Powell Industries Inc (POWL) 2016 Q1 法說會逐字稿

Greetings and welcome to the Powell Industries first-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stephanie Zhadkevich. Please go ahead.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal-year 2016 first-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 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 10, 2016, 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 3, 2016, 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 Tom Powell, Chairman, President, and Chief Executive Officer; and Don Madison, Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Stephanie, and good morning, everyone. Thank you for joining us today for a review of our fiscal 2016 first-quarter results.

It's been a while since I've done one of these conference calls, so bear with me. I'm going to make a few opening comments, and then I will turn the call over to Don Madison for financial details before we take any of your questions.

Our performance over the last several years as a Company has not been up to par. We have disappointed some customers with delays, we've disappointed the investment community, and we've decided it's time for a new beginning.

As such, I've stepped back into the role of CEO. The Board is actively working to name a new CEO and we are evaluating both internal and external possibilities. The time frame is not predictable, as you might expect.

While much of the work required to integrate our business system throughout the Company has been done, there is still some work to be done, but we have made good progress. This set of process and management tools requires greater cooperation and communication between the various groups within the organization if we are to see all the benefits they offer.

Canada and the challenges they encountered are improving, and in the first quarter they are on target with our expectations for fiscal 2016. We're pleased with their improved performance.

As you are already aware, the oil and gas marketplace is continuing to show signs of a slowdown in the global economy. Orders during the quarter were in line with previous quarters and reflect the impact of lower oil and gas capital spending. Related inquiries are down and projects are smaller in size and scope. The prices are more competitive.

2016 will be a challenging year for everyone involved in the energy markets. But we certainly are going to tackle it and we are going to be successful.

Our Companywide focus in the coming quarters will be to work hard on efficiency and productivity, while operating in this much more competitive environment. We have many customer commitments to meet during the year and we intend to meet them.

Throughout our history, we've participated in markets that are cyclical. We have handled market downturns many times, weathered them well, and we believe this time will be no different. Our focus is to support our customers and assist them with their needs, build on past and new customer relationships, and be prepared to bring our expertise to project opportunities when and where they are needed.

Growth in oil and gas capital spending will return, and when it does, Powell is in a solid position to perform. We have modern facilities and equipment and the most talented and motivated employees in the business. I'm proud of this group.

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

Thank you, Tom.

Revenues decreased by 2% or $3 million to $150 million in the first quarter of fiscal 2016, compared to the first quarter of fiscal 2015. Compared to the first quarter of fiscal 2015, domestic revenues increased by $9 million to $105 million and international revenues decreased $11 million to $45 million.

Revenues from utilities increased by $4 million to $29 million. Revenues from municipal and transit projects increased by $3 million to $9 million. And revenues from industrial markets decreased by $10 million, while remaining healthy at $113 million.

Gross profit for the first quarter of fiscal 2016 increased by $2 million to $23 million. Gross profit as a percentage of revenues increased to 15%, compared to 14% in the first quarter of fiscal 2015.

As Tom discussed, we are benefiting from operational improvements in our Canadian operations. However, these improvements were partially offset by unfavorable [project] costs on a large transit project.

Selling, general, and administrative expenses as a percentage of revenues decreased to 13% in the first quarter of fiscal 2016, compared to 14% during the first quarter of fiscal 2015, as we have begun to align our spending in response to current market conditions.

In the first quarter of fiscal 2016, we incurred $3.8 million of restructuring and separation costs associated with the departure of our former CEO.

We recorded a benefit for income taxes of $1 million in the first quarter of fiscal 2016, as well as the first quarter of fiscal 2015.

For the first quarter of fiscal 2016, we recorded a loss of $459,000 or $0.04 per share, compared to a loss of $239,000 or $0.02 per share in the first quarter of fiscal 2015. Excluding restructuring and separation costs, net income for the first quarter of fiscal 2016 was $2 million or $0.18 per share.

New orders placed during the first quarter were $102 million, resulting in a backlog of $391 million. This compares to a backlog of $441 million at the end of the previous quarter and $506 million a year ago.

For the three months ending December 31, 2015, cash provided from operating activities was $24 million. And investments in property, plant, and equipment totaled $1 million. At the end of the quarter, we had cash of $59 million, compared to $44 million at September 30, 2015. And long-term debt, including current maturities, was $2.4 million.

In December of 2014, our Board of Directors authorized a share purchase program, which allowed us to repurchase up to $25 million of our outstanding stock. As of the program's expiration this past December, we had purchased 806,000 shares at an aggregate cost of $25 million.

Looking ahead, while first-quarter results were disappointing, we continue to expect full-year fiscal 2016 revenues to range between $520 million and $560 million and we expect full-year earnings to range between $0.65 and $1.05 per share. Our earnings outlook for fiscal 2016 excludes restructuring and separation costs the Company will incur during the year.

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

(Operator Instructions). Jon Tanwanteng, CJS.

Just given that you think the quarter was disappointing, what gives you the confidence in the outlook for the rest of the year? And does that include any restructuring or cost-savings initiatives in there?

Clearly, the first quarter was burdened a little bit by project cost overruns on a transit project that wasn't anticipated and that we had -- our service revenues in December particularly was a little bit short of where we expected.

But when you're looking at the outlook for the balance of the year, particularly the next couple of quarters, the backlog is filling in and we are pretty confident on the short-term production requirements. We have seen and are continuing to see operational improvements from an efficiency standpoint. They were somewhat masked in the first quarter; we think those will start dropping through in the coming quarters. And the overall outlook is still in line with the guidance that we had provided at the beginning of the year.

So we did have a couple of bumps that held us back a little bit in the first quarter, but overall, things within the business are shaping up fairly nicely. The biggest challenge we have is the market conditions and making sure that we can fill in the backlog in the last few months of the year.

Okay, great. And can you talk about the landscape and the pipeline heading into the back end of the year, and maybe a couple months beyond that? What does that mean for fiscal 2017 revenues and earnings?

It's still too early to call for 2017, but clearly the pipeline is getting tougher. Competition is getting stronger. In general, I would say the projects -- while there are still several projects out there, a lot of projects out there, they tend to be a smaller nature. So when you look at them in an aggregate dollar volume, it's harder to reach the numbers that we've had in the past.

But overall, there is still a couple of sizable projects that we expect to close in the current fiscal year and we think that we are in a competitive position for those, but by and large we are seeing more small projects than large projects when you're looking at the next couple or three fiscal quarters.

Great, thank you. I will jump back in queue.

John Franzreb, Sidoti & Company.

Good morning, everyone; welcome back, Tom.

I was just wondering about the inefficiency problems that you had in the quarter and how much that impacted the gross margin. Can you quantify that for us, Don?

I'll bet the quantification of it -- it depends on how you -- where you want to draw the line on the issues, but there is a couple or three projects that we did incur some late costs, and in total I would say the pretax impact was in excess of $1 million, partly due to some rework that occurred late in a project, on the transit project. Then we had -- with some of these large projects that we've been building in the last -- this past summer that are beginning to ship, some of these that we've been responsible for freight to site, and we were a little bit short on a couple of those relative to what we had anticipated in our planning. So that gives a little bit of pressure.

Unlike, I say, the third item, which was more of a December issue than a quarter issue, was that service in December came in a little bit lower than we anticipated, which would have benefited us in the quarter. But when we're looking at the balance of the year, we're still expecting that to be in line with the full-year expectations.

Okay, got it. And given the weakness in the main oil and gas markets, can you talk a little bit about your ability to diversify, maybe some of the markets that you exited a few years back, the competitive landscape there and the ability to hit some of those, call it, more traditional industrial or power generation type markets?

First off, I would say that we haven't exited any markets. I would say that clearly we've been much more dominant in the oil and gas because of the size of the market in the last couple of years.

But when you're looking at the non-oil and gas markets, the activity that we're seeing, clearly we are participating and actually seeing, I would say, marginal improvement in market opportunity in utilities, particularly in the distribution side. We've had some success there. Last year, our fiscal 2015 exceeded 2014 at this point in time. I would say that trend is likely to continue, that we think we will see good opportunities through fiscal 2016.

We've talked about it in the past. We spent time and effort growing our relationships with utilities in Canada with the long-term goal of making that a secondary market for Powell. We are having success there. We've booked some business late last year, and when we're looking at the opportunities in front of us for fiscal 2016, we think we'll have more success.

Looking at the oil and gas, the oil and gas has not gone away. We're still booking business in petrochem, we're still doing a lot of bidding activity -- or more budgetary -- in pipelines. There's a lot of activity out there, but the question is which and how many of these projects will actually be funded in the near term. But there is still -- I would say when you're looking at number of quotes by market sector, that's still probably one of the strongest sectors that we're seeing from a budgetary perspective for a quote. But again, most of them are budgetary.

International, oil and gas is still stronger than I would say it is here. We're seeing it particularly in the Middle East; we've booked some business. And we're also booking some business in the Middle East in the generation area, so we're not fully dependent on US oil and gas, but clearly that is where the market is the softest.

Okay. It's good news revenues won't go to zero. Okay, thanks for the color, Don.

Brent Thielman, D.A. Davidson.

Good morning. You know, really just one question for me here, remaining. Tom, you've been through a number of cycles in this industry. I would really just be curious to get your thoughts on what you think looks different in this down cycle, if anything, and also what you think might be different about Powell in this down cycle versus the past.

There's not a lot of different; it's just more issues and more people to deal with.

This came on rather quickly, in fact, this downturn, and I don't think we quite saw it on a timely basis. We had some difficulty in the implementation of Oracle systems, and that caused us to back up and not make some deliveries. So we spent a lot of time on overtime and contract labor and so forth. But we are getting back to the size that we can manage and prepare for the future more adequately.

It's the same -- it's a lot of the same people. We've got the talent. We've certainly got the energy to get it done, and I think we're on the right track and we will get it turned here very quickly.

The biggest issue is communications, getting people to communicate and getting communications between departments. And we'll get there. We're getting there now.

So, I'm confident that it's going to get better. There's a number of initiatives that we're undertaking. We're working with customers to improve those relationships and communications. We're strengthening our partnerships with our suppliers. Again, opening communication between employees and the various departments; greater emphasis on improving the functions of project management. Certainly we're continuing to work on cost-reduction focus areas, and we're going to pick up the pace in research and development. I'm confident we can get the job done.

Very good. I appreciate that and best of luck here.

Jon Tanwanteng, CJS.

Can you discuss the scale or magnitude of potential further cost reductions, and if any of that is actually factored into your outlook for the year?

Jon, clearly we are continuing to pursue cost-reduction activities, both from a supply management. We're looking at it from an efficiency standpoint. Our capital investments that we're targeting this year are all based on cost improvements, quality, and efficiency related. So when you're looking at our guidance and our anticipated results, clearly we're looking for improvements in several facets.

When you're looking at the second half of the year, which I think you're looking at are we -- what requirements are we going to have to overall look at our size of the organization, it's too early to call the impact there because that's strictly going to be tied to the success we have in the marketplace.

And I would add an attitude adjustment helps.

Okay. Tom, you mentioned that R&D may be more of a focus, actually. Is there any -- can you quantify that in any way, shape, or form?

I don't know that it will be more dollars; it will just be to expedite some of them -- some of the products we're working on more quickly. Not more dollars.

Understood, thanks. And are there any prospects for further share repurchases, given that your stock is trading below tangible book value here?

We just completed our stock repurchase program in December. Clearly, how we utilize our cash is something we constantly evaluate and discuss with our Board. At this point in time, there is no authorization to have a second repurchase, but we will be evaluating the best use of cash over the coming year.

Great, thank you very much.

(Operator Instructions). Tom Spiro, Spiro Capital.

Tom Spiro, Spiro Capital. Good morning, Tom; good morning, Don.

Hey, Thomas. How you doing, buddy?

I'm doing all right, Tom, and welcome back.

Thank you, sir.

Tom and Don, we used to hear not so long ago discussion of a potential second wave of petrochemical spending. I was curious whether there's any evidence of that out there.

Clearly, there are several small projects going on. I would say right now when you're looking at the actual order flow, we're getting several projects that are coming in. From a larger size projects, from a capital capacity standpoint, there is at least one project that we believe will be awarded this year, probably in the coming quarter or two. And there are several others that are in the pipeline, but the others of any size, I think, will be falling into our fiscal 2017. I don't see any others that appear to be close enough to be awarded between now and the end of September.

What's going on in the area of LNG exports?

LNG, we've been fairly successful the last 12, 18 months. We have several projects that are in our backlog. There are other projects that we are currently working on. Again, there is at least one that I think that may come to an award this fiscal year, but at this point in time, we have several projects in the backlog that will be generating revenues between now and the end of the fiscal year.

And lastly, the rules regarding the exportation of crude have changed. I gather now we can export crude, and I wondered whether that offers any opportunities for Powell.

Down the road, I think it could from an infrastructure standpoint. Clearly, it's going to take time to see exactly how the industry responds to that opportunity and where the demand is. But when you start looking at increased exports, then you have to say there would be some opportunity for capital investments in export terminals. It's an area we will be watching closely.

Thanks very much.

John Franzreb, Sidoti & Company.

Yes, just one long question that has a couple tie-ins here.

During the last downturn, Tom, you were kind of reluctant to do any kind of significant layoffs because your expectations were that two or three years down the line, things were going to be turning around and be a lot better. If I heard Don correctly, the restructuring actions that you're discussing right now is more along process and systems and it doesn't sound like there's any major headcount reduction.

So I'm kind of wondering, what is your expectations of the depth and duration of this downturn? And B, are you considering changing your staffing levels to accommodate or to rebalance for those expectations?

John, we're actually evaluating that and have been evaluating that now for a number of weeks. Obviously, one of the first things you would look at is the contract labor, which is expensive and frankly not quite as efficient as our in-house people.

But at some point, we may be forced to look at our staff and certainly the workforce in the shop. It's a difficult thing in our business because we are relationship oriented and our talented and very skilled and knowledgeable employees are not easily replaced. But we will do what we have to do. I wouldn't dare give you the magnitude or so forth at this point, but let me tell you we are on top of it and we'll do what we have to do to improve the outlook for the business.

Obviously, I'd rather be more focused on closing more orders, but if there are not opportunities out there, you have to deal with what's there.

Okay, thank you. Thanks for your take.

Thank you. That concludes our Q&A session. I would like to now hand the call back to management for final comments.

Powell has been through a number of these downturns in our 70 years of business -- certainly, I have -- and we've managed through those very effectively. Right now, our focus again is on strengthening our relationships with our customers, our suppliers, and certainly our employees. We are making progress and I'm encouraged with the attitude and dedication of our employees. We've got great people and thank you for joining us today. We look forward to talking to you at the end of next quarter. Have a good day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.