Powell Industries, Inc. (POWL) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Powell Industries Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Stephanie Zhadkevich of Dennard Lascar. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. We appreciate you joining us for Powell Industries’ conference call today to review fiscal year 2015 fourth quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the web. 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 and would like one, please call our office 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 via webcast by going to the Company’s website at powellind.com, or a recorded replay will be available until December 9, 2015, and 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, December 2, 2015, 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. 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 strategies. For further information, please refer to the Company’s filings with the Securities and Exchange Commission. Now, with me this morning are Mike Lucas, President and Chief Executive Officer; Don Madison, Chief Financial Officer. I will now turn the call over to Mike.

Thank you, Stephanie. Good morning, everyone. Thank you, for joining us today for a review of our fiscal 2015 fourth quarter results. As usual I’ll make a few opening comments and then I’ll turn the call over to Don to review the financial details. During our fourth quarter, revenues remained solid at a $162 million. We made good progress in working through the high customer demand and related cost issues that impacted our results in our Houston operation during much of 2015, we still maintain a significant number of contract employees in our Houston facility that were brought in to help meet customer schedules as we work through several large projects currently in production. Our focus continues to be on operational efficiency, project execution and customer satisfaction. In Canada, we’re through the summer period of low factory loading and production volume is now ramping up, we’re in the process of adding skilled labor to meet the projected workload and expect full employment in Edmonton by the end of this calendar year. During the slow summer period, we maintained our investments in both management and supervisory personnel, and the labor market is favorable for our current recruiting as skilled trades. We continue to conduct rigorous reviews on these projects to ensure the engineering designs, operational efficiencies, cost and project schedules are all in line with expectations. As a result, we expect year-over-year improvement in our Canadian operations. We’ve been talking about the lagging impact of reduced oil prices on our bookings for the last few calls. As we have been anticipating reduced capital spending by our oil and gas customers has started to be reflected in our bookings rates. Orders slowed in the fourth quarter but the magnitude of the decline was greater than expected. During the quarter, few project awards were delayed, but market volume was decidedly down. Our oil and gas customer base has clearly adapted a wait and see attitude and then until the direction of the global economy and the price of oil is clear. We expect capital spending to remain at depressed levels through fiscal 2016. Remaining large project activities primarily limited to a few U.S. LNG export terminals and some pipeline construction projects. Fiscal 2016 will be an unquestionably challenging year, projects are fewer and smaller. We have seen competitive pricing pressures on bids during the fourth quarter and anticipate that these pressures will continue through 2016. We will respond with price adjustments to the extent that it makes good business sense. Fiscal 2016 revenues in the first half of the year will be largely supported by our beginning backlog. Bookings for the first four to five months of the fiscal year will determine revenue levels for the second half of the year. We continue to assess available business activity and monitor our backlog levels in order to adjust our resources to production requirements. Let me now turn the call over to Don to review the financial details.

Thank you, Mike. Revenues decreased modestly by $500,000 to $162 million in the fourth quarter compared to the same quarter in fiscal 2014. Domestic revenues increased by $24 million or 25% to $123 million in the fourth quarter. The increase in domestic revenues was primarily driven by large petrochemical projects. International revenues decreased by $25 million or 39% to $39 million. The decrease in international revenues was primarily driven by the substantial completion of several large projects in Canada and various international export projects produced in the U.S. compared to last year. Gross profit as a percentage of revenues improved to 18.4% in the fourth quarter of fiscal 2015 compared to 15.8% in the fourth quarter of fiscal 2014. This increase in gross profit was primarily driven by improvements in production efficiencies and reduction in incremental costs that affected our margins last year. Selling, general and administrative expenses decreased by $2.5 million to $18.5 million in the fourth quarter primarily due to lower performance-based compensation, personnel and administrative costs, and sales commission expenses. SG&A expenses as a percentage of revenues decreased to 11.4% in the fourth quarter compared to 12.9% in the fourth quarter a year ago. We recorded a provision for income taxes of $3 million compared to a provision of $800,000 recorded in the fourth quarter of fiscal 2014. The effective tax rate for the fourth quarter was 32% compared to an effective tax rate of 26% for the same period a year ago. In the fourth quarter of fiscal 2015, we reported net income of $6.3 million or $0.54 per diluted share compared to net income of $2.4 million or $0.20 per diluted share a year ago. Excluding fourth-quarter restructuring costs and tax adjustments, net income for the fourth quarter of fiscal 2015 was $5.2 million or $0.45 per diluted share. For the 12 months ended September 30, 2015, revenues increased by $14 million or 2.2% to $662 million compared to fiscal 2014. Gross profit as a percentage of revenues was 16.4% compared to 19.4% during fiscal 2014. This reduction in gross profits was primarily due to high production costs incurred to meet our customer schedules as well as the margin on the overall mix of projects. Selling, general and administrative expenses for the year decreased by 12.5% to $76.8 million compared to fiscal 2014. This decrease was primarily due to lower performance-based compensation, sales commissions, and lower personal administrative costs resulting from reductions in force as well as other cost reduction efforts. During fiscal 2015, we incurred approximately $3.4 million in restructuring and separation costs. Our provision for income taxes was $13.6 million in fiscal 2015 compared to $11.1 million in fiscal 2014. The effective tax rate in fiscal 2015 was 59% compared to an effective tax rate of 36% for fiscal 2014. This increase in effective tax rate in fiscal 2015 was primarily due to the establishment of a valuation allowance against the Canadian net deferred tax assets, partially offset by the resolution of an IRS audit and a retroactive reinstatement of the federal research and development tax credit. Our fiscal 2015, we reported net income of $9.4 million or $0.79 per diluted share, compared to net income of $29.2 million or $1.62 per diluted share a year ago. Excluding restructuring and separation cost of $2.7 million net of tax and tax adjustments totaling $3.3 million, our net income for fiscal 2015 was $15.4 million or $1.29 per diluted share. A non-GAAP net income reconciliation was included in yesterday’s news release. As Mike mentioned previously, new orders for the fourth quarter was $92 million. As a result, our backlog decreased by $77 million to $441 million compared to the backlog at the end of the third quarter. At September 30, 2015, we had cash of $44 million compared to $103 million at September 30, 2014. In fiscal 2015, cash generated from operating activities totaled $12.9 million and investments in property, plant and equipment totaled $35 million. During the fiscal year, we’ve repurchased 670,000 shares of common stock for a total of $21.3 million at an average price of $31.72 per share. And now, remaining under the Company’s current share repurchase authorization is $3.7 million, which is schedule to expire December 31, 2015. Also, during fiscal 2015, we paid dividends totaling $12.4 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. And we expect adjusted earnings to range between $0.65 and $1.05 per share, including in our outlook is a consideration of year-over-year deleveraging as a result of lower production volumes, unfavorable price pressures, in market mix. All partially offset by improvements in operating efficiencies and cost reduction efforts. Our earnings outlook excludes all restructuring and separation charges that maybe incurred during fiscal 2016. Now, I’ll turn the call back to Mike for a few additional remarks.

Thank you, Don. Before we open for questions, near-term activity in our key oil and gas markets remains depressed and difficult to predict. Our customers have little visibility into the future price of oil until the balance of the global oil supply and demand is reached. Customers are very cautious and have understandably taken a conservative approach to all capital spending investments. Our long-term outlook for our markets remains positive when growth in capital spending does return Powell is well positioned. We’ve completed significant infrastructure investments in facilities, equipment, and systems. We’re financially healthy. Our balance sheet is solid as we carry very little debt. And cash flows will improve in the short-term as working capital is freed up. We participate the cyclical business and we’ve experienced market downturns in the past, even during down markets there is maintenance work, upgrade activity and optimization projects. We will continue to support our customers in the system with all their needs. Our focus during this challenging time will be on continues improvement actions in our core project execution areas and also in investing in strategic product development and growth programs both solid long-term investments in our business. We’ll manage the things within our control and focus on being the go to supplier for our customers, just as we have for almost 70 years. We’ll open it up now for questions. Don and I will be glad to take any questions you have.

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Tanwanteng from CJS Securities. Please proceed with your question.

Good morning, Mike and Don. Thanks for taking my questions.

Good morning, John.

What’s specifically you take in to preserve margins given the near-term tougher environment, and how much of that is factored in to the outlook for next year.

Yes. There is several actions. We’re always continuously working cost reduction activities. We’ve probably got somewhere between $10 million and $12 million with the cost savings programs that are factored in there. Those are always a big part of what we focus on. And then we continue to monitor our fixed cost levels to adjust those as required based on the volume in the backlog activity.

So how is that going to happen through the year, is it going to be a restructuring upfront or is it more of a gradual thing.

The cost reduction actions are really spread pretty evenly throughout the year, that’s a constant process we’re working. These kind of tailor to have the front half as I’d mention in our opening comments is really driven heavily by our existing backlog going in and in the front half of the year looks pretty solid. Its – these softer orders we’ve seen in the fourth quarter that lead to a softer second half and that’s maybe where some additional actions would be required.

Got it. That’s helpful. And any thoughts on the administration – and the administration change in Canada and a pipeline there or lack thereof our climate deal would meaningfully impact your business and what have you assumed actually in your outlook?

Yes, so it’s actually a similar story there. We've got a very healthy backlog from some pipeline projects we have booked in 2015 that take it into 2016 that activity as we’ve mentioned some of the opening comments were still ramping up. Employment there we expect to hit peak employment about the end of the calendar year. And that will carry us for a couple of quarters. And the back half of Canada will be determined by what the order rates look like over the next few months.

Okay. So you haven’t assumed any strengthening of the business or a decline, I mean based on what people are saying about pipelines, and the East project or Keystone, what may be left of that?

Everything we understand about that market is dialed into that forecast we gave you right now.

Okay, understood. Are you guys essentially past all the production problems you had in Houston and Canada in the past year or so.

I’d say we're feeling pretty good about Canada, it is still a little early. We've got multiple projects on the floor as we're ramping the skill trade back up. All of those look positive from a margin and schedule standpoint. I think we feel pretty good about what we see in Canada. I think a lot of the – in Houston, we still have a lot of production that's outside that's not under the factory roof. There are some inherent inefficiencies with weather and conditions outside. So there's a little bit of trailing efficiency issues. But we're also still carrying a fair amount of contract labor, which is at a premium cost and that contract labor looks like it'll be well into the second quarter before that ramps back down. And of course the contract labor that's a very flexible work for us, so as the volume goes away. That cost goes away quickly.

Our next question comes from the line of John Franzreb from Sidoti and Company. Please proceed with your question.

Good morning guys.

Good morning John.

I just wanted to bounce back to the drop in orders and the magnitude of it. By my calculations it's the lowest order intake since third quarter of 2006. What I was wanting from you guys, can you talk a little bit about how we should think about the order bookings going forward kind of the depths in duration of this low bookings do you kind of see it as a one timer. And will be more of a high/low scenario going forward. Or it’ll be more of a longer term kind of trough maybe closer to the 2010 or 2011 timeframe we kind of bounce around it the low 100 level.

Yes. So couple of comments on that. So if you remember our third quarter bookings level was still pretty very solid. We had a very large project that was right there at the end of the third quarter could have easily fell in the fourth. So the fourth quarter I think was unusually low. It’s just based on some of that project timing that’s coming in. We don’t expect this quarter to look a whole lot different. We’re getting a sense from the customers at this point, that often at the end of the calendar year you might see some extra spending as they burn up whatever remaining budgets they have. It kind of appears they are going to just reload the budgets and start fresh in January. So I think that third quarter it’s not going to be that bad if you straight line that. It won’t be that soft. But we’re expecting to burn backlog this year. So if you kind of use some of the numbers we provided if you pick the midpoint on revenue guidance at roughly 540, revenue – bookings will be less than that, because we do expect to burn some backlog this year.

Okay.

So I think the other thing we will see, as we go through this year, more erratic nature of orders than we have in the past, at least recent past. And I think at this point in time, first half, fourth quarter, first quarter, has continued to be soft, we do anticipate that at this point in time, some strengthening first of the year.

Okay. That’s helpful, Don. And if I remember correctly the last time you had a meaningful drop in volumes. You were actually little resistant to cut some of the overhead because your expectation is that when times did turn, you wanted to retain some of your more skilled employees and not lose them out the door. Any updated thoughts you might have on retention of employees, how long you want to see this out before making a determine - of when you want to do any kind of overhead cuts.

Clearly, John, that is one of the most difficult things in our business, because we’re relationship oriented. And our employees of whom we have relationship through with our customers, suppliers and the skills and the knowledge they have is not easy to be replaced. Can we do nothing, no, we have to respond to market conditions. But I do agree that the nature of our business tend to want to make sure a big move in that direction cautiously.

Okay. I’ll get back into queue.

Our next question comes from the line of Brent Thielman from DA Davidson. Please proceed with your question.

Hi, good morning.

Good morning, Brent.

In terms of outlook, you mentioned bookings next few months kind of determine how the second half played it out at this point, is the guidance kind of assuming bookings will kind of sustain in the pretty low level translate into a lower 2H in terms of earnings.

I mean clearly we have reflected the fourth quarter bookings and anticipated fourth quarter bookings and our guidance that we provided to you. There is an assumption that we are going to see some improvement with a turn of the calendar year. But we are taking a more cautious look on a – from a topline perspective that we may have anticipated taking booking 90 days ago.

Sure, sure, understood. And then in terms of additional cost, I mean faster commitments, I’m sorry, if you’d talked on this, but can you dive a little more into that, and maybe that how do you see that playing out and influencing 2016 expectations.

Let me respond to that a little bit and Mike can add to that. From a Canadian perspective, we’ve got two businesses we’ve talked about predominantly. From an incremental cost of operating the business from a Canadian perspective, those costs are all behind us. We’re operating the business with our own employees. We’re doing all the work internal. And we’re tracking on the projects that we’re starting here in the last month or two very well and I’m pleased with the progress that we see with this new ramp. From a U.S. perspective, here in Houston, we have the extra cost is more related to the cost per hour of a contract employee than any other inefficiency. So its clearly inefficiencies doing work outside versus doing at inside. We have roughly 300 contract employees in the company today, the majority of them here in Houston. And they are supporting our outdoor construction activities. The cost of those on an hourly basis is higher than an employee, the positive thing is that the – there is no separation cost when we need to release them. They will be the first cost that we take out of the business as soon as we can get the production back indoors and not in the building, hold these large projects in the parking lot. Does that help.

I think so, Don, does that alleviate. I guess as we get into the first half of the year or is that going to continue.

It basically will start winding down in our second fiscal quarter, but it will probably have some trailing affect even maybe into early into the third quarter, but at an much reduced rate.

Okay. And then just one more Mike, I want to – in the past you talked about the potential for maybe a second wave of petrochemical spending anything new developing on that front.

You know still watching it closely. It certainly looks like the economics for the customers makes sense to do that and we’re certainly seeing in some of the reports out of the EPC firms that they’re starting to see some feed work in some smaller projects. We’ve got several small projects identified by nothing like the $25 million plus jobs that we have booked in 2014 that drove to 2015 revenue. So there could be some upside there, but right now mostly what we’re seeing is some smaller projects, but the EPC seem to be seeing some activity in that area. Just not materialize into any identifiable funded projects yet.

Got you. Okay, I’ll get back in queue. Thank you.

[Operator Instructions] And our next question comes from the line of John Franzreb from Sidoti and Company. Please proceed with your question.

Hi guys. You mentioned the competitive bidding process is kind of heated up a little bit. What kind of margin profile should we think in - about in 2016 on the gross margin side?

Clearly that is going to be heavily dependent upon the second half when you're looking at full year results. And at this point in time that is the biggest variable. Clearly, how we were going to see year-over-year margin improvements are anticipated. I would expect them to be at least 200 basis point improvement year-over-year. But even with 200 to 250 basis point improvement we still got a fairly sizable of gross margin challenge relative to the lower revenue volume.

Okay. And when you think about capital spending in the year ahead, you've got a lot of work behind you, what’s the CapEx budget for 2016 look alike.

When we're looking at our CapEx spending for next year at this point in time, it is very heavily depended on maintenance and cost improvement activities that we're trying to look to the organization.

Right.

I would expect this to have a CapEx actual spend next year probably plus or minus $10.

$10 million? Okay. And I guess the only good news out of this is that you have available parking space. Okay, thank you very much guys, I’ll get back in queue.

Thanks for identifying the silver lining there John.

All right.

Our next question comes from the line of Brent Thielman from DA Davidson. Please proceed with your question.

Hi, just a couple more from me. I wanted to touch on the utility market topic, I think you mentioned - a little bit more work going on there as well just curious how about developing them?

Yes, we had a pretty good. We had a very good booking here in utility and the quotation activity seems to be remaining steady. Little lumpiness with the kind of nature of the project work, it looks like that’s going to hold it about those levels for this fiscal year.

Okay. And then on Canada, I think what you said what you doing up there is pipeline projects. Is that still the majority of what you are pursuing there or are you starting to look to step in other areas?

Yes, we’re starting to look at things in other areas. Now that we have our base of operation more established. We’ve landed a couple of smaller hydro electric projects this past year. Mining is still pretty dead in Western Canada. I think there is some hydro electric utility opportunities up there and some of the heavy industrial stuff. So it is – it has been upto this point, pipeline has still been a predominant part of what we do. But I think there are some market diversification opportunities in Canada. Now that we have our base established.

Okay, great.

And there is still optimization projects going on even within the oil sands region. But they are just not – they are not capacity related. They are efficiency related activity, smaller projects.

Great. Thank you.

It appears there is no further questions at this time. Management, would you like to make any closing remarks?

I just wanted to say thank you for everyone for joining us today again and good set of questions. And enjoy your holidays and we’ll talk to you next quarter. Bye, bye.