Powell Industries Inc (POWL) 2017 Q2 法說會逐字稿

Greetings, 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, Mr. Ken Dennard. Thank you, Mr. Dennard. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal year 2017 second quarter results.

With me on the call are Brett Cope, Powell's Chief Executive Officer; and Don Madison, Chief Financial Officer.

Before I turn the call over to management, I have the usual details to run through. If you didn't receive an e-mail of the news release issued yesterday and would like one, please call our offices at Dennard-Lascar, and we will get that right out to you. Our number is (713) 529-6600. Also, if you'd like to be on the e-mail distribution list for Powell, please let us know.

There will be a replay of today's call. It'll be available via webcast by going to the company's website, powellind.com, or a recorded replay will be available until May 10. And the information on how to access the replay feature was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, May 3, 2017. And therefore, you're advised that any time-sensitive information may no longer be accurate at 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 competitive pressures, sensitivity to economic -- 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.

And now with that behind me, I'd like to turn the call over to Brett.

Thank you, Ken, and good morning, everyone. Thank you for joining us today to review our 2017 second quarter results. I'll make a few comments, and then I will turn the call over to Don for more financial commentary and our outlook before we take your questions.

Our second quarter revenue was $105 million, slightly down from our first quarter of $110 million. However, our second quarter gross margin was 15%, an improvement of 1.4 points over the first quarter. The improvement in gross margin was largely driven by operational efficiencies, where we have had an increased focus over the last 18 months. A significant portion of our second quarter performance was contributed by our Houston operations.

Our operational teams across Powell executed very well in the second quarter. Our on-time performance in meeting or beating project milestones has improved across the company. Strong execution in our fabrication and assembly operations over the last several quarters has further improved our speed of execution without sacrificing quality or safety performance.

One of the strengths of our brand is the trust our customers have in our ability to meet critical dates. We have worked very hard to return predictability in meeting scheduled commitments over the last 18 months. Our efforts are producing positive results.

Our second quarter experienced the continued deterioration of our backlog amid soft market conditions. Reported backlog was $228 million compared to $271 million in the first quarter, resulting from reduced customer activity that has been severely impacted by uncertainties in the oil, gas and petrochemicals markets.

New orders in the quarter were a disappointing $62 million compared to $91 million in our first quarter of 2017. We attribute our lower bookings rate to a combination of timing of awards and continued competitive market pressures that we have been experiencing for available industrial projects.

Inquiry activity has remained steady across the company, especially for the utility market, including distribution, and to a lesser extent, the power generation segment.

In our core oil, gas and petrochemical markets, we've yet to see any signs of significant increases in our customers' spending behavior. However, we continue to see incremental improvements in market sentiment. We have seen a slight increase in activity during the second quarter for a few offshore projects.

I want to caution, however, that this segment has been very low for the last several years, and this increase in activity is limited and not a return to pre-2014 levels.

We do not see any short-term fundamental changes in market pricing or timing of awards that would significantly benefit our 2017 performance. We will continue to closely review our cost structure, making prudent adjustments when necessary.

During our second quarter, we did take additional restructuring actions to further adjust to the prolonged slowdown of industrial projects.

I would like to personally express my appreciation to each of the employees impacted by this decision for their dedicated service at Powell.

As a large proportion of our businesses is long-cycle project activity, we need and have shown to be pragmatic in trying to balance our need to cut costs and boost operational efficiencies, while targeting new markets and investing in research and development.

We have also strategically shifted resources and projects to the facilities that best serve the customer in order to better leverage our resources and optimize our performance. These combined initiatives have helped us to this point, but we expect third quarter revenues to decline due to lower booking levels as well as customer delays that are pushing projects into the fourth fiscal quarter and into our fiscal 2018.

Despite these current trends and concerns, we believe that the combination of solid, long-term business fundamentals, a sustained commitment to R&D innovation and effective management of cycle timing will enable our business to capitalize on opportunities that will come with a sustained economic recovery and result in shareholder value creation.

With that, I'll turn the call over to Don.

Thank you, Brett. Revenues decreased by 31% or $48 million to $105 million in the second quarter of fiscal '17 compared to the second quarter of fiscal '16.

Here are some comparisons to last year's second quarter. Domestic revenues decreased by $31 million to $76 million and international revenues also decreased by $16 million to $29 million. These decreases are the results of the decline in our project backlog as we completed existing projects and continue to see lower demand from our customers in our core oil, gas and petrochemical markets.

Gross profit as a percentage of revenues decreased to 15% in the second quarter of fiscal '17 compared to 20% in the second quarter of '16. Gross profit decreased by $14 million to $16 million.

Our Canadian operations continue to see positive improvement in gross profit that was offset by a decline in gross profit in our domestic operations.

Selling, general and administrative expenses decreased by 16% or $3 million to $16 million in the second quarter of fiscal '17. However, SG&A as a percentage of revenues increased slightly to 15% due to lower revenues.

In the second quarter of fiscal '17, we incurred $840,000 in separation cost, as we took actions to further adjust our cost structure.

In the second quarter of fiscal '16, we incurred approximately $3.3 million of separation cost due to the restructuring of our senior management team and reductions in our workforce.

We recorded a benefit for income taxes of $1.3 million in the second quarter. In the second quarter of fiscal '17, we recorded a loss of $829,000 or $0.07 per share compared to income of $5.6 million or $0.49 per share in the second quarter of fiscal '16.

Excluding restructuring and separation cost, we recorded a net loss for the second quarter of fiscal '17 of $283,000 or $0.02 per share.

New orders placed during the second quarter of fiscal '17 were $62 million, resulting in a backlog of $228 million compared to a backlog of $271 million at the end of the first quarter and $357 million a year ago.

For the 6 months ended March 31, 2017, revenues decreased 29% or $87 million to $215 million compared to the same period a year ago. Gross profit as a percentage of revenues decreased to 14% compared to 18% in the first 6 months of '16.

Our Canadian operations experienced an increase in gross profit, which was offset by a decline in gross profit from our domestic operations. Domestic margins were negatively impacted by reduced volumes as a result of weak oil, gas and petrochemical market conditions, competitive pricing pressures and an increase in transit project volume, which typically have lower margins.

Compared to the first 6 months of fiscal '16, selling, general and administrative expenses decreased by $7 million to $32 million. SG&A expenses as a percentage of revenues increased to 15% due to lower revenues.

We recorded an income tax benefit of $2.8 million for the first 6 months of fiscal '17. For the 6 months ended March 31, 2017, we reported a loss of $1.1 million or $0.10 per share. Excluding restructuring and separation charges, we incurred a loss of $582,000 or $0.05 per share for the first half fiscal '17.

For the 6 months ended March 31, 2017, cash provided from operating activities was $20 million. Investments in property, plant and equipment totaled $1.7 million.

At March 31, 2017, we have cash and short-term investments of $108 million compared to $98 million at September 30, 2016. Long-term debt, including current maturities, was $2 million.

Looking forward, we expect to report a net loss for fiscal '17. We continue to be adversely affected by soft market conditions. However, conditions appear to have stabilized and no further erosion in our overall market is anticipated.

We expect our third quarter orders will return to or exceed first quarter levels. And third quarter revenues are expected to decline due to prior low booking levels as well as customer delays that are pushing orders into our fourth quarter or into fiscal '18.

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

(Operator Instructions) Our first question comes from Jon Tanwanteng with CJS Securities.

Can you talk about project margins in the backlog? Are they lower than what you executed in Q2?

When you are looking at over the balance of our backlog, which is a little over $200 million, there is a downward pressure on margins based on prices. We are going to start seeing that more as a greater percentage of our mix beginning in the latter part of the third quarter and continuing on to the fourth and first quarter next year.

Got it. And then the SG&A run rate you put up in the quarter was pretty nice. Is that sustainable? How does that grow if orders do come back? And could there be more reductions if necessary?

We're constantly looking at where we can trim cost and maintain our cost structure relative to our production volume. So there's always another way that we can try to trim and we'll continue to manage that as we go forward. Relative to increases, the biggest challenge will be -- or the biggest increase would be the variable costs related to the sales transaction. Manufacturers reps would be the biggest variable in the near term relative to increases.

Okay. Got it. And then just on orders, which obviously weren't that great. What gives you the confidence that it isn't further weakening in the end markets? And it's just the timing issue and that there will be a rebound in Q3?

The overall funnel, Jon, that we've been tracking pretty closely quarter-over-quarter since hitting the challenge here mid-'14, it's held pretty constant. We track that pretty granular. As to the status of the order, when it's going to close, we have kind of alluded during the past calls about the shifting in the timing has become more difficult, we definitely experienced that in the second quarter. And then just general competitive pressures, there are certainly some jobs that we're tracking the margins very closely, those that we were disappointed to lose in the quarter and some that we're continuing to exercise prudent discipline as to when to say no. But when you look at the overall funnel, no real big change. Just definitely some timing effects in Q2 and a couple of competitive ones that didn't materialize for us.

Does pricing continue to deteriorate with the competitors in the market? Or has it held steady?

I feel like it's held steady. It hasn't improved. But the grind on pricing has sort of maintained for the last 2 quarters. I didn't see any change this past quarter as we didn't see any change from the last call.

Got it. And then, Brett, you did mention some pickup in offshore. Just not to get too excited about it. But is there any time frame for when there could be a recovery in that market, whether it's in 2 years or 3 years? What is the long-term outlook for offshore in general?

We're monitoring it very closely. There has been some -- the offshore yard is one of the areas that we've been exploring some new markets, trying to leverage some of the assets out there. We talked about some of the [blast] buildings that we've worked on. Some of the more traditional module, the thicker [bolder] plate construction that we find in the offshore market has returned. Again, not a lot, but a couple of projects. Looking out, we are tracking all of the work that we traditionally do work in the Gulf of Mexico, offshore Africa, parts of the Med. There is some percolating activity, but it's still very cautious. There's just a lot of comments out there by the Tier 1, Tier 2 companies about their reserves and are they going to start bidding projects to the engineering houses. And we're trying to track all of those developments very closely. So it's -- I don't think we'll see it this fiscal year, it's safe to say, but still a little murky for '18. It may drift into the latter half of '18, the best guess right now, but it's still not clear.

Got it. And then, Don, just -- can you give us an update on what the backlog looks like in terms of mix between Canada and the U.S.? Is there stuff in the pipe in Canada to continue the performance you've had there?

At this point in time, the backlog in the Canadian facility is actually beginning to be very weak. Our overall backlog at $200 million is still more domestic U.S.-based than it is in Canada or in the U.K. And the reductions in volume will definitely be impacting our Canadian operations the second half of the year.

Our next question comes from John Franzreb with Sidoti & Company.

Most of the topics have been addressed, but could you just talk a little bit about the balance sheet? And how the free cash flow is going to play out for this year? Is there any concern about the dividend we have to borrow to support it?

John, at this point in time, we closed the quarter with $108 million in cash. We anticipate we will continue to maintain and grow -- or grow our cash position between now and the end of the fiscal year that we will see some pressure from earnings, but we'll basically see the benefits of reduced working capital. I do not see any risk in our dividend program at this point in time.

(Operator Instructions) Our next question comes from Tom Spiro with Spiro Capital.

Brett, could you update us on the outlook for petrochemical opportunities in the Gulf of Mexico?

It's one of the markets, John -- Tom, sorry. When we hit the downturn, it was one of the markets that just dried up completely. All of the work by the majors, Anadarko, Exxon, Chevron, Shell, it just stopped. There are a couple of projects that have come back. They are not Gulf of Mexico oriented and the ones that we referred to in Q2, they're more further parts away from the Gulf. There is some conversation coming back in the Gulf. Couple of projects from -- you can follow in the press. BP has a couple -- some conversation out there, will Anadarko continue? (inaudible) another one, but they're not as far along as some of the other ones that we compete in off Brazil. And off of Israel, there's a couple of jobs going on. So it's -- I don't think it's going to be anytime soon. As I kind of mentioned earlier in the question from John was it's a guess, latter half of '18, but it doesn't look -- it's not gangbusters anytime soon.

That's helpful. And how about the LNG opportunities for you in the Gulf of Mexico?

We've won a fair share of the LNG facilities, which we're still executing on. There's a number of projects that are ongoing in construction phase and now entering commissioning. We are tracking and involved in pre-fee, pre-engineering discussions on the others that are progressing their permitting. I think we have a good handle on a lot of those projects. They're competitive. A lot of them are also being led by, what I'll call, nontraditional money. There are some majors out entering in the market, funding some of the jobs. But if you even look at the current LNG jobs, there's a lot of new participants that are driving those projects. So I feel good that we're tracking them. We're engaged with the engineering companies that are competing for those business and making sure they understand our value proposition and what we can do here, especially with our Gulf -- with our offshore facility being able to build the large modules that those facilities require. It kind of reduces the amount of splits that some of our competitors offer because we can build the larger module and ship it right to their site.

That does conclude our question-and-answer session. I would like to turn the floor back over to management for any closing remarks.

Thank you, operator, and thank you, Ken. We continue to confront current market challenges by optimizing our costs, securing what new business is available and strengthening our balance sheet. In the meantime, we will carefully watch the timing of new order awards and their impact on Powell's future performance.

I want to thank Powell's employees who have responded admirably in response to this historically difficult business environment. Our teams across the company have worked hard to align our operating cost with market conditions, and at the same time, help prepare Powell for future opportunities.

In conclusion, I continue to see positive overall market sentiment and believe that Powell has positioned itself well for an eventual market recovery. And although it's not imminent, our customers' capital expenditure budgets going into 2018 will offer better visibility into future project activity.

In the meantime, we remain focused on leveraging our successful internal initiatives, including the delivery of superior customer service and the expansion of our product lines to meet customer demand.

Thank you, again, for your interest in Powell. And we look forward to speaking with everyone next quarter.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.