Powell Industries Inc (POWL) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Powell Industries Third 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 with Dennard Lascar Investor Relations. Thank you. Ms. Hairston, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review the full year 2018 third 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 cover.

If you didn't receive an e-mail and news release issued yesterday and would like one, please call our offices at Dennard Lascar and we will get that to you. The 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, powellind.com, or a telephonic replay will be available until August 15. The information on how to access these replay features was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, August 8, 2018, and, therefore, you're advised that any time-sensitive information may no longer be accurate at the time of 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 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 I'll turn the call over to Brett. Brett?

Thank you, Natalie, and good morning, everyone.

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.

Powell's fiscal third quarter results are highlighted by improvements in both operational performance and market activity across our domestic operations. Our improved revenue and gross margins are a result of increasing volumes as well as improvements in operating efficiencies.

During the quarter, we continued to make steady progress towards completing lower margin projects that were booked under more extreme competitive pressures throughout last year and into early 2018.

We experienced continued strength in new bookings. Market strength again is primarily from the U.S. Notable in the quarter was increased activity from downstream and midstream markets. However, as we reported over the last several quarters, new orders continued to be driven largely by an overall increase volume of small brownfield and maintenance projects. We are experiencing modest activity for larger orders with only a handful of awards in our third quarter over $5 million and only one project over $10 million across the company.

We continue to be encouraged by improved bidding activity across a variety of end markets. We've also seen the planning for several larger projects continue to move towards key milestones.

We continue to be prudent in today's market environment. We are unafraid to push back or even turn down projects with unreasonable commercial liability or contracts with complicated and risky payment terms. While these situations are less prominent in a recovering market, we intend to maintain our focus on mitigating burdensome operational and financial risks and we'll continue to exercise a balanced approach to risk management.

Internationally, our operations are executing well, considering they continue to experience challenging market conditions. There are some underpinning pockets of activity emerging, including East Canada and the Middle East. We expect that these markets will remain sluggish over the next few quarters but see potential improvement in mid to late 2019.

We continued to add to our U.S. workforce during the third quarter, selectively hiring certain positions with increases to both fixed and variable costs to address the increasing activity in production demands at specific locations. However, while necessary but still difficult, we took the action to make small reductions in the balance of our workforce during the quarter, sizing the teams to current market conditions.

We remain diligent in managing our collaborative structure and are becoming more adept at shifting our work between North American facilities as needed. We did begin to notice a moderate uptick in material prices from our suppliers during the quarter, particularly as it related to the proposed Section 232 tariffs on aluminum and steel.

While we haven't had difficulty to date in securing the components we need, we have seen the uncertainty around the proposed tariffs and anticipation of regulatory action become the backdrop for higher prices. As a result, we have experienced a wide range of increases across our metal commodities ranging from 10% to 40% over the last 6 months. We expect further volatility until the full impact and duration of the tariffs become clear.

Looking ahead, our focus continues to be on incrementally scaling up our labor force in advance of increased business activity. We expect to see larger scale engineering designs and cost estimating work continue and are tracking several final investment decisions by our customers.

Our strategic investments in research and development, prudent investments in manufacturing equipment, and our ability to leverage our systems and processes continue to enhance Powell's suite of capabilities. Our focus on safety, service and product quality have and will continue to serve us well.

I could not be more proud of our people, they are the reason we have successfully navigated these last few difficult quarters and are now more than ever demonstrating our core values that will help lead Powell's success in the future.

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

Thank you, Brett.

Revenues increased 42% or $36 million to $122 million in the third quarter of fiscal '18 compared to the third quarter of fiscal '17. Sequentially, revenues increased in both the second and third quarters of fiscal '18 by 13% and 19%, respectively. Revenue growth is from increased domestic activity. Domestic revenues increased by 66% or $36 million to $91 million. International revenues were $31 million, unchanged from a year ago.

Gross profit increased by $9 million to $18 million in the third quarter. Gross profit as a percentage of revenues increased to 15% compared to 11% a year ago. Gross profit and margins are improving due to increased volumes and better utilization of our manufacturing facilities.

Selling, general and administrative expenses as a percentage of revenues decreased to 13% from 17% last year due to higher revenues. SG&A expenses increased $1 million over last year to $16 million, primarily due to the timing of variable performance-based compensation.

We recorded a provision for income taxes of $388,000 in the third quarter. At third quarter fiscal '18, we recorded income of $301,000 or $0.03 per share compared to a loss of $3.2 million or $0.28 per share in the third quarter of fiscal '17.

New orders in the third quarter of fiscal '18 totaled $139 million compared to $91 million a year ago, primarily due to increased demand from our customers in core oil, gas and petrochemical markets.

The order backlog at the end of the third quarter was $316 million compared to $300 million at the end of the second quarter and $233 million a year ago. For the 9 months ended June 30, 2018, revenues increased $13 million to $314 million compared to the same period a year ago, primarily due to improving market conditions and increased order activity.

Gross profit for the first 9 months of fiscal '18 increased by 4% to $41 million. Gross profit as a percentage of revenues was 13% for both 9-month periods.

Selling, general and administrative expenses increased to $48 million compared to $46 million in the first 9 months of '17. SG&A expenses as a percentage of revenues was 15%, unchanged from a year ago. We recorded an income tax benefit of $2.4 million for the first 9 months of fiscal '18.

For the 9 months ended June 30, 2018, we reported a net loss of $9 million or $0.76 per share.

For the 9 months ended June 30, 2018, cash used by operating activities was $26 million, primarily due to the increased working capital requirements needed to support factory activity and revenues. Investments in property plant and equipment totaled $4 million. At June 30, we had cash and short-term investments of $55 million compared to $95 million at September 30, 2017. Long-term debt including current maturities was $1.6 million.

Looking forward, we anticipate our fourth quarter earnings results to show continued improvement over the third quarter. However, we continue to expect to report a net loss for fiscal '18.

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

(Operator Instructions) Our first question comes from the line of Jon Tanwanteng with CJ Securities.

It's Pete Lukas for Jon. You touched on it a bit in the prepared remarks, but could you comment a little -- expand a little bit on trend, order trends heading into the September quarter? It's kind of focusing on how margins have improved off the bottom that you saw the last few quarters?

Good morning, Pete. So yes, on the comments, the most recent quarter, pleased with the order performance, but again characterized by overall -- smaller. Still not anchored by large -- larger projects that we've seen in the past and while we're still tracking them.

Heading into the next couple of quarters, it's all about timing. We are tracking some larger projects. I still think there's a little bit of time 'til they materialize as we track through final funding by the oil and gas companies if they get to the return they want and they pull the trigger. So still a little bit of uncertainty, but really characterized by timing.

Very helpful. And then can you give us any update on the sale of the GE industrial unit and how you see that impacting your business?

Well, it happened. They got the approval and went through with it. And we've seen all the e-mail exchange over from GE to ABB. Nothing in the short term. I don't have any -- day to day. Haven't seen any change in the way we've been working with the historical GE team that has not transitioned. And we'll continue to support them like we have in the past.

And last one for me, any update on the CFO search?

We got a partner that's helping us progress through the search, and I think it's moving along.

(Operator Instructions) Our next question comes from the line of John Deysher with Pinnacle Capital Management.

I was just curious if you're starting to see the impact of tariffs on steel and aluminum. And if so, how are you positioning your business to deal with those?

John, it's Brett. Yes, we are feeling some effects, we've been watching it closely now since they were announced and watching the supply chain react to it, and certainly trying to do what we can through supply chain and through our pricing, to pass through what the market will bear as we -- in my prepared comments.

We see a wide range of effect on the different metals that we buy, but it's important to remember that every project we do is custom. So the range of metals that we buy can vary significantly. For instance, you take like carbon steel, structural steel that we use to build the bases of our onshore design, becomes a little heavier when you get an offshore design. It is -- really ranges depending on the complexity. The weight of equipment going in can affect how much we'll use, the blast requirements. So it's a scalable variable that we have to work through every project.

So it is hitting us and so far, we've been, I think, relatively successful in trying to mitigate it. But it is also a headwind that will have some effect, although minimal at this point, on the bottom line.

Okay. So if I hear you correctly, so far you've been able to pass through the price increases to the customers because of the custom nature of the work?

Basically, to date, we saw -- again, our prices are fixed based on the contracts we took in the past. But what we've been doing to date is looking at alternate supply channels because not all supply channels are going up. We do not buy direct from the mill for the norm. We buy through distribution and so we are having to do that much more with effort to shop through distribution, to mitigate the increases. A lot of the increases are in anticipation of their cost increase as opposed to their actual cost increase to date.

Okay. So final question. So you anticipate being able to do that going forward or do you anticipate margins perhaps feeling the impact in the coming months?

In the current situation, we are factoring that into our pricing decisions. But again, keep in mind that is a competitive market and the market will set the final price. But we are having some success passing that forward in future contracts, contracts that we're currently bidding today, and we'll continue to mitigate it through our supply channels. But to say that we'll be 100% successful at completely mitigating it is unlikely. There was likely to be some impact. The degree of the impact is hard to predict at this point in time, but I would say it was probably going to be in the low single-digits overall.

Okay. And that will happen probably in fiscal 2019, I would guess?

That would be my anticipation as well.

Mr. Cope, there are no further questions at this time. I'd like to turn the call back over to you for any closing remarks.

Thank you, operator.

Over the last several quarters, we have realized steady improvements in our backlog. We have also demonstrated discipline in our cost structure through a very challenging period and are emerging stronger and more confident in our ability to tackle the future as our markets improve.

As we close out this fiscal year, we will continue to execute on our strategy while investing prudently in our workforce, our facilities and our research and development programs to position Powell for the future. Powell's financial position remains strong.

Thank you to our customers, employees and our supplier partners. We look forward to an exciting future for the company. We appreciate your continued interest in Powell and we look forward to speaking with everyone next quarter.

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