Powell Industries Inc (POWL) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Powell Industries second-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard of Dennard Lascar. Please go ahead, sir.

Thanks, Kevin. Good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year 2016's second-quarter results. We would also like to welcome our Internet participants listening in the call, as this is being simulcast live over the Web.

Before I turn the call over to management, I have the usual details to cover. If you didn't receive an email and news release issued yesterday afternoon and would like one, please call our offices at Dennard Lascar and we will get one to you. That number is 713-529-6600. Also, if you want to be on the email distribution list for Powell releases, please relay that information to us.

There will be a replay of today's call. It will be available via webcast by going to the Company's website, and that's Powellind.com. Or a recorded replay will be available by telephone, and that is until May 11. The information on how to access the replay was provided in yesterday's earnings release.

Please note that that information reported on this call speaks only as of today, May 4, 2016, and therefore you are advised that time-sensitive information may no longer be accurate of the time of any replay listening or transcript reading.

As you know, this conference call includes certain statements including statements related 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 the 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 more 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; Brett Cope, Chief Operating Officer; and Don Madison, Chief Financial Officer. I would now like to turn the call over to Tom.

Thank you, Ken. Good morning, everyone. Thank you for joining us today for a review of our 2016 second-quarter results. I will make a few opening comments, and then I will turn the call over to Brett and to Don for more commentary before we take your questions.

While the overall market conditions continue to be down, I am particularly pleased with the operational results from our Canadian operations. And across the Company we are seeing results from our focus on solid project execution and cost reduction initiatives.

Powell has historically found ways to meet our customer obligations even during difficult business condition. This time around is so different from past cycles, and I appreciate each and every Powell employee for their efforts to do what is right for our customers and the Company.

Powell prides itself on customer service, supporting existing and new customer relationships, and preparing ourselves 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 will be in a solid position to perform. We have a strong balance sheet, great products, modern facilities, and the most talented and motivated employees in the business.

I will now turn the call over to Brett to discuss some of our operational improvement initiatives and some additional color on our end-markets. Brett? It's yours.

Thank you, Tom, and thanks to everyone participating on today's call. Overall, our markets remain difficult, yet we are working diligently to manage our businesses through this challenging period. By making some tough decisions, we will be able to lower costs to correspond with reduced project activity and subsequently lower revenues. We have cut expenses throughout the Company's operations over the past several quarters while we continue to further streamline our operations and increase productivity.

As far as cost management, we have taken proactive steps to adjust our workforce to our anticipated production requirements, and our most recent actions have been to lower fixed costs by reducing the corporate office headcount by about 15%. We are also reviewing our products and, where possible, reducing the manufacturing costs through design improvements and are leveraging our supply chain. We continue to look closely at our product designs for additional efficiency improvements through the factory.

Finally, we have started to look for cost improvements that do not detract from our value proposition of offering a differentiated solution to the market. Over the past five to 10 years, our customer needs have changed. We need to ensure that our offers match with the market values.

As Tom mentioned, Canada was a highlight during the second quarter. We posted better-than-expected results from our Canadian operations due to the material productivity savings from improved project execution, operational efficiency initiatives and cost reduction activities. The UK also performed well in the second quarter.

In the US, the opportunity funnel is narrowing as competition continues to intensify during these soft market conditions. While there are projects available, they tend to be smaller in nature, and we are seeing increased price pressure from new bookings. We expect this trend to continue into 2017.

Strategically, we are targeting future growth in markets where we have not had a strong presence historically. These include geographic opportunities to extend the strength of our electrical solutions and to capitalize on Powell's full breadth of service offerings. We are also targeting existing markets where we already have a strong reputation and see opportunities to expand our products, integrated solutions and services.

Don will provide you with an update on our outlook. But it's important to note that the operational and efficiency obstacles we faced in prior quarters are largely behind us. Going forward, we will continue to focus on navigating the Company through this lower order environment. The duration of these market conditions is impossible to predict, but we expect to experience continued challenges in our markets for the balance of 2016 and into 2017.

Now let me turn the call over to Don.

Thank you, Brett. Revenues decreased 11%, or $18 million, to $152 million in the second quarter, compared to the second quarter of fiscal 2015. Domestic revenues decreased by $14 million to $107 million, and international revenues decreased by $4 million to $46 million due to a reduced number of large projects in our backlog. Gross profit as a percentage of revenues increased to 20% in the second quarter of fiscal 2016, compared to 14% in the second quarter of fiscal 2015 due to improvements in our international operations primarily driven by improved project execution and reduced costs in our Canadian operations.

Selling, general and administrative expenses decreased by $400,000 to $19 million in the second quarter, primarily due to cost reduction efforts. SG&A expenses as a percentage of revenues increased to 13% during the second quarter, compared to 11% in the second quarter a year ago, primarily due to lower revenues.

In the second quarter of fiscal 2016, we incurred approximately $3.3 million, or $2.3 million net of income taxes, in restructuring and separation costs. In the second quarter of fiscal 2016, we reported income of $5.6 million, or $0.49 per diluted share. Excluding the second-quarter restructuring and separation costs, net income for the second quarter of fiscal 2016 was $7.9 million, or $0.69 per diluted share.

For the six months ended March 31, 2016, revenues decreased 6%, or $21 million, to $302 million compared to the same period a year ago. Gross profit as a percentage of revenues was 18%, compared to 14% in the first six months of fiscal 2015 due to the improvements in our international operations.

Compared to the first six months of fiscal 2015, selling, general and administrative expenses decreased by $1.9 million to $38 million. SG&A expenses as a percentage of revenues remained flat at approximately 13% for both six-month periods.

In the six months ended March 31, 2016, we incurred approximately $7.1 million, or $4.8 million net of income taxes, in separation costs as we continued to restructure our senior management team and align our salaried and hourly workforce with anticipated production requirements.

We recorded an income tax benefit of $300,000 for the first six months of fiscal 2016. The effective tax rate was a 7% benefit, which was favorably impacted by the mix of income from our Canadian operations and the utilization of net operating loss carry-forwards in Canada. Additionally, the effective tax rate was favorably impacted by $800,000 due to the retroactive reinstatement of the R&D tax credit.

For the first six months, we reported net income of $5.2 million, or $0.45 per diluted share. Excluding restructuring and separation charges, income for the first half of fiscal 2016 was $9.9 million, or $0.86 per diluted share.

New orders received during the second quarter were $117 million, resulting in a backlog of $357 million, compared to a backlog of $391 million at the end of the prior quarter and $499 million a year ago.

At March 31, 2016, we had cash of $57 million, compared to $44 million at the beginning of the fiscal year. During the first six months of fiscal 2016, cash provided by operating activities totaled $25 million, and investments in property plant equipment totaled approximately $1 million.

Also during this same period, we paid dividends totaling $5.9 million and repurchased $3.7 million of Company stock to complete our share repurchase program.

Long-term debt, including current maturities, totaled $2.4 million.

Looking ahead, based on our backlog and current business conditions, we expect full-year fiscal 2016 revenues to range between $520 million and $560 million, unchanged from our previous guidance. And we expect adjusted earnings to range between $0.80 and $1.10 per share, compared to our previous guidance of $0.65 to $1.05 per diluted share.

Our earnings guidance excludes restructuring and separation charges. We recorded $4.8 million in restructuring and separation costs net of tax in the first six months of fiscal 2016, and we will continue to evaluate additional restructuring that may be needed to align our operating costs with market conditions.

In closing, Powell has a strong financial position. At the end of our second quarter, our working capital totaled $175 million, of which $57 million was cash. Over the next six months, we expect our cash balance to continue to increase as we complete many of the projects currently in process. We have virtually no debt and have nearly $60 million available under our existing credit agreements. We are well-positioned to manage the business through a depressed capital spending cycle, especially in our core oil and gas markets.

At this point, we will be happy to answer your questions.

(Operator Instructions) Jon Tanwanteng, CJS.

This is actually Robert Majek sitting in for Jon. Can you talk about the recent uptick in energy prices and if that has affected your customer discussions in a positive way? Or, said another way, do you still expect the same amount of pressure on orders and pricing versus where you were two or three months ago?

Let me give you a high-level overview of that and then Brett, maybe you want to add a little more color on it. But when you are looking at our market, keep in mind that we lagged all the industry -- we come in at the backside of the cycle. So, even projects that may go forward and is sanctioned in the near-term, you're probably looking at another year down the road before we will start seeing activity. And then another three to four quarters after that before you are starting to generate any significant amount of revenues.

So when you are looking at the short-term impact of price levels of the oil, clearly it's a positive indicator. But as far as impact in our markets, it is going to take some time, and it will take even more time before you start seeing any benefit to Powell. Brett?

No, we haven't seen any change in the activity. As far as meeting with customers and quoting activity, I think the market is still looking to squeeze as much as it can out of the supply chain to bring the profitability of these projects in line.

Thank you. We've heard that utilities are on the cusp of a capital spending increase. Have you seen that at all, and is that built into your guidance?

The utility distribution market -- we have seen improvements over the last couple of years. From an activity standpoint, that continues to be stronger in the last couple of quarters than we saw in the prior years. But it's still relatively small projects, still relatively small percentage of our total order intake.

Appreciate it. And lastly from me, can you go into a little more detail regarding the Canadian performance? What went well there and what do you expect -- or, rather, do you expect the strength to continue?

Clearly from an execution standpoint we expect the strength to continue. That clearly we've talked about the activity that we've been -- that's been ongoing in Canada. The efforts that we've taken, the transition in our backlog of roughly two quarters ago. And the efforts that we've been putting in to ensuring that the execution of those that were with affected. That the change in this past quarter is the magnitude of the benefit.

Clearly, the direction was anticipated. The magnitude was a pleasant surprise. They have worked hard, and they performed well this past quarter.

Looking forward, we expect the level of performance from an order execution standpoint to continue, but they will be challenged with volume. The market in Canada is probably the most impressed of the oil and gas markets that we serve, and their backlog of the balance to the year is definitely something.

Thank you. I will jump back in.

John Franzreb, Sidoti and Company.

Just to go back to the order discussion. The last two quarters, order intake has been north of $100 million. But some of the commentary I am just hearing suggests that we should be braced for something maybe a little lesser than that. Is that the case what you are hearing out there, or do you think we have stabilized north of that $100 million threshold?

I don't want to necessarily comment on the $100 million, but I think what you -- you will continue to see some lumpiness in our orders. With smaller orders on average, the lumpiness is not as dramatic as it maybe has been in prior years. I think there is still going to be some erratic behavior from quarter to quarter. I don't believe anyone would want to go out and say that we will have a strengthening of orders. But at the same point in time, I don't think on average that we are expecting to see a radical change downward on average. But in any one quarter, it could be up or down.

Okay. And in regards to the restructuring actions you have taken, how much of it is sustainable restructuring actions that won't require maybe (inaudible) people once the market returns? And you can kind of put in context how much has been taken out that is sustainable and if that has reset your breakeven for the Company on a quarterly basis?

Good question, John. That -- how much of the costs that we've taken out of the business will we have to put back into the business once order volume and revenues increase? There will be a rehiring effort. There will be production-level employees and supervision, engineers that will have to come back into the business.

I would guess at this point in time, more of them will have to come back than will be permanently saved. But we would attempt to try to take this opportunity as we restructure and we lean out our processes to be able to retain a portion of that, even in stronger market conditions. But I don't have a specific number to say that would be permanently retained. Again, a lot of that is going to be where the mix of business is across the Company.

Okay. I will get back in the queue. Thank you.

(Operator Instructions) [Marissa Mohul], DA Davidson.

Really I just have one question. What are you guys seeing in power generation? How competitive is it, and I guess what could order of magnitude be?

Well [Rhett], this is Brett. 24 months ago, generation was a lot stronger. We are seeing some activity increase in the last couple of quarters on the quoting side. Competition is definitely -- price pressure is definitely increasing. As Don mentioned and we have mentioned on previous calls, on the distribution side, we saw an uptick two, three quarters ago. And those projects tend to be smaller in that they are not as big as generation. But we are seeing regionally in the States some markets that are stronger than others on generation. We are doing some work in the UK and we have also had some success in the Middle East.

Thank you.

Tom Spiro, Spiro Capital.

Brett, I believe you may have mentioned or perhaps it was Tom in your opening commentary that over the last five or 10 years in your view, the customer needs have changed. And I'm not quite sure what you were referring to. I thought you might elaborate a bit on what has changed and what does that mean for Powell.

Tom, good question. I'm going to try to give you an example of what we are trying to get at there without too many details because there's some things there that we are still getting our hands around. But as an example, 10, 12 years ago on the documentation side -- every one of our projects requires documentation. And the engineering companies which are 99% of the time involved in the change from the end-user to us used to take care of that requirement. Over the last 10, 12 years, that's been pushed down to the supplier.

So we are looking at best practices and how to address that, making sure that what we are doing and positioning and offering to our clients in terms of what we can offer is uniform and best leveraged throughout the Company. So we are trying to in our operational reviews make sure we are positioning that right and executing it right. So as an example, that's what we are doing. We are looking at our products and our integrated solutions with teams and trying to attack it with the same sort of passion.

Thanks. That's helpful. Also I took away from Brett, it might have been your commentary that the Company is going to be intensifying its focus on overseas expansion. Did I come away with the right read on what you are saying there?

Well, to clarify, there were a couple of markets geographically that we have taken steps into. We talked in previous calls about the utility market and also East Canada. That's an initiative that is going well, and we continue to be actively learning and seeing what we can do to accelerate the rate of success there. We did take some steps in the Middle East.

In terms of core oil and gas markets, that's still a strong area, but it's also extremely competitive. Don made a comment here a minute ago about onshore Canada being tough. While the market is still spending in Middle East, but everybody is playing there. So it is a tough market. And we did take some steps in the Far East but I would say that's also a market that has decreased activity. Some of the elections are really delaying things there and the funding just looks to be not as strong as it was, say, a year ago.

I see, I see. Lastly, and this isn't really a touchy-feely or judgmental kind of a question, but with current levels of demand within the industry, how much excess capacity would you folks guess the industry has today? And I know it's just guess.

Yes, I assume you are speaking of the electrical equipment industry.

Yes, that's right.

Of those that are focused on the hot specifying project related business, I would suspect that they are feeling the same as we are with significant pressures. Those that are more on the commercial construction at least here in Houston should be doing well.

Okay. Thanks very much and good luck.

Thanks, Tom.

John Franzreb, Sidoti and Company.

I might've missed this earlier if you said it. Can you just talk about the quarter that just happened -- the second quarter? The revenue profile was (technical difficulty) than I expected. Was it the timing of jobs? You mentioned that Canada outperformed. Was it isolated to Canada? Can you just elaborate a little bit why the quarter was so good?

From a revenue perspective, there was some shift of revenues that they have come in a little bit. You are not talking a huge amount. But I would say some of the revenues that we had previously anticipated would occur in the April/ early May period did get pulled in, and we were able to support the customers' requests in those areas. So -- but I would view that as less than 10% of our total revenues.

When you are looking at the bottom-line impact, clearly, it was primarily influenced by the cost improvements and efficiency benefits that we received from the Canadian business.

Is Canada profitable now?

Canada was profitable in the second quarter. It actually exceeded our average and was able to pull up the gross profit as opposed to be a business that had to be supported.

Great, great. And regarding the pricing pressure that you mentioned in the earlier commentary, how much is that impacting the incoming order book? Are you looking at a lower gross margin profile and new orders today than you were, say, six months ago?

I think the trends have been consistent, and it is downward. It is, depending on the particular project, who shows up from a competition standpoint, which market it's in. I don't want to sit here and say that everything is falling off a cliff. But I would say the majority of the projects that we go into ultimately end up with price pressures either from the engineering firm or from competitive levels from the beginning. There's a lot of rebidding going on where firms are attempting to try to find the bottom as well as justify going forward what they are spending. And when you rebid projects, typically that pushes the price levels down. (inaudible) additional comments.

No, I agree. The degree of rebidding on projects before they release full funding has definitely increased, and that creates lots of opportunities for new entrants to the market and just amplified some of the pressures we see. Again, I think Don's right: not across the board but, on average, we are seeing an uptick.

Got it. And regarding your R&D efforts, how much at this point is dedicated to reengineering our current product lines to maybe maximize efficiencies as far as manufacturing processes? Or how much is it dedicated to new product development and new product opportunities and new applications?

We are focusing on both. If you're looking at the most recent quarter spend, it would be more in improved manufacturability, improved features and improved design costs of products that we have historically manufactured. But we have invested in and we do have resources that are 100% dedicated to looking and developing new products, particularly in some of the areas we talked about in the past from a control and monitoring standpoint.

Okay. Thank you for taking my questions.

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to management for any final comments.

We appreciate your questions today. Thank you for joining us, and we look forward to speaking with you again next quarter.

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.