Powell Industries Inc (POWL) 2017 Q4 法說會逐字稿

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

It is now my pleasure to introduce your host, Natalie Hairston, Dennard-Lascar, Investor Relations. Thank you. Ms. Hairston, you may begin.

Thanks, operator, and good morning, everyone. We appreciate you joining us today for Powell Industries' conference call to review its fiscal year 2017 fourth quarter results. We would also like to welcome our Internet participants listening to the call that is being webcast.

Before I turn the call over to management, I have the usual details to cover. If you did not receive an e-mail of the news release issued yesterday afternoon and would like to get one, please call our offices at Dennard-Lascar Investor Relations, and we will get one to you. That number is (713) 529-6600. Also, if you want to be on the e-mail distribution list for Powell 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 replay will be available by telephone until December 13. The information on how to access the replay was provided in yesterday's earnings release.

Please note that information recorded on this call speaks only as of today, December 6, 2017. 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. The conference call includes certain statements relating to the company's expectations of its future operating results that may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements may 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 strategy. For more information, please refer to the company's filings with the Securities and Exchange Commission.

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

Now I'll turn the call over to Brett. Brett?

Thank you, Natalie, and good morning, everyone. Thank you for joining us today to review our 2017 fourth quarter and year-end results. I will make a few comments, and then I will turn the call over to Don for more financial commentary before we take your questions.

2017 presented Powell with a mix of both operational accomplishments and performance challenges across many of our key customer markets. The spirit of Powell is demonstrated immediately after the landfall of Hurricane Harvey. Several of our U.S. and Canadian facilities teamed up to assist key customers, whose critical Gulf Coast operations have been paralyzed by flood-damaged equipment. Powell's capacity-sharing and supply chain capabilities were highlighted during this crisis, which showcased the strength of our front-end engineering, manufacturing and electrical service teams. Notably, we were able to turn around certain projects in days, which otherwise would have taken weeks or months. This collaboration was across the board. Our employees, customers and suppliers pooled resources to get these devastated facilities back up and running quickly without jeopardizing safety. As a result of Hurricane Harvey, we lost 8 to 10 days of production at our Houston factories. This negatively impacted our results for the quarter. However, we are very proud of the response by our employees who mobilized the help, those whose homes were damaged, both through donations and hands-on rebuilding efforts.

We are also proud of our employees' response to our customers. Powell came through these storms as a team. We were able to generate goodwill with our employees as well as goodwill with our customers and suppliers. I would like to personally thank each and every employee for their courageous efforts during Harvey and our collective recovery. This crisis epitomized our can-do spirit of who we are, a world-class producer that embraces complexity through our custom engineered solutions. After 70-plus years in business, it's in our nature to make it right for our customers and employees.

Overall, 2017 proved to be a challenging year. Price and volume were definite headwinds for Powell, resulting in a drastically reduced backlog and working through uneven production loads across most of our facilities. Despite slower and anticipated market activity, we are awarded a respectable number of projects of their scope and scale was and continues to be significantly smaller than in the past couple of years.

We did, however, deliver on several successful internal initiatives during 2017. Continuing the efforts that we started in 2016, we further strengthened the utilization and optimization of our business systems, improved scheduling and manufacturing efficiencies and improved collaboration between our functional teams. Our confidence to deliver the most complex of projects on time and on budget for our customers has never been higher.

In keeping with our commitment to innovation, we developed and launched several new strategic products in 2017, with the goal of looking for ways to boost operational efficiency, reduce costs and further improve cycle times. Powell released its first wave of intelligent, sensor-based monitoring products this year, which give our customers realtime data on the health and status of their electrical systems. We launched both new and redesigned products for our medium and low voltage ANSI and IEC product lines. Benefits of these newer designs include reductions in equipment footprint, reduced weight and designs that support better efficiency and manufacturing and increased electrical and safety performance for our customers and their facilities. And finally, we aggressively attacked new energy code requirements being adopted in North America. These new requirements significantly increased the energy efficiency and will require new designs for prefabricated electrical substations in the U.S. and Canada.

Now let's look ahead to 2018. As we enter the first quarter, I'm pleased to report that trends and customer activity have modestly improved when compared to 6 and 9 months ago. The competitive pricing pressures we experienced throughout 2017 have somewhat subsided. A stronger economy and more stable upward trending energy prices are bringing new planning development work for the custom electrical distribution systems that are ideal for Powell. We see customer momentums slowly building for the funding of higher quality jobs ranging up to $3 million, large and progressive upgrade that have been postponed over the past 2 years.

In addition to improved market conditions, we have started to drive order quality by leveraging the confidence in our execution and improved cycle times as well as a slight shift toward more selective opportunities during the bidding process, which will improve the quality of our backlog over time. If current customer activity continues to gradually increase throughout fiscal 2018, we expect to show a year-over-year order improvement from 2017, which should position Powell for an improved fiscal 2019.

Powell remains a financially healthy company. And relative to our weaker backlog, our teams have continued to perform well and delivered solid project execution. We will, with measured optimism, accept any tailwinds to help us along the way. And although modest, our recent volume, activity and quality indicators suggest we may have finally seen a turning point toward a more stable market environment in fiscal 2018.

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

Thank you, Brett. Revenues decreased by $30 million (sic) [$30 million] to $90 million (sic) [$95 million] in the fourth quarter fiscal '17 compared to the fourth quarter fiscal '16. Compared to last year's fourth quarter, domestic revenues decreased by $36 million to $63 million and international revenues decreased by $1 million to $32 million. The decreases are the result of the decline on our pricing backlog as we complete 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 11% in the fourth quarter of fiscal '17 compared to 20% in the fourth quarter of fiscal '16. Gross profit decreased by $15 million to $11 million. This decline in gross profit was primarily due to lower revenues, market price pressures and the underutilization of our manufacturing facilities.

Selling, general and administrative expenses decreased by 12% or $2 million to $15 million in the fourth quarter of fiscal '17. However, SG&A as a percentage of revenues increased to 16% due to lower revenues.

In the current quarter, we've recorded a benefit for income taxes of $1 million. In the fourth quarter of fiscal '17, we recorded a loss of $5.1 million or $0.45 per share compared to income of $5.5 million or $0.48 per share in the fourth quarter of fiscal '16.

New orders placed in the fourth quarter of fiscal '17 totaled $112 million compared to $91 million last quarter and $111 million a year ago. Order backlog at year-end totaled $250 million compared to a backlog of $233 million at the end of the third quarter and $291 million at the end of last year's fourth quarter.

For the 12 months ended September 30, 2017, revenues decreased 30% or $169 million to $396 million compared to fiscal '16. We entered fiscal '17 with a weak order backlog and depressed market conditions, and continue to experience lower demand from our core oil and gas petrochemical customers.

Gross profit as a percentage of revenues decreased to 13% compared to 19% in fiscal '16. Gross profit was negatively impacted by reduced production volumes, resulting in under-absorption of our manufacturing facility costs and competitive price pressures. Gross profit was negatively impacted by an increased volume in municipal transit projects, which typically yield lower margins due to market competition. In addition, we experienced execution challenges on certain municipal transit projects.

Selling, general and administrative expenses decreased 18% or $13 million to $62 million in fiscal '17 compared to fiscal '16, primarily due to cost-reduction efforts that we took in fiscal '16 in response to our adverse market outlook. SG&A as a percentage of revenues increased to 16% in fiscal '17 compared to 13% in fiscal '16, primarily due to lower revenues.

In fiscal '17, we incurred $1.3 million in separation of restructuring costs, as we continue to reduce our overall cost structure to better align our cost with anticipated production requirements. In fiscal '16, we incurred approximately $8.4 million of separation costs due to the restructuring of our senior management team and reductions in our workforce.

We recorded an income tax benefit of $7.4 million in fiscal '17 compared to the income tax provision of $2.3 million in fiscal '16. The effective tax rate for fiscal '17 was 44% compared to an effective tax rate of 13% for fiscal '16. The effective tax rates for both fiscal '17 and '16 were favorably impacted by the lower tax rate in the U.K. as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with the valuation allowance.

In fiscal '17, we recorded net loss of $9.5 million or $0.83 per share compared to net income of $15.5 million or $1.36 per share in fiscal '16. The reduction in income compared to the prior year was primarily due to depressed market conditions and competitive price pressures. For fiscal '17, cash provided from operating activities totaled $37 million. Investments in property, plant and equipment was $3.6 million.

At September 30, 2017, we had cash, short-term investments and restricted cash of $120 million compared to $98 million a year ago. Long-term debt, including current maturities, was $2 million.

As Brett mentioned, we entered our fiscal '18 with moderate signs of market improvement when compared to 6 months ago in the terms of price pressure, project quality and order volume. While it is unclear whether these positive trends are sustainable, if current customer activity continues to gradually increase throughout fiscal '18, we will end the year with a stronger backlog, which will position Powell for an improved fiscal '19. However, by entering fiscal '18 with a weak backlog, both in terms of volume and quality, we will need to continue to manage production gaps in many of our facilities. And as a result, we expect to report a net loss for fiscal '18. Despite the challenges we face from an earnings perspective during fiscal '18, we will continue to focus on managing our cost structure and maintaining our strong balance sheet.

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

(Operator Instructions) Our first question comes from the line of John Franzreb with Sidoti & Company.

I got on a little bit late, so I might have missed this. Can you quantify the impact Hurricane Harvey had on fourth quarter results?

So John, we talked about it hitting about 2 weeks’ worth of production at the 3 Houston-based facilities. All 3 facilities were hit. The facilities themselves came through the storm pretty well. We did have a number of employees with some pretty traumatic stories, and we worked pretty hard together as a team to get everybody back to work, and then our supply base. And then we had some facilities and customers that were hit. So we did a good job recovering revenue. I looked at some of the incoming needs against some of the -- all the moving and shaking, puts and takes and things that were going on to try to recover. It was in excess of a $1 million hit, and -- but hard to come up with an exact number.

Okay, that's enough. Okay. And regarding your outlook for fiscal 2018, I guess, I'm kind of looking directionally what we should expect. Are we at the low point of the revenue stream? And should we think about half of the year being (inaudible)? Or is the depth and duration maybe deeper than I was expecting?

John, I'm sorry, you cut out. Can you repeat your question?

Sure. Looking into fiscal 2018, I want to -- I'm curious toward the bottom of the revenue profile, and also if you just think about the loss profile for the company will be worse, more pronounced in the first half or closer to breakeven or above in the second half.

So it's hard to say we're at the bottom of the revenue side. If you'll recall, last couple of quarters, one of the big headwinds in '17 were shifts in our loadings. And that really Q3, if I look at Q3 last year, really had a lot of customers come and move production schedules on us. And our ability to respond in a really tough market was extremely hard. It always is hard in a project business. So that, I think, still continues today, maybe slightly to a lesser degree as we end Q4. It's still a concern. And the overall quality of the backlog, as we talked about, the overall volume and things that were just really tough, competitive price still tough now, but some of that's still in that backlog. And if things move around or shift, it will impact us going forward. Market-wise, as we hit the end of Q4 and kind of start the Q1, base business definitely improved up off the bottom, pricing slightly better than it was 6 to 9 months ago. So that bodes well, but the key is to hopefully maintain that. My concern in the near term is just still a lack of larger projects. So base business is up off the bottom. We're seeing some good health there, but still not a lot of 10 million-plus-type opportunities. Although, as I commented, we are seeing some things in the engineering houses that could bode well for late this year or into '19 if they become funded.

(Operator Instructions) Our next question comes from the line of Jon Tanwanteng from CJS Securities.

It's Pete Lukas in for Jon this morning. Can you talk about the relationship with GE and how the sale of its industrial group will impact you over the next year or so?

Yes. The actual impact, Pete -- well, first of all, good morning, but the actual impact is unknown. GE is a significant customer to Powell. Since the acquisition of the medium voltage line some 10-plus years ago, I think, today, we've got a very solid relationship with GE. And they are a big channel for us in the commercial market, not so much in the heavy industrials and oil and gas core market balance to Powell, but what the actual impact will be, what is carried over, how would they expect, it's something we are watching closely. And as ABB takes control of that unit, we've got an ongoing relationship with them as well on other business. So we'll see come midyear when they through all their due diligence.

Great. And can you also quantify maybe a little bit more the degree of margin improvement that you are seeing for new orders going into backlog and discuss about how long it will be before you work through some of the lower-margin projects out of the current backlog?

I guess, my answer on the pricing, because knowing -- folks might be listening in, it's off the bottom, and it's more than a point. I'll let Don add some comments. From a cycle standpoint, it is on the front end only. I wouldn't expect to see the blend in the backlog for another 4 or 5 months before we see how it comes out of the backside, but my expectation is it will come out as good or better operationally.

Pete -- Peter, I guess, the only thing I would add to that is the backlog that we currently have in place today will substantially be completed by the end of our second quarter. The work that we're booking today is what we're dependent upon as far as the third and the fourth quarters. And so this kind of goes back to John's question as well. We do expect to see a first -- second half over first half improvement, but it is all based on what's yet to come relative to orders.

Great. And last one for me. I just want to make sure I heard it right. You talked a little bit about larger projects and hoping to get funding there and maybe see something in '19, is that kind of how we should think about larger projects given the current price of oil? Are you seeing any benefit from that?

Well, again, like you guys, we're looking for the correlation and the matching as well. It does seem, in the last quarter, from my own visits around some of the engineering houses around the world, there is funded FEED activity, that process where they're hiring the engineering houses to design the projects. They go through a lot of cost reductions before they get funded. So if some of these projects are being designed, initially, it seems very large. I guess, I would believe they're going to get whittled down depending on what happens to oil and what everybody believes. But it's a first refreshing sign to see some of these houses hiring engineers and doing more than what ifs and actually scoping out some jobs that could bode very well if oil does support those fundamentals in the future.

Our next question comes from the line of John Deysher with Pinnacle.

I just have a couple of quick questions. What are the plans for the cash? I think you said it was $120 million. I think that's $10 a share plus in cash. I know you paid a dividend, which I figure is sustainable for the foreseeable future, but are there any specific plans for the cash? Or what are you thinking about in terms of the use of the cash, be it buybacks or potential acquisitions? Or anything along those lines?

Well, at this point in time, John, this is Don Madison, the -- from a cash perspective, we do need to be cautious from the standpoint that as the market rebounds and our revenues begin to rebound, we will need to have some reserves to fund working capital. In a project business, a lot of our cash over the last year came from reductions in working capital, which will need to be replaced once we see the volume improvements. From the -- but from beyond that, we are looking as to how we can improve the business long-term from a growth and strategic perspective. We have taken the valuations of different opportunities, but we are being selective from an acquisition standpoint to make sure that what we do is a strategic value that complements what we do and where we want to go across the world. From a share repurchase standpoint, yes, we did one a couple of years ago. It has been discussed from time to time with our board. But at this point in time, there are no plans for a share repurchase.

Okay. My follow-up, in terms of the acquisitions, obviously, you're suffering from a cyclical downturn. I would guess some of your competitors are as well. It sounds like you're fairly active on the acquisition front, actually evaluating properties?

Put it this way, that we've had discussions to say that -- who are relatively active, it all depends on a reference point.

Yes. John, this is Brett. So I've just completed my first year in the role of CEO. And certainly, those discussions for me with the board have been had. We continue to have them. We're involving the management team and as well as some others in the company to talk about what geographic and strategic areas we've been talking about for the last couple of years makes sense and talking about what we should do in '18, '19 and '20 going forward. So there are active discussions, but that's kind of all the further we've gotten to this point.

Okay. I mean, I'm not suggesting that the money is burning a hole in your pocket, but you don't want to look back in 2 or 3 years when the cycle has turned, and you say to yourself, "Wow. We should have bought that company or this company. And really, it'll generate us some growth because of those acquisitions."

Well, we couldn't agree more with you. And so part of the process, by looking at where do we really think it, and as Don said, strategically enhances the technology side of where we think we really play nice, the project side, geographically, where should we expand our footprint, both important future avenues for Powell that we talk about. And we'll see how the next couple of quarters will go. But as Don said, we're also very focused in the short term, making sure that we can -- if this is truly a turnaround, and the market can sustain on its base business that we stay focused on the operation. I think that's, certainly, a need in '18.

(Operator Instructions) There are no other questions in the queue. I'd like to hand the call back over to Brett Cope for closing comments.

Thank you, Doug. During 2017, the teams across Powell worked hard to fine-tune our operations to prepare for the next level of market expansion, and we have built a solid company that is supported by streamlined infrastructure and by workforce of highly skilled, energetic and empowered people.

While we will continue to monitor our operating costs, we plan to continue to invest in our workforce, our facilities and our research and development programs, and to target opportunities that could advance Powell's geographic footprint or enhance our strategic capabilities. Rest assured, Powell's foundation is solid, and we look forward to a future of not just returning to our previous level's performance, but exceeding it.

Thank you, again, for your interest in our company, and we look forward to speaking with everyone next quarter.

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