this is for Don. In the fourth-quarter results, how much was the results impacted by the IT upgrade rollout -- whatever you want to call it -- a business system upgrade? Can you quantify that for us?

Well, relative to the rate that we have been experiencing, say, in the previous quarter, it came in pretty much as we anticipated. It wasn't a lot of surprises from our September call. The deterioration for the quarter was probably pretty close to our estimate of two-thirds was a result of the Canadian operation, about one-third of it was related to the systems.

And those numbers that we had anticipated came in pretty close to where we thought, with a couple of exceptions, as Mike noted, regarding the service. And improvements on a couple of projects from a cost perspective that were better than anticipated. But the inefficiencies and the extra costs came in very close to where we thought they would be.

Okay, thank you, guys. I'll get back into queue.

The next question is from Noelle Dilts of Stifel.

Thanks, good morning.

Good morning, Noelle.

Just to kind of expand upon that last question. As we look out into the first quarter and the remainder of 2015, how should we think about the Canadian and business systems drag trending through the year? I understand hopefully you'll be through this business systems drag here in the next couple weeks.

But can you talk about if you expect the drag to be half of what it was in the fourth quarter and the first? Any sort of direction there would be helpful.

Let me take them in two pieces. First the business system piece. And I believe your comments are correct, Noelle. We think we'll have that essentially behind us in the next few weeks. We've seen good steady progress in getting the output levels back up -- I'm going to call it to pre-Go Live levels we saw earlier. So I think we'll essentially have that mostly behind us in the next few weeks.

Canada -- the projects we were working on, we've had to throw some extra cost at those in the way of outsourced cost and extra labor and overtime and expediting fees. So those are now built into our margin expectations of those projects. Until that current backlog of projects is flushed out, it will continue to be a margin drag.

And the bulk of those will be shipped by mid- to end-of second fiscal quarter. So you'll see it continue to be a drag through the first quarter, less so in the second quarter. And then once we get that -- the predominant portion of that backlog behind us, third and fourth quarter ought to be much stronger. Don, would you add anything to that?

No, I agree with the comments that Mike's made. And to put things in perspective, keep in mind we're on percentage completion from an accounting perspective, so we've had to take down the expected margins on these jobs, which is will be recognized over the life of the project. From an extra cost-incurred cash flow perspective, most of that will substantially ramp down here at the end of this month, in the early part of January.

Okay. And then, have you seen any project order cancellations associated with some of these production deadlines being pushed out -- or, pardon me, delivery deadlines being pushed out? I know on your update call, you said you hadn't seen too much of that, but just curious to get an update there.

Noelle, was your question on cancellation?

In Canada.

No, we've seen no project cancellations. Once they're in backlog, we've see no cancellations in Canada, or really anywhere else in any of our other markets. Once the project reaches that point, the odds of it continuing are very high. They're pretty substantially far into their investment. So no cancellations anywhere.

Okay. And then, when we look at this Canadian plant expansion, the $33 million expansion, how can we think about the total productive capacity of that facility after this is completed?

Well, I think the best way to characterize that is keep in mind what we talked about with our facility here in Houston. That we built it with a three- to five-year view, and did not fully equip the machinery and equipment, and a lot of things that we will need over time as the volume in the business expands.

We're doing the same thing with this expansion in Canada. We need some floor space today, immediately. We've already had to move some of our inventory off-site because we just did not have sufficient space to manage all the volume going through the existing footprint.

Our goal is to -- we're working with the builder to try to get some of that space available to us sooner, as in the facility-in-total. We're hoping to get some of that space completed and usable here early in our January time period.

But when you're looking at the business as a whole, we're basically nearly doubling the manufacturing footprint. So theoretically, we're doubling the capacity long-term. But to reach those capacity levels, there will have to be incremental people, incremental machinery and equipment, that's not in the current scope of our planning.

Okay, thanks. I'll hop back into queue.

The next question is from Jon Braatz of Kansas City Capital.

Good morning, everyone. With the specter of maybe some project cancellations or even slowing orders, my question is, are you currently seeing any pricing issues? And are you seeing companies trying to fill their order book by pricing -- by taking some discounts?

And secondly, if indeed it comes to be a second-half issue, would you expect to see margins a little bit lower on new orders in the second half?

At this point, Jon, we've seen no change in the pricing outlook, nor in our pricing strategy. Pricing has been holding so far. And I think the second half will just -- it's a little hard to call right now what the margins might look like, based on potential market softening at that point. It's a little bit hard to call.

We're going to be competitive on these projections, as we always have. We're going to try to win the ones we want to win. But right now, pricing has been holding so far, both into Canada and the US.

Okay. Thank you very much.

Thank you.

(Operator Instructions)

The next question is from Ryan Thibodeaux of Goodwood Capital.

Good morning. Just trying to reconcile the revenue guidance with the current level of backlog. Are you implying that you're going to have just a more delayed billings level? Or are you implying that you think order growth is going to tick down sequentially over the next several quarters?

Repeat your question, I'm sorry. I lost my train of thought.

I'm just trying to reconcile with the revenue guidance versus the current backlog. If I look at projected new orders over the next several quarters and then what's shipping out of your backlog into revenue. I'm just trying to arrive at the number that you're guiding to, and it's a little difficult.

When you're looking at the current backlog, there is a backlog coverage of about high-60% of our revenue guidance. But again, that, keep in mind, is just an analytical number. When we've taken a look at it, we also have to look at the timing of that.

We do have some revenues that will -- excuse me, we do have some backlog that will not generate revenues into future years. We do have some projects in the backlog that goes out over a 12-month period of time, as of the end of the fiscal year. So we'll go into 2016.

Okay. So that would imply that the trend we've seen over the last several quarters, where any quarterly revenue has a percentage of your prior-quarter backlog, is trending down. Which means your backlog is a little bit more extended than it has been in previous quarters.

It has been, but keep in mind that we got behind as a result of the issues we've talked about, so we had a temporary spike in our backlog. I'd say we're now returning more to a more normal level. By the end of this first quarter, we'll probably substantially be back to a more normal trend, where they show between backlog and revenues.

The real issue that we need in the, quote, near-term, meaning the next six to nine months is going to be smaller projects to fill in gaps, and in the business that has shorter cycle. We tend to talk about the main part of our business, which has a cycle of plus or minus a year. But we do have product lines and the businesses that have projects that are more in the six- to nine-month cycle.

And then you've got your book and bill, which is predominantly our service. Our service that we do here and in Canada, that amounts to close to 20% of our total revenues, and that business typically runs on a backlog of three months or less.

Okay, great, thank you. And then also on the margin side, do you think that if -- once the Canadian ramp-up issues are behind you and the internal systems issues are behind you, do you expect to get back to your normalized gross margin level by the back half of the fiscal year?

Yes. We're looking -- the first half will continue to be a drag, the second half we're expecting to see noticeable improvements. Even for the full year at this point in time, we're still targeting year-over-year improvements in our gross margin, and we're targeting to get back -- if not to -- close to what we performed in FY13.

Okay, great. And my last question -- you mentioned the first wave of petrochem orders. Do you think that we've peaked on the first wave? Can you talk a little bit more about when those projects began, and when you receive the orders and when you'll fill them? And then, same line of thinking on the second and third waves, what your expectations are around those?

Yes, the order activity we've seen probably started 18 to 24 months ago with orders coming in, and they've been very strong through all of 2014. We think there's still some activity there through mid-2015, but will probably begin to taper down, based on the projects we see that have been sanctioned, that are actively being engineered.

There are -- you can certainly read plenty in the press about the billions of dollars of additional petrochem spend that is queued up. But we see that still a little longer-term, with many of those projects unsanctioned or not entered engineering phases yet.

So I'd summarize, it's been very healthy through 2014. Some good activity through maybe mid-calendar 2015, starting to taper off. And if there's a second wave, it's more likely a 2016 bookings wave.

Okay. So how long after the projects start would you get the bookings for the orders? And when would you deliver those, in terms of -- is it 18 months ahead of time when you get the order? Or is it nine months ahead of time?

Typically, I believe, on most of these projections -- and again, it depends on the size of the project. We have smaller ones and some larger ones. But you could look at it that they deliver roughly year-after we will book the order.

Relative to when did the project actually start, that's a very subjective comment. Because some of these have been in the engineering firms from a budgetary analysis stage for two or three years. We watch some that percolate in the engineering firms and never come out, and we watch others that come in and come out very quickly.

So it's hard to really say that when that order started, because they tend to stay in engineering firms to different lengths of time, depending on the [else] and the client. But I would say based on the activity we see today, I don't think there's anything that is in the engineering firms that we would expect to come out to be bid and order placement before well into 2016.

Maybe one other piece, Ryan, that would help you there a little bit. I would say once our equipment ships and gets to that petrochemical site location, depending on the scope of that job, it could be 6 to 18 months before that site location is up and running. So if you're trying to rationalize that with information you're gathering from the marketplace, even after we're done, that site location still could have another 6 to 18 months of work to do.

Right, okay, understood. Thank you very much.

The next question is a follow-up from Noelle Dilts of Stifel.

Hi, again, thanks. My first question was just quickly on your orders in the quarter. Can you talk about how big some of the larger orders were? I'm assuming that, that was probably some petrochemical work that you booked?

Yes, there was one significant project in there that was petrochemical. It was in the $35 million range. I would say of the $200 million, roughly, about $70 million was petrochemical, $35 million of that was one big project, the rest were other nice-sized $5 million to $10 million projects. Other than that, there was no other large projects in the quarter, except the one $35 million. Nice ones in the $5 million to $10 million range, but no other mega projects.

Okay. And then just going back to how you guys are thinking about your exposure to lower oil prices, you talked about some of the upstream work obviously being more at risk. When you look at your business, are there some markets that you look at as a little bit more insulated? How are you just evaluating that exposure?

Good question. I'll reiterate a couple things Don already said here. Certainly, anything that's production-related -- we don't see much on the exploration side, as you know. But on the production side, both onshore and offshore, we think those probably have a higher risk to the movement in oil prices. In any really large mega projects, when you're into billions of dollars of capital spend, we would anticipate those to drag out a little bit.

The ones we think might be a little less susceptible would be -- at least in the short-term -- is pipeline. We're still pretty bullish on the pipeline outlook for the next few months. And what's left in the tail of petrochemical, because that tends to be more driven -- at least the projects we're pursuing -- are more driven by the price of gas than the price of oil. And LNG, of course, is more gas price-driven than oil, as well. So we see those a little less susceptible to the price of oil.

Pipeline, petrochemical, LNG; less susceptible. Production, both onshore and offshore, and large mega projects; more susceptible, more risk.

Great, thank you.

Thank you.

(Operator Instructions)

The next question is a follow-up from John Franzreb of Sidoti.

You mentioned that the shorter-cycle business is going to be an important detriment to the earnings profile going forward. I just wonder if you could recap what the demand profile was in the shorter-cycle business in FY14? And what will be the key drivers, both positive and negative, for that business in FY15?

Tough question.

We usually don't characterize it that way. So you've asked a question here we've got to think on a little bit.

The mega projects, we always lay those -- the bigger projects, we always lay those in the schedule first. And then we're always trying to pursue some smaller fill-in business to wrap around that. And in the midst of a scheduling challenge, to keep the opportunity pipeline full and manage that with the production schedule.

With the book and bill we still need later in the year, we still have some need for those smaller fill-in businesses. But those tend to be the ones that get impacted by short-term things going on in the marketplace. So I'm not quite sure how to characterize it, other than that's probably going to be a little bit more volatile in 2015, a little bit more variability in those short-term, quick-cycle projects than we've seen in the past.

But John, you can also go back and lock at just the backlog coverage. Now while you do have some work in both years that goes out beyond the 12-month time period, and the backlog coverage is coming down a little bit, it's not materially different than what it has been the last couple of years.

Half of that incremental business is going to be short-cycle, either maintenance service or small projects that would be more geared towards maintenance spending. But there is obviously some capital spending that goes in there as well. But it's not a huge risk; it's really more of a timing risk.

Okay. And Don, I just want to make sure I heard you correctly. Did you answer to one of the questions previously that you expect the gross margin in the second half of FY15 to be similar to what you incurred in FY13?

Well, we're definitely looking at the second half of the year to be more in line with 2013. And we still haven't given up on getting back to the full year being close to what we had in 2013.

Okay, thank you very much, guys.

Thank you. We have no further questions in the queue at this time. I would like to turn the floor back over to management for any closing remarks.

Well, we appreciate you joining us this morning. I'd just like to hit some of the highlights I think were important to walk away from here. We think our operational actions, both in the US and Canada, are starting to show solid results. And our focus is going to be remaining on meeting customer commitments, even while doing so means incurring some additional costs in the short-term.

While we enter 2015 a bit more cautious due to the recent decline in oil prices, we open the year with a very healthy backlog after record-level bookings in 2014. Our core energy markets still provide a strong long-term outlook. And the investments we've made over the past couple of years in our production facilities, in our business systems, are critical in setting us up for long-term future growth.

These additional investments we're making that are underway in Canada, they're are only going to strengthen our position in that important market. And given the market conditions, we believe we're very well-positioned going into what could be a bumpy 2015.

Just wanted to thank you again for your continued interest in Powell, and we look forward to talking to you next quarter. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.