Powell Industries Inc (POWL) 2015 Q1 法說會逐字稿

Greetings and welcome to the Powell Industries first-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Stephanie Smith. Thank you, Ms. Smith, you may begin.

Thank you, Rob, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year 2015 first-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 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 office and we will get one to you. That number is 713-529-6600. Also if you would like to be on the permanent email distribution list for Powell news releases, please relay that information to us.

There will be a replay of today's call and it will be available via webcast by going to the Company's website at PowellIND.com. Or a recorded replay will be available until February 11, 2015 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, February 4, 2015, 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 or Mike Lucas, President and Chief Executive Officer, and Don Madison, Executive Vice President and Chief Financial Officer. I will now turn the call over to Mike.

Thank you, Stephanie. Good morning, everyone. Thank you for joining us today for a review of our fiscal 2015 first-quarter results. I will make a few opening comments and then I will turn the call over to Don to review the financial details.

For the first quarter of the new fiscal year we booked orders totaling $154 million and realized revenues totaling $153 million. Financial performance did not meet our expectations due to the project cost inefficiency issues in our Canadian and US manufacturing facilities as we discussed last quarter.

First, turning to our Canadian business, let me just recap quickly. The positive market response to our expanded integration capabilities was greater than we originally expected, which required a rapid hiring ramp. Training new employees and ramping up operational efficiencies created schedule delays and missed delivery deadlines.

After our project schedules were realigned last fall, we made the decision to expend the necessary resources to hold these revised customer commitments. The unplanned cost associated with this decision affected us again this most recent quarter.

While we are seeing improvements in factory operations and generally holding our customer delivery schedules, the associated cost of outsourcing activities, expediting materials and overtime will continue as required.

Many of the active projects now show significantly reduced margins. Overall margins will remain depressed until these projects are flushed out of backlog.

Secondly, we continue to experience added cost in our Houston manufacturing facility as we work through the backlog created form earlier project delays. If you recall, we implemented a new suite of software tools in mid-2014 designed to drive efficiency, improve productivity and standardize best practices.

We are now confident that these new systems are working and we are diligently moving through the project delays that were created during system implementation. We are absorbing some additional expenses to maintain these customer commitments. As a result of both of these issues significant margin pressure will continue through the second quarter.

Turning to the markets -- like all companies associated with the oil and gas industry, market dynamics are rapidly changing. The recent decline in oil prices is certainly impacting our customers' cash flows and their capital spending plans.

Powell equipment is typically purchased later in our customers' project schedules and once projects have progressed to that point they are rarely canceled. We currently have a healthy backlog and expect all projects in backlog to complete. We also anticipate steady order rates over the next few months.

Reduced customer capital spending will be more impactful on new orders in the back half of this fiscal year and on revenues in fiscal 2016. Although all sectors of the energy markets will be impacted by this industry decline, we believe that spending in the pipeline market will be less susceptible to the price of oil. We still expect select projects will move from the engineering phase into award during 2015 both in US and in Canada.

By contrast, the offshore production market has already been hit hard by the drop in oil prices. As we discussed last quarter, large projects are being pushed out and we do not expect any new major offshore project awards this fiscal year.

In the us petrochemical market we still anticipate opportunities in this segment through the middle of the calendar year. During this most recent quarter petrochemical bookings remained solid with several new smaller project awards. However, as we have mentioned before, we believe we passed the peak of the major electrical equipment awards for the first wave of investment in petrochemical.

The LNG export market remains at significant long-term opportunity for Powell as LNG export is still in the very early stages of development in North America. We anticipate a select few projects to move forward, but likely on extended schedules.

The energy markets, as you know, are cyclical in nature and Powell has navigated through several down cycles in the past. We are confident in our management teams, our business model, our financial strength and our long-term growth prospects to weather this market downturn as well. I will now to the call over to Don to review the financial details.

Thank you, Mike. Revenues decreased $19 million to $153 million in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, primarily due to the completion of a large international project in fiscal 2014. Domestic revenues decreased by $8 million or 9% to $97 million in the first quarter and international revenues decreased about $27 million or 33% to $56 million.

Gross profit for the first quarter decreased by $14 million to $21 million compared to the first quarter of fiscal 2014. Gross profit as a percentage of revenues decreased to 13.8% in the first quarter compared to 20.5% a year ago, primarily due to the incremental cost incurred to hold customer schedules and continued inefficiencies.

Selling, general and administrative expenses decreased by $816,000 in the first quarter compared to the first quarter of last year, primarily due to lower variable compensation expense, partially offset by higher personnel and administrative costs related to our expanded scope of operations in Canada. SG&A expenses as a percentage of revenues increased to 13.6% during the first quarter compared to 12.6% during the first quarter of fiscal 2014, primarily due to lower revenues.

We reported a benefit for income taxes of $1 million in the first quarter of fiscal 2015, of which approximately $600,000 relates to the retroactive reinstatement of the federal R&D tax credit which expired on December 31, 2013. In December, legislation was enacted which retroactively restated and extended the R&D tax credit for one year from December 31 of 2014.

For the first quarter of fiscal 2015 we reported a net loss from continuing operations of $239,000 or $0.02 per share compared to income from continued operations of $7.3 million or $0.60 per share in the first quarter of fiscal 2014.

New orders for the first quarter were $154 million resulting in a backlog of $506 million compared to a backlog of $507 million at the end of the previous quarter and $455 million a year ago.

For the three months ended December 31, 2014 cash used in operating activities was $23 million and investments in property, plant and equipment totaled $19 million of which approximately $16 million was for our facility expansion.

At December 31, 2014 we had cash of $57 million compared to $103 million at September 30, 2014. Long-term debt, including current maturities, totaled $3 billion.

This past December we announced that our Board of Directors offered us a repurchase of up to $25 million in shares of the Company's common stock. The repurchase authorization extends through December 31, 2015. While we did not repurchase any shares during the first quarter we plan to move forward with the repurchases with timing and the amount to be based on the evaluation of market conditions and our business needs for cash.

Looking ahead -- based on our backlog and current business conditions we now expect full-year fiscal 2015 revenues to range between $625 million and $675 million, primarily due to customer driven change orders increasing our scope of work on certain large projects that will delay delivery dates and a more cautious view of incoming orders.

We now expect full-year fiscal 2015 earnings to range between $1.25 and $1.75 per share due to first-quarter results and lower revenue expectations for fiscal 2015. At this point Mike and I will be happy to answer your questions.

(Operator Instructions). John Tanwanteng, CJS.

Just a couple quick ones here. Did you have any deliveries pushed out from the quarter at all?

No, it wasn't substantial (inaudible). As Don had mentioned in some of his opening remarks, we've had some recent change orders coming in after the quarter that will move some revenues around from second to third, third to fourth and maybe some out at the end of the year. But nothing substantial during the first quarter.

Okay, thanks. And then on the margins, it seems like you took one step forward last quarter and then two steps back in this one. When do you see the normalization in Canada and margins getting back on track?

Yes. So in Canada, now that we have taken some of the project hits many of these project margins in Canada are at breakeven or some even at a loss. So until that backlog, until the active projects in backlog flush through, even when the revenue is recognized there won't be much margin or little or no margin on those jobs.

So we've got several projects that will flush through over this quarter and a little bit into the third quarter. And then we've got several new projects that are not yet on the factory floor that will be hitting later this quarter. It is really going to take some of those newer projects getting to the factory floor before we see the margins turn back up.

Okay, great. And then on a relative basis, could you tell us how much the weakness in the quarter was from Canada and how much was from your Houston operations?

When you are looking at the quarter-over-quarter sequential issues, the big issues between the two operations were relatively flat. If you recall what we talked about in our fourth quarter, we did have some strong service revenues and some project closeouts that benefited the fourth quarter. Those did not occur in the first quarter of fiscal 2015. But when you are looking at the operating results from these businesses, there was not significant changes between the two businesses.

Thank you.

Noelle Dilts, Stifel.

So with my first question I will just kind of expand on what you were just talking about with Canada. It sounds like -- I understand that you have got to get these low or I guess zero or loss projects flushed through. But it sounds like since these issues emerged in June you kind of have consistently underestimated the cost that it would take to meet those deliveries and keep customer schedules.

I mean, as you look at this quarter did you have to rely more on outsourcing and subcontractors? What has continued to exceed your initial expectations when you are looking at the cost of these projects?

Yes, good morning, Noelle. First of all you said also some of the schedule impacts. Since we rescheduled the backlog back in the fall we are for the most part holding those schedules. So it has been more an under estimation of the cost to complete those and it has been significantly labor.

So some of those projects were originally quoted to be done in-house which we had to outsource, so there is outsourced labor associated with that. In some cases it has been overtime to be able to hold those, in some cases it has been expediting cost associated with materials to hold those. It has mostly been labor-related, either outsourcing things we intended to bring in, overtime, or even in some cases additional contract labor to help support that.

Let me just talk a little bit about going forward too with this. As these newer projects hit the floor what -- can we be assured that they are going to be any better? We have taken several actions to try to make sure we have got these costs under control and understand them now.

At this point we have shipped quite a number of eHouses, it is well over 20 that have been shipped. So we have gained a lot of experience, we are building that experience back into our pricing and estimating models. We have got a lot of ex-pats up there out of our Houston facility now in a variety of different functions to help bring that expertise in.

We have got several cost out projects identified on some future work we are expecting to try to take cost out of even the estimates we put together. So there is a whole host of activities going on to help ensure if those next projects hit the floor that we have got better estimates of those costs.

Okay, so as we look out to your guidance for the remainder of the year, can you maybe give us a little bit of detail just what you are expecting in terms of specifically these projects and the cost overruns in Canada? And then the Houston issue, what you are expecting in terms of improvement as we look out to next quarter?

When you are looking at the profile of results about the year relative to our guidance, we are expecting only modest improvements in earnings in the second quarter with most of the earnings coming in the third and the fourth quarters.

Thank you.

Brent Thielman, D.A. Davidson.

Just sort of taking a look at the guidance. So should we think about Q2 looking similar to Q1 and then kind of materially stepping up in [2H] to kind of get to that guidance range? Is that the right way to think about this?

Yes. We are expecting to see some improvement in the second quarter over the first. We are not expecting a [lot], but we are expecting the majority of the earnings to come in the second half of the year.

Okay. And then are you beginning to see customers anywhere in the oil and gas arena maybe coming back and rebidding work or maybe even looking for discounts on orders you guys have already received?

There's been a couple of spot inquiries there, but nothing I would say significant yet. We certainly anticipate that going forward, expecting more pricing pressures to be out there. Awards we expect to close here soon are taking just a little bit longer to get them closed. Customers are taking a little extra hard look at those pricing and sharpening the pencils before they issue final awards. So we are starting to see some of that and expect it to increase over the next few quarters.

(Operator Instructions). John Franzreb, Sidoti.

I want to focus on the unexpected part. I mean it is not like these issues are new; you have added personnel to address them. But you say they are unexpected. Maybe a little bit more granularity of why they are unexpected because I think that was the whole point of your whole expansion that these issues wouldn't recur.

Well, we have a pretty structured project review process we go through every month where we sit down and look at what work is still remaining on these projects. So it is refreshed constantly and we still are uncovering additional costs of being able to hold these schedules, work taking longer than we thought it would and having to throw more overtime or bring in additional labor to cover it.

These are very complex projects, and it is a constant process of refreshing what did we get done and what is our estimate left to complete. And we put our best estimates into those every month, we just still continue to underestimate the amount of labor it is taking to hold these schedules.

Well, maybe it would be helpful if you talk about the orders that are impacting results now. When were they booked? And maybe you could talk a little bit about the new orders that came in, the $154 million or so. Will they have the similar problems or is that going to be gone?

We do expect -- a lot of these orders that have shipped came in late 2013/early fiscal 2014. So they have been in the backlog for a while. As I said I think what we try to constantly do to improve this outlook and accuracy, as we have ramp-up this facility it is challenging to sort out the cost overruns. One's just the learning curve proficiency related and did we actually underestimate some of those.

So that now that we have got several (inaudible) under our belt and have experience with those, we are constantly taking that feedback back and building it into our quotation and pricing tools to make sure we have the most estimates upfront of the labor it is going to take.

And as I've said, we also have just worked through quite a peak load in the facility. Now we still have a lot of work ahead of us, but the load is leveling out a little bit. So as these new projects hit the floor some of them have been requoted or were quoted under revised estimating tools, so we think we have better accuracy and estimates going in.

We have got -- we are using part of the new facility we are working in up there. So up to now we have actually been working outside on some of these projects. As you can imagine, an Alberta winter outside is not the most productive use of time. We've been able to move all those projects back indoors now. Anything new that hits the shop floor will be done indoors.

We are just about done with the outsourcing activities where we've used other people's construction yards to build the buildings. We have got a couple more to finish up. But everything going forward will be done in-house.

We have got some cost out projects identified so even if the quotation and tools are accurate, which we believe they are, we found some areas where we think we can continue to work cost down. So there is a lot of actions going forward to help make sure anything new hitting the floor is in much better shape.

Thank you. [Tom Spiro], [Spiro Capital Management].

Mike, with respect to Canada and whatever market changes you may be anticipating up there, do you expect that perhaps later in this fiscal year or going into the next fiscal year you may have to actually reduce capacity for lack of business?

A significant amount of our business in Canada is pipeline-related. We started to see the production activity slow down a while ago. So it is the pipeline piece we think is going to be a little less susceptible. We have a couple of projects that we think will move to award stage over the next quarter or two. And depending on when those come in and the timing of those delivery schedules, we think we can keep that -- maybe not at current capacity levels but certainly sufficient enough.

Thanks. And, Don, a question I asked a call or two ago I will ask again. Do you have any concerns about the quality control and warranty reserves particularly with respect to these tough jobs that have been coming out of Canada?

Tom, the way that we do our inspections internal before we ship product and the fact that most everything that we deliver is also customer [witness] tested in our facility, the risk of there is relatively low.

Thank you. Cezary Nadecki, Schroders.

Just a few questions, both are on the resources in Canada. This obviously is lasting a little longer than probably most of us anticipated. But do you think you have enough resources up there from the managerial or ex-pat community, or your employees should I say, employee base? Do you guys spend much time there? Can you give us a sense of how close are you really to all these problems?

This is Mike. I am up there every other month just about and we've got regular phone calls. So we are up there quite frequently. Our Chief Operating Officer, Neil Dial, spent probably the last three months prior to the holidays up there. We are quite close to that activity in Canada.

Okay. So switching to your bookings, the $154 million in bookings, I think it was 20% down year over year. Can you kind of peel the onion a little bit? Is that a weakness we should read into it or is this something unique to your operations? And maybe break it down a little bit by international versus domestic if we were to look like book to bill of one. Is that representative of the mix?

Yes, it wasn't weak, it was actually pretty close -- very close to our internal targets we were looking for out of the first quarter. I don't have the breakdown of domestic and international. But we had a really good bookings month.

Utility was actually surprisingly strong. I wouldn't call that a trend yet, but we had a very good activity from utility. Petrochem held up very well and we did book one offshore project that came in a little earlier than we anticipated. There was also some refinery and pipeline in there.

So the mix I wouldn't say is significantly different than what we've seen in the other quarters with the exception of utility was probably a little stronger than the norm. But I don't have the breakdown here in front of me of domestic and international.

John Tanwanteng, CJS Securities.

It may be a bit early, but from what you see now do you think the LNG and the pipeline opportunities you are seeing is good enough to support growth in fiscal 2016? And maybe is Keystone a factor in that at all?

Key -- we have not considered Keystone in that outlook at all -- any plans of it going forward. There are other pipeline projects we've been tracking for a while that we do think will go forward. In fact we have had meetings as late as last week that seem to be very optimistic that a couple of those pipeline projects are going to go forward. What was the other segment you'd asked about, John, you said pipeline and --?

LNG -- just wondering if both those areas are going to be able to support overall growth.

Yes. So, LNG there are a couple -- a couple of the US projects that look like they are moving forward. We don't expect them to be canceled or pushed out significantly, but will probably take a little longer to get closed.

Right now it is a little too early to call if that is enough to sustain growth for next year. Certainly the way it is shaping up, if orders come down in the second half and that starts to impact revenue that is going to put some headwinds in our business going into 2016. But it is a little too early to call how deep and how long might this downturn be.

Let me just kind of remind everyone what our cycle looks like through a market downturn. By the time our customers get to the point of requesting quotes and issuing orders for electrical equipment they are pretty far along in their commitments to that project, which really means we lag a bit the market downturn.

Roughly six months from when the markets turn we see it start to show up in the order rates. And then as I said, once the orders are in-house there is not a lot of revenue upfront, there is a little bit on the engineering side until drawings and documentation are all approved. And then revenues typically start three to six month after the order is received.

So we do lag. We've got a little bit more time than say like an oilfield services company to respond to this. We expect orders to hold up for a few more months. And then whatever capital spending reductions customers will make will start showing up in the last half of the year.

So we have a little bit more time to watch this thing unfold. We have got a very healthy backlog, we've got a lot to get done in the next two quarters, almost three quarters to get out the door and our focus is very much on executing the backlog we have got.

Thank you. Noelle Dilts, Stifel.

So again, I understand this is a little bit early, but as you look out to the back half, how much are you expecting orders to be down at this point?

You are going to put us into a situation of trying to guess it by quarter. We think we are going to have a very solid second-quarter bookings and then we've got it down sequentially third -- second to third and third to fourth. It is a little too early to try to put a percentage on it, but our outlook is kind of solid next quarter and then sequentially down for the next couple. And (multiple speakers).

So if you had to guess kind of back half over first half do you have an estimate there?

Noelle, let's look at this will. We started this year with a very healthy backlog of over $500 million. I think it is likely that we will see some reduction in that backlog by the time we get to the end of the year starting next year. But at this point in time we think that we will still have a very strong backlog going into our fiscal 2016. It may not be quite as good as 2015, but it is not going to be appreciably less.

Thank you. At this time I will turn the floor back to management for closing comments.

Well, I just want to thank everyone for joining us this quarter. We will certainly keep you posted. It is a period dynamic time, as everyone knows, in the marketplace. So we will be watching that very closely. Appreciate your interest in Powell and some very good questions this morning. Thank you all for your time and we will talk to you next quarter. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.