Welcome to the Powell Industries Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, May 9, 2012. I would now like to turn the conference over to Ms. Karen Roan of DRG&L. Please go ahead, ma'am.

Thank you, Camille, and good morning, everyone. We appreciate your joining us today for Powell Industries conference call to review the fiscal 2012 second quarter results. We would also like to welcome our internet participants listening to the call simulcast live over the internet. 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, please call our offices at DRG&L, and we will get one to you. That number is 713-529-6600. Also, if you want 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 by webcast by going to the company's website at www.powellind.com or a recorded replay will be available until May 16, 2012. 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, May 9, 2012 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. 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 strategy. 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 of the Board and CEO, and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Tom.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our 2012 second quarter results. First let me say, I'm pleased to be back after missing our first quarter's earnings call while having my right knee replaced. Only missed a couple of weeks, I'm not dancing yet, but I can still kick whenever it's needed. I'll begin by just making a few initial comments on the quarter and the current market environment and then Don will cover the financial details and then we will be happy to answer your questions. The business of delivering custom engineered fixed priced projects has a number of challenges. For example, a recently completed project had over 160,000 man hours of assembly and electrical work and that doesn't include the engineering or testing, so it's easy to see that at times unforeseen issues can create additional and unexpected cost while at other times the task involve go more smoothly than expected and you get to enjoy the benefits. Execution is the key and our people do a very fine job here in the organization. All the work we have done to improve project management and operation, paved the way for an improved quarter resulting in earnings of $0.63 per share. Our efforts in Canada are on track while there is still work to be done there. We have seen improvements in the operational results and I fully expect to see these results continue to move in a positive direction. The Canadian oil and gas market is experiencing substantial activity, which will increase with ongoing development of the oil sands regions. This is an important area for Powell and we remain confident and committed to being a significant participant. For the company as a whole, enquiry levels are very high. The booking of the business is good and we continue to see budgetary requests occurring at a very strong pace. However it is clear that there is still much pent-up demand and many projects are sitting on the sidelines uncertain about the U.S. political environment, upcoming elections and the overall economic direction. Even under these conditions, we're booking the orders and building our backlog demonstrating success at our efforts to develop and maintain solid customer relationships and to be the provider of choice. Now, I'd like to turn the call over to Don Madison for detailed results. Thanks.

Thank you, Tom. Revenues were $181.5 million in the second quarter, an increase of $56 million, or 45% improvement compared to the second quarter fiscal 2011. This increase in revenues is the result of the increase in our backlog of orders compared to a year ago. Gross profit as a percentage of revenues was 19% in the second quarter fiscal 2012, compared to 20% in the second quarter of fiscal 2011. This decrease in gross profit is primarily due to competitive market pressures that existed during the period in which orders were awarded as well as project execution challenges at our Canadian operations. Selling, general and administrative expenses were $21.5 million, unchanged from last year. Our SG&A expenses as a percentage of revenues, decreased to 12% in the second quarter, compared to 17% a year ago due to higher revenues. Amortization expense was $704,000, a decrease of $550,000, compared to the second quarter a year ago. This decrease is a result of the lower balance of intangible assets following the impairment charge recorded last year. For the second quarter of fiscal 2012, we've recorded a provision for income taxes of $4.6 million, which reflects an estimated tax liability on our non-Canadian earnings. Second quarter losses incurred at our Canadian operations have not been tax affected. We've reported a net income of $7.4 million or $0.63 per diluted share for the second quarter of fiscal 2012, compared to $1.7 million or $0.15 per diluted share in the second quarter of 2011. For the 6 months ended March 31, 2012, revenues were $339 million, compared to $250 million in the same period a year ago. Domestic revenues increased by 22% to $202 million. While international revenues increased by $52 million, or 62%, primarily due to the size and the number of international…

Thank you, Don. Powell is a strong company and we take great pride in fact that we are often the first choice of our customers in providing solutions for their equipment needs. We are tied to the capital investments of our customer base and we're subjected to global economic cycles. However with each major market cycle, we have the opportunity to build and strengthen our relationships. We use the down cycles to improve our ability to serve our customers and use the up cycles to deploy our strength and serve the market in the manner expected from Powell. In summary, our margins were better than expected in the second quarter as our organization exceeded performance targets and operated very efficiently. The Canadian operations are showing improvement and we're optimistic about further progress through the balance of the year. Inquiries and budget requests are very high and our order rates are good overall. Regarding current activity in our major markets. Interest in international oil and gases investments remains extremely high. And in both the U.S. and Canada, there are more light rail infrastructure projects moving forward. And finally, we're seeing domestic utilities showing some signs of renewed capital investment activity. Before we go to questions, I'd like to make a few more comments about the CEO search. Finding the right person to lead the company is extremely important. It's more important than that we make the right choice than a fast one. To that end, the search committee working with our outside search firm is working hard to evaluate candidates carefully considering their industry experience and personal fit within the Powell organization. We expect to have an announcement in the coming months. At this point, Don will be happy to answer questions.

[Operator Instructions] Our first question is from the line of Fred Buonocore with Rodman & Renshaw.

My question relates to the obvious, the outstanding margin performance in the quarter. And looking at your guidance it would seem to imply that you don't expect this sort of performance to persist for the balance of the year if I'm interpreting the EPS guidance correctly. Can you comment on, little more color on how things unfolded in Q2 and then what you expect for the balance of the year?

Fred, clearly we had some what I think is very positive, exceptional type of performance in some of the projects that were coming towards the final stage of completion in the second quarter. As we tried to talk about in the press release as well as in the prepared comments is that while these projects have been very large, it's kind of like a lot of other things we've talked about in the project business that can for you. It can go against you. We had some very effective projects go together of minimal amount of work that we had to do when we went into the some of the testing of it and that was clearly better than what you would typically expect based on historical performance. When you are looking at our guidance, we got to be a little more realistic as opposed to putting best case scenarios out there on projects that are in the backlog. The guidance that we put out is based on our projections and those projections are our best estimates based on the amount of work content in each of the projects. Clearly, I would say there is upside opportunities to some of those, but there is probably hidden risk in others.

Okay. Fair enough. That's helpful. For my follow-up question. Now that we're halfway through fiscal year '12 and backlog at its highest level since fiscal year '09, if I'm correct, it seems like you're probably getting increasingly good visibility for the next several quarters. So with that in mind, can you give us a sense maybe at this point for what you might expect from a top line growth perspective in 2013 assuming the backlog stays at its current level or continues to grow moderately on a sequential basis for the balance of the year?

Fred, it's way too early for us to start putting out a guidance or estimates for 2013. But, clearly as we've talked in the past, we are a backlog-driven company. And as we are able to continue to grow our backlog that positions us well for 2013.

And our next question is from the line of John Franzreb with Sidoti & Company.

Don was there any impact from the problematic Powell Canada job in the second quarter. Can you call that out if there was?

Yes. There was some carryover impact as we went through, which we consider the punch list or deficiency list at the end of the project that did roll over into the early part of the second quarter, but that project has now been completed and the full impact of that have been recorded in the second quarter.

Do you have a number for us, so we could maybe pull it out and see what the margin impact was?

No. It was much smaller than in the previous quarter. It is the primary reason that we continue to report a loss in the period. We did see substantial improvements over the previous quarter of the balance of the business. And actually while I'm not here to make any predictions, the organization did very well in their final month and actually I was able to report some earnings in the black. But to say that that is a continuous trend into the second half of the year, it's too early to say. There are still things in the backlog. But when you are looking at, just to give you an order of magnitude, the impact of that project in the second quarter probably had 1%, 2%-- Excuse me $0.01 to $0.02 EPS impact on the corporation. So without that project, we might have been $0.65 plus or minus.

Okay. That's kind of what I'm looking for, Don. And, in last year guidance, last quarter you gave absent any potential recoveries from this job. I just want to make sure we're still in the guidance. We're not assuming any recoveries from the job. Maybe you can give us also an update on how that recovery negotiation is proceeding.

No claims or recoveries that have not been documented by change order have been included in our actuals or in our forecast. We did go through some discussions with the client in the second quarter and were able to generate some modest change orders and those were reflected in the second quarter and that's the net number when I was talking a minute ago as far as the impact of that project. When you are looking at progressing forward, we are working on preparing a claim that we expect to present to our clients here in the next few weeks. I think that we will probably make the end of May before we present that, because at this point forward, I think everyone has agreed that we just need to put all the cards on the table and figure out where we are both, from a Powell perspective as well as the client perspective. How quickly that will progress, at this point in time it's way too early to project.

Okay. And what kind of size are we talking here?

It would be a claim that would exceed the cost that we have incurred and reported in our financial statements.

[Operator Instructions] Our next question is from the line of Brent Thielman with D.A. Davidson.

Tom or Don, were the orders in the quarter still coming predominantly from Canada or you've seen a more of a shift in mix of orders coming from the U.S?

Brent, I must have misled you in the past. We've never seen a disproportionate amount of working coming from Canada. The vast majority work is coming from the oil and gas sector, most of it coming from international projects but not necessarily exclusively in Canada. Looking at the Canadian backlog growth, it is we've seen real growth over the last 6 to 8 months. We're approaching double from what we had maybe 8 and 9 months ago, but when you are looking at the total Canadian backlog versus the corporation, it's still less than 10% of our total backlog.

Okay. And then, I was interested in the comment on that the rail infrastructure jobs. Could you provide any more color on what you're seeing there? I know these tend to be larger jobs for you. Maybe timeline of what you see coming forward there?

Well, when you are looking at from a historical perspective, the last 6 months we've been pleasantly surprised with projects that's gone forward with funding. Some, we're still trying to figure out exactly where the funding traces back to, but nonetheless projects have been sanctioned and gone forward. We've ended up in the last 6 months with 3 or 4 good size projects. Good size meaning the largest one being $25 million plus or minus, but still good projects for Powell, both in the U.S. and in Canada. But when you are looking at overall public works projects, surprisingly there is some activity there greater than what we might have expected 6 months ago. Is it on fire? No, but it is looking more optimistic even in the public works area than what we would have estimated this time last year.

And our next question is from the line of Tom Spiro with Spiro Capital.

Number one, nice bookings in the quarter. Generally speaking, how is pricing out there these days and how are margins? You're seeing much change?

Well, it's still competitive, but I think it's going to be improving as there's more activity that we are looking at.

Well, that's promising. It's quite promising. And, the bookings in the quarter, are they tending to be lots of small jobs or the handful of larger ones? What's the makeup?

Small to mid range with no real mega projects at this point, although there are some scheduled to be bid probably in early 2013. Right now, that is asking for budgetary estimates. So as far as firm quotes and orders, we're looking at 6 months out.

The pipeline of opportunities is remaining strong and there's clearly more sizable [ph] projects that are being planned by many of our clients we’re estimating as to when they will be sanctioned.

Would you guess that your year-end backlog at the end of this fiscal will exceed end of last fiscal?

Absolutely.

Well, that's certainly promising. Up in Canada, Tom, I may be misquoting you. But I think a quarter or 2 ago, you said you are hopeful or you can expect by our fourth quarter Canada might break into the black. What are your thoughts today?

I think that we could be profitable in the second half of the year, whether we're profitable overall for the year, I'm a little skeptical at this point due to the losses in the first half of the year. So, I always remain optimistic and we're pushing hard to improve the operation and the people are really coming together up there. We're kind of proud of them.

Well, that's great. And lastly, I see your CapEx is running a little higher than in past years, what's your budget for the year and what are you spending the money on?

I'm having a good time.

Tom, you can break the CapEx spending today basically into the 3 buckets. We purchased 2 parcels of land that we've had opportunities to acquire this debt we view as something that will benefit us in the future when it comes to expansion requirements and the balance of it has been on improvements to our existing machinery equipment as well as to some software upgrades to our business system. When you are looking at the year, I still think that you are looking at something in the $7 million to $8 million, maybe as much as $10 million in normal CapEx. Last year as you recall, we've ended up the year fairly light. Some of that will rollover to the first of this year, so therefore it will not surprise me if we end up on the high side of our $7 million to $8 million normal maintenance-type spend. Regarding what we need to do from a capacity standpoint with the backlog growth that we are seeing and backlog growth that we're continuing to anticipate over the next few quarters, that's one of the business issues that we're addressing as a management team trying to put forth the right plan.

Are you adding staff? Are you hiring?

Yes. If you look at the last 6 months, we're up probably somewhere between 200 and 250 employees and I would say we'll be up that much again between now and the end of the year.

And our next question is from the line of Noelle Dilts with Stifel, Nicolaus.

I think you talked about this little bit, but in the past you've discussed how there are some projects in your backlog that aren't that were bit in more competitive conditions that maybe had a little bit lower embedded gross margins and then some that you know you are very happy with. Can you talk about how that I guess the embedded margin in your backlog is changing and the composition of your backlog in terms of those projects?

When you're looking at the overall mix in our backlogs today versus this time last year, it clearly is moving more to the oil and gas sector which gives us opportunity from complex jobs that we've talked about in the past which can benefit Powell, but then there's also a skew towards the international side which would sometimes be more challenging to yield the same level of margins as a domestic project would. When you are looking at what we consider the very low margin jobs from the end of last year to where we are today, a substantial amount of that has been driven to our revenue stream, but there are still some jobs that were booked as much as 18 months ago that have not fully been completed. We'll see some of that continue to impact our overall. We did have margins probably through the balance of the year.

So, if you had to say percentage of your backlog that is composed of that lower margin mark. Could you give us…

Its order of magnitude, it's less than a $100 million, so less than 5%.

Okay. And then could you give us a sense on just what's going on in the Gulf Coast. If you’re seeing any pickup in offshore activity?

Clearly, we are seeing more activity in the Gulf Coast region. There are projects that are being sanctioned out there that we worked on a budgetary standpoint and that we actually business in our backlog supporting projects that have been sanctioned not only in the offshore area, in the Gulf of Mexico, but as well as with parts of the world, but activity is clearly picking up and we anticipate that activity to continue into 2013.

And our next question is from the line of George Gaspar [ph], private investor.

I got a question just on the looking at the order backlog that you have assimilated here in your ongoing activities in that backlog. Do you see anything different on off-shore platform or production platform? Installations that you're involved in, getting more sophisticated and allowing Powell to broaden its, any technology capabilities that weren't available to you before which could open some new revenue avenues for you?

George, let me start with that and then I'll let Tom wrap up, but clearly we are seeing changes in the requirements and the specifications that are coming to us in the off-shore area, particularly those in the U.S. waters Gulf of Mexico, that first off one common characteristics around the world they’re becoming larger and larger and that size, weight, dealing with the complex projects is becoming more and more critical to whoever they select as their partner. From a technology standpoint, one of the trends that we're seeing particularly in the Gulf of Mexico, is greater and greater emphasis on safety, both in the type of equipment that's being fit on there, the monitoring capabilities of it as well as just the construction requirements necessary to deploy projects into the Gulf of Mexico, so they are growing in size and they are growing complexity and safety is the override driving difference from this time 2 years ago.

The switchgear and so forth is a little more complex with having a lot of communications between off-shore and on-shore. And on the rig it's only the platform itself. So it takes a little longer to get the engineering quota completed, but that's about the only changes I see.

Okay. So basically, in your basic business, just the magnitude of the size implications growing just requires more of the same switchgear reduction being able to move power around in an off-shore installation and that opens the door for you.

Well, communications and monitoring capabilities has defiantly grown significantly and that's an area that allows us to differentiate ourselves as well.

Got you. Interesting. And one question on Canada. You're talking pretty positively going forward. Can you dimension what oil sands development means in importance to the overall situation for Powell and/or, is it away from oil sands, or is there something special going on there that wasn't there before that gives you opportunity?

With the oil sands, it is probably more cyclical than most other areas even when it relates to oil and gas investments. The last 3 or 4 years in the oil sands, the investments in that region have been very, very modest. We first went into Canada thinking that we would see the upturn probably 12 months before we actually have seen it, but today we are experiencing it and it is a phenomena that's hard to understand if you are not there and can experience it first-hand, but the amount of activity being planned and being deployed on projects in the oil sands region is significant. One of the greatest challenges that Powell as well as all other firms are having is basically finding the human resources necessary to manage and staff these type of projects, so clearly it's going to be over the next 2 or 3 years, a major opportunity for growth for Powell.

But we've also seen opportunities. As the oil sands expand, they are having to improve the utilities and distribution network. And now we've been successful on several transit projects there as well, so it's not just the oil sands.

And mining is doing well in Western Canada as well, so I mean the overall economy, particularly in western Canada is very robust relative to most other parts of the world.

Our next question is a follow-up question from the line of Fred Buonocore with Rodman & Renshaw.

Yes. I just wanted to go back on that theme in terms of the non-oil and gas end market starting to see a pick-up in your comment you just made about. Utility and transit also benefitting in Western Canada, that gives it some perspective but can you give us a sense for say in the previous quarter, maybe what percent of bookings were non-oil and gas related say, versus a year ago, or give us some sense of how the composition of backlog may have changed to non-oil and gas related projects?

Fred, I think I would characterize is that the activity from a bid perspective and the activity from some orders actually being placed is increasing. Is it becoming a material percentage of our backlog? Is it materially changing from this quarter versus last quarter, versus this quarter a year ago, it's modest at this point in time, but encouraging. Except for transit as Tom pointed out, we have been successful. In some transit projects, we've picked up 3 or 4 here in the last 6 months. Again, most of them $20 million or less, but still that is a sizable part of our backlog and a unexpected benefit that we hadn't planned on this time last year.

And are all of those in Canada, or some of those in the U.S.?

U.S. and Canada. Basically all in North America, but some are in the U.S. some are in Canada. So, basically the Canadian are in the Western half of the country, but again, where we've had a presence and as our presence benefit us on each and every opportunity, probably not, but clearly it has benefited on some.

Okay. And then to go back to Noelle's question on the shift in margin and backlog and how you had been impacted by competitive pressures, say on projects booked, the year or so ago. Has behavior from some of your larger, say, European competitors changed with respect to aggressive pricing or the way they are going after what would typically be considered small projects for them, because they are not as busy. Are you noticing a change in that regard?

What you are referring to is behavior that we saw maybe 10 years ago by some of the foreign players in the domestic market. Throughout this last downturn, I would say the overall market why I got competitive everybody was in the business to make money. Just how low are they're willing to go and how little are they willing to make. When you are seeing the overall business today, if you look at it by sector, I would say it's been fairly stable over the last 6 to 9 months from a price level perspective. But clearly as Tom mentioned earlier, there is optimism with the overall business and the economy beginning to expand that we are going to be able to generate some price appreciation over the next year. Our backlog today versus the year ago is probably modestly better, because of some of the work that is now being shipped as opposed to some of the most recent bookings. Does that help understand what's going and the dynamics?

Our next question is a follow-up from the line of John Franzreb with Sidoti & Company.

Yes. Regarding your comments on the utility market, I think you kind of laid that it's gradually improving, but could you give us some sense of what you think the market is going to look like over the coming year as far as order bookings. Can you address that please?

John, I am very hesitant to predict what any one market sector is going to do. I don't think this is, again, now speaking in my personal comments of it. Tom add his comments here in the second, is that you are going to see a rapid expansion in the utility spending. I think it's going to be more on a case-by-case basis of pent-up demand as we've talked about. There are some projects that have been put on the sideline for so long that they are just having to go forward with them to keep their business going. They say that we're going to see a broad economic investment cycle going on within the utility sector in the next 12 to 18 months. I don't think it's going to happen.

But we are seeing a lot of activity in the west coast, from Colorado on.

But I don't think that I would one to predict that we're going to see an industry-wide expansion in capital investments of any significant volume.

Okay. And just to stick with some of the numbers, how much cash did you finish with in the quarter?

At the end of the quarter, we had on the books $128 million.

And Tom, regarding the CEO search, it's getting a little long in the tooth. What characteristic has been the most difficult to fill?

Well, I've got advance on that one. I think somebody that really understands the customer base and understands electrical product. They just haven't found the right one yet. We're working hard at it.

We're working hard at it.

Okay. Do you have a shortlist of candidates at this point or no?

Yes.

[Operator Instructions] Our next question is a follow-up from the line of Brent Thielman with D.A. Davidson.

Yes. Are your orders beginning to reflect some projects in the chemicals arena yet, or is that yet to really show up in the backlog.

Most of that is budgetary and planning work at this point in time as opposed to any material impact on our backlog chemicals.

Any sense on when we could start to see that?

I think there is a good chance that we might start seeing some of that becoming more material in 2013.

Okay. And then just secondly on the off-shore side, I know Brazil has been discussed as maybe a longer term prospect for that side of the business. Have you seen any opportunities in that market yet?

There's nothing of any size that we have booked into our backlog regarding Brazil.

Still see that as an opportunity though?

Yes. It may be an opportunity. We just haven't had any firm quotes at this point.

Again, I think that region is one that local content is one of the biggest obstacles that we have.

Thank you. And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

All right. Any employees that are listening in today, thank you for your efforts, guys. Keep up the good work. I thank all of you for joining us today. We look forward talking to you the next quarter. We appreciate your interest in Powell. Have a good day.

Ladies and gentlemen, this concludes Powell Industries second quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1-303-590-3030 with the access code of 4532672. ACT would like to thank you for your participation. You may now disconnect.