Powell Industries Inc (POWL) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Powell Industries' fourth-quarter 2015 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 Zhadkevich of Dennard-Lascar. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review FY15 fourth-quarter results. We would also like to welcome our internet participants listening to the call simulcast live over the web.

Before I turn the call over 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 want to be on the permanent email distribution list for Powell news releases, please relay that information to us.

There will be a replay of today's call, and it will be available via webcast by going to the Company's website at Powellind.com, or a recorded replay will be available until December 9, 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, December 2, 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 are Mike Lucas, President and Chief Executive Officer; and Don Madison, 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 FY15 fourth-quarter results. As usual, I'll make a few opening comments, and then I'll turn the call over to Don to review the financial details.

During our fourth quarter, revenues remained solid at $162 million. We made good progress in working through the high customer demand and related cost issues that impacted our results in our Houston operation during much of 2015. We still maintained a significant number of contract employees in our Houston facility that were brought in to help meet customer schedules as we work through several large projects currently in production. Our focus continues to be on operational efficiency, project execution, and customer satisfaction.

In Canada, we are through the summer period of low factory loading, and production volume is now ramping up. We're in the process of adding skilled labor to meet the projected workload, and expect full employment in Edmonton by the end of this calendar year. During the slow summer period we maintained our investments in both management and supervisory personnel, and the labor market is favorable for our current recruiting of skilled trades. We continue to conduct rigorous reviews on these projects to ensure that engineering designs, operational efficiencies, cost and project schedules are all in line with expectations. As a result, we expect year-over-year improvement in our Canadian operations.

We've been talking about the lagging impact of reduced oil prices on our bookings for the last few calls. As we have been anticipating, reduced capital spending by our oil and gas customers has started to be reflected in our bookings rates. Orders slowed in the fourth quarter, but the magnitude of the decline was greater than expected. During the quarter, few project awards were delayed, but market volume was decidedly down.

Our oil and gas customer base has clearly adopted a wait-and-see attitude until the direction of the global economy and the price of oil is clearer. We expect capital spending to remain at depressed levels through FY16. Remaining large project activity is primarily limited to a few US LNG export terminals, and some pipeline construction projects.

FY16 will be an unquestionably challenging year. Projects are fewer and smaller. We have seen competitive pricing pressures on bids during the fourth quarter, and anticipate that these pressures will continue through 2016. We will respond with price adjustments to the extent that it makes good business sense.

FY16 revenues in the first half of the year will be largely supported by our beginning backlog. Bookings for the first four to five months of the fiscal year will determine revenue levels for the second half of the year. We continue to assess available business activity, and monitor our backlog levels, in order to adjust our resources to production requirements.

Let me now turn the call over to Don to review the financial details.

Thank you, Mike.

Revenues decreased modestly by $500,000 to $162 million in the fourth quarter, compared to the same quarter in FY14. Domestic revenues increased by $24 million, or 25%, to $123 million in the fourth quarter. The increase in domestic revenues was primarily driven by large petrochemical projects.

International revenues decreased by $25 million, or 39%, to $39 million. The decrease in international revenues was primarily driven by the substantial completion of several large projects in Canada, and various international export projects produced in the US, compared to last year.

Gross profit as a percentage of revenues improved to 18.4% in the fourth quarter of FY15, compared to 15.8% in the fourth quarter of FY14. This increase in gross profit was primarily driven by improvements in production efficiencies, and reductions in incremental costs that affected our margins last year.

Selling, general and administrative expenses decreased by $2.5 million to $18.5 million in the fourth quarter, primarily due to lower performance-based compensation, personnel and administrative costs, and sales commission expenses. SG&A expenses as a percentage of revenues decreased to 11.4% in the fourth quarter, compared to 12.9% in the fourth quarter a year ago.

We recorded a provision for income taxes of $3 million, compared to a provision of $800,000 reported in the fourth quarter of FY14. The effective tax rate for the fourth quarter was 32%, compared to an effective tax rate of 26% for the same period a year ago.

In the fourth quarter of FY15, we reported net income of $6.3 million or $0.54 per diluted share, compared to net income of $2.4 million or $0.20 per diluted share a year ago. Excluding fourth-quarter restructuring cost and tax adjustments, net income for the fourth quarter of FY15 was $5.2 million or $0.45 per diluted share.

For the 12 months ended September 30, 2015, revenues increased by $14 million, or 2.2%, to $662 million, compared to FY14. Gross profit as a percentage of revenues was 16.4%, compared to 19.4% during FY14. This reduction in gross profit was primarily due to higher production costs incurred to meet our customer schedules, as well as the margin on the overall mix of projects.

Selling, general and administrative expenses for the year decreased by 12.5% to $76.8 million, compared to FY14. This decrease was primarily due to lower performance-based compensation, sales commissions, and lower personnel and administrative costs resulting from reductions in force, as well as other cost-reduction efforts. During FY15, we incurred approximately $3.4 million in restructuring and separation costs.

Our provision for income taxes was $13.6 million in FY15, compared to $11.1 million in FY14. The effective tax rate in FY15 was 59%, compared to an effective tax rate of 36% for FY14. This increase in effective tax rate in FY15 was primarily due to the establishment of a valuation allowance against the Canadian net deferred tax assets, partially offset by the resolution of an IRS audit, and the retroactive reinstatement of the Federal Research and Development Tax Credit.

For FY15, we reported net income of $9.4 million or $0.79 per diluted share, compared to net income of $29.2 million or $1.62 per diluted share a year ago. Excluding restructuring and separation costs of $2.7 million net of tax, and tax adjustments totaling $3.3 million, our net income for FY15 was $15.4 million, or $1.29 per diluted share. A non-GAAP net income reconciliation was included in yesterday's news release.

As Mike mentioned previously, new orders for the fourth quarter were $92 million. As a result, our backlog decreased by $77 million to $441 million, compared to the backlog at the end of the third quarter.

At September 30, 2015, we had cash of $44 million, compared to $103 million at September 30, 2014. In FY15, cash generated from operating activities totaled $12.9 million, and investments in property, plant and equipment totaled $35 million.

During the fiscal year, we repurchased 670,000 shares of common stock for a total of $21.3 million, at an average price of $31.72 per share. The amount remaining under the Company's current share repurchase authorization is $3.7 million, which is scheduled to expire December 31, 2015. Also during FY15, we paid dividends totaling $12.4 million.

Looking ahead: Based on our backlog and current business conditions, we expect full-year FY16 revenues to range between $520 million and $560 million, and we expect adjusted earnings to range between $0.65 and $1.05 per share. Included in our outlook is consideration of year-over-year deleveraging as a result of lower production volumes, unfavorable price pressures and market mix, all partially offset by improvements in operating efficiencies and cost-reduction efforts. Our earnings outlook excludes all restructuring and separation charges that may be incurred during FY16.

Now I'll turn the call back to Mike for a few additional remarks.

Thank you, Don.

Before we open for questions, near-term activity in our key oil and gas markets remains depressed and difficult to predict. Our customers have little visibility into the future price of oil, until a balance of the global oil supply and demand is reached. Customers are very cautious, and have understandably taken a conservative approach to all capital spending investments.

Our long-term outlook for our markets remains positive; when growth in capital spending does return, Powell is well positioned. We have completed significant infrastructure investments in facilities, equipment and systems. We're financially healthy. Our balance sheet is solid, as we carry very little debt, and cash flows will improve in the short term as working capital is freed up.

We participate in a cyclical business, and we've experienced market downturns in the past. Even during down markets, there's maintenance work, upgrade activity and optimization projects. We will continue to support our customers, and assist them with all their needs.

Our focus during this challenging time will be on continuous improvement actions in our core project execution areas, and also in investing in strategic product development and growth programs, both solid long-term investments in our Business. We'll manage the things that are within our control, and focus on being the go-to supplier for our customers, just as we have for almost 70 years.

We'll open it up now for questions. Don and I will be glad to take any questions you have.

(Operator Instructions)

Our first question comes from the line of Jon Tanwanteng from CJS Securities. Please proceed with your question.

What steps are you taking to preserve margins, given the near term tougher environment, and how much of that is factored into the outlook for next year?

There's several actions. We are always continuously working cost reduction activities. We've probably got somewhere between $10 million and $12 million worth of cost savings programs that are factored in there. Those are always a big part of what we focus on, and then we continue to monitor our fixed cost levels, to adjust those as required, based on the volume and the backlog activity.

How's that going to happen through the year? It's going to be a restructuring upfront or is it more of a gradual thing?

The cost reduction actions are really spread pretty evenly throughout the year. That's a constant process we're working.

It is a tale of two halves. The front half as I mentioned in our opening comments, was really driven heavily by our existing backlog going in, and the front half of the year looks pretty solid. It's these softer orders we've seen in the fourth quarter that will lead to a softer second half and that may be where some additional actions may be required.

Got it. That's helpful. Any thoughts on the administration change in Canada? A pipeline there or a lack thereof or climate deal would meaningfully impact your business there, and what have you assumed actually, in your outlook?

It's actually a similar story there. We've got a very healthy backlog from some pipeline projects we had booked in 2015 that take us into 2016. That activity, as we mentioned in some of the opening comments, we're still ramping up employment there. We expect to hit peak employment about the end of the calendar year, and that will carry us for a couple of quarters. And the back half of Canada will be determined by what the order rates look like over the next few months.

Okay. So you haven't assumed any strengthening of the business, or decline based on what people are saying about pipelines, the East project or Keystone, what may be left of that?

Everything we understand about that market is dialed into that forecast we gave you right now.

Okay. Understood. Are you guys essentially past all the production problems you've had in Houston and Canada in the past year or so?

I'd say we're feeling pretty good about Canada. It is still a little early. We've got multiple projects on the floor as we're ramping the skilled trades back up. All of those look positive from a margin and a schedule standpoint. I think we feel pretty good about what we see in Canada.

I think a lot of the -- in Houston, we still have a lot of production that's outside. It's not under the factory roof. There are some inherent inefficiencies with weather and conditions outside, so there's a little bit of trailing efficiency issues. But we're also still carrying a fair amount of contract labor which is at a premium cost and that contract labor looks like it will be well into the second quarter before that ramps back down.

And of course the contract labor, that's very flexible work for us. So as the volume goes away, that cost goes away quickly.

Our next question comes from the line of John Franzreb from Sidoti & Company. Please proceed with your question.

Just want to bounce back to the drop in orders and the magnitude of it. By my calculations, it's the lowest order intake since third-quarter 2006. What I was wondering from you, can you talk a little bit about how we should think about the order bookings going forward? The depth and duration of this low bookings, do you see it as a one-timer, and will be more of a high/low scenario going forward, or will be more of a longer-term trough, maybe closer to the 2010, 2011, time frame where we bounced around the low $100 million level?

So a couple of comments on that. So if you remember, our third quarter bookings level was still pretty -- very solid. We had a very large project that was right there at the end of the third quarter, could have easily fell in the fourth. So the fourth quarter, I think, was unusually low, just based on some of that project timing that's coming in.

We don't expect this quarter to look a whole lot different. We're getting a sense from the customers at this point that often at the end of the calendar year, you might see some extra spending as they burn up whatever remaining budgets they have. It appears they're going to just reload the budgets and start fresh in January.

So I think that third quarter, it's not going to be that bad, if you straight line that, it won't be that soft. But we are expecting to burn backlog this year. So if you use some of the numbers we provided, if you pick a midpoint on the revenue guidance at roughly $540 million, bookings will be less than that, because we do expect to burn some backlog this year.

I think the other thing as we go through this year, more erratic nature of orders than we have in the past, at least recent past, and I think that at this point in time the first half, fourth quarter, first quarter, is intended to be soft but we do anticipate at this point in time some strengthening first of the year.

Okay. That's helpful, Don. And if I remember correctly, the last time you had a meaningful drop in volumes, you actually had a little resistance to cut some of the overhead, because there are expectations that when times did turn, you wanted to retain some of your more skilled employees, and not lose them out the door. Any updated thoughts, Mike, on retention of employees, how long you're willing to see this out before making the determination when you want to do any kind of overhead cuts?

Clearly, John, that is one of the most difficult things in our business, because we are relationship oriented, and our employees who we have relationships through with our customers, suppliers and the skills and the knowledge they have is not easily replaced. Can we do nothing? No. We have to respond to market conditions. But I do agree that the nature of our business tends to want to make sure -- move in that direction, cautiously.

Okay. I'll get back into queue.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

In terms of the outlook, you mentioned bookings next few months determine how the second half plays out. At this point, is the guidance assuming bookings will kind of sustain at a pretty low level, translate into a lower 2H in terms of earnings?

Clearly, we have reflected the fourth-quarter bookings and anticipated first-quarter bookings in our guidance that we provided to you. There is an assumption that we are going to see some improvement with the turn of the calendar year, but we are taking a more cautious look from a top line perspective than we may have anticipated taking 90 days ago.

Sure, sure. Understood. And then in terms of the additional costs, customer commitments, I'm sorry if you talked on this, but could you dive a little more on that, and maybe how you see that play out and influencing 2016 expectations?

Let me respond a little bit, and Mike can add to it, but from a Canadian perspective, we've got two businesses we've talked about predominantly. From an incremental cost of operating the business, from a Canadian perspective, those costs are all behind us. We are operating the business with our own employees. We're doing all the work internal, and we're tracking on the projects that we're starting here in the last month or two very well, and are pleased with the progress that we see with this new ramp.

From a US perspective, here in Houston, we have -- the extra cost is more related to the cost per hour of a contract employee than any other inefficiencies. There's clearly inefficiencies doing work outside, versus doing it inside.

We have roughly 300 contract employees in the Company today. The majority of them here in Houston, and they're supporting our outdoor construction activities. The cost of those on an hourly basis is higher than an employee, but the positive thing is that there's no separation cost when we need to release them. They will be the first cost that we take out of the business, as soon as we can get the production back indoors, and not building all these large projects in the parking lot. Does that help?

I think so. Don, does that alleviate, I guess, as we get into the first half of the year, or is that going to continue?

It basically will start winding down in our second fiscal quarter, but it will probably have some trailing effect even maybe early into the third quarter, but at a much reduced rate.

Just one more. Mike, I think in the past you talked about the potential for maybe a second wave of petrochemical spending. Anything new developing on that front?

Still watching it closely. It certainly looks like the economics for the customers makes sense to do that, and we're certainly seeing in some of the reports out of the EPC firms that they're starting to see some feed work and some smaller projects. We've got several small projects identified, but nothing like the $25 million plus jobs that we had booked in 2014 that drove the 2015 revenue. So could be some upside there, but right now mostly what we're seeing is some smaller projects, but the EPCs seem to be seeing some activity in that area, just not materialized into any identifiable funded projects, yet.

Got you. Okay. I'll get back in queue. Thank you.

(Operator Instructions)

And our next question comes from the line of John Franzreb from Sidoti & Company. Please proceed with your question.

You mentioned the competitive bidding process has heated up a little bit. What kind of margin profile should we be thinking about in 2016 on the gross margin side?

Clearly, that is going to be highly dependent on the second half when you're looking at full year results, and at this point in time, that is the biggest variable. Clearly, we were going to see year-over-year margin improvements are anticipated. I would expect them to be at least 200 basis point improvement year-over-year. But even with a 200 to 250 basis point improvement, we've still got a fairly sizable gross margin challenge relative to the lower revenue volume.

Okay. And when you think about capital spending in the year ahead, you've gotten a lot of work behind you. What's the CapEx budget for 2016 looking like?

When we're looking at our CapEx spending for next year at this point in time, it is very heavily dependent upon maintenance and cost improvement activities that we're trying to look at the organization. I would expect us to have a CapEx, actual spend next year, probably plus or minus $10 million.

$10 million. Okay. And I guess the only good news out of this is that you have available parking space. Okay. Thank you very much. I'll get back in the queue.

Thanks for identifying the silver lining there, John.

Our next question comes from the line of Brent Thielman from D.A. Davidson. Please proceed with your question.

Just a couple more from me. Wanted to touch on the utility market. In the past, I think you mentioned you've seen a little more work going on there as well. Curious how that's developing.

Yes, we had a pretty good -- we had a very good booking year in utility, and the quotation activity seems to be remaining steady, a little lumpiness with the kind of nature of the project work, but it looks like that's going to hold at about those levels for this fiscal year.

Okay. And then on Canada, I think what you said, a lot of what you're doing up there is pipeline projects. Is that still the majority of what you're pursuing there, or are you starting to look at stuff in other areas?

We're starting to look at things in other areas now that we have our base of operation more established. We've landed a couple of smaller hydroelectric projects this past year.

Mining is still pretty dead in Western Canada. I think there's some hydroelectric and utility opportunities up there, and some of the heavy industrial stuff. So it has been up to this point, pipeline has still been a predominant part of what we do, but I think there are some market diversification opportunities in Canada, now that we have our base established.

Okay. Great.

And there's still optimization projects going on even within the oil sands region. But they're just not capacity related. They're efficiency-related activity, smaller projects.

Thank you.

It appears there's no further questions at this time. Management, would you like to make any closing remarks?

Just wanted to say thank you for everyone for joining us today again, and a good set of questions, and enjoy your holidays, and we'll talk to you next quarter. Bye-bye.

This concludes today's conference. Thank you, and you may disconnect your lines at this time.