Powell Industries, Inc. (POWL) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Powell Industries Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Ms. Natalie Hairston. Thank you. You may now begin.

Thank you and good morning everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year 2017 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 of the news release yesterday would like one, please call our offices at Dennard-Lascar and we will get one to you. That number is 713-529-6600. Also, if you want to be on the e-mail distribution release for Powell releases, please relay that information to us. There will be a replay of today's call, it will be available via web cast by going to the company's website, powellind.com or a recorded replay will be available until August 16th. The information on how to access the replay feature was provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, August 9, 2017 and therefore, you are advised that any time sensitive information may no longer be accurate at the time of replay listening or transcript reading. As you know, the 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 more information, please refer to the company's filings with the Securities and Exchange Commission. Now I will turn the call over to Brett. Brett?

Thank you, Natalie, and good morning everyone. Thank you for joining us today to review our 2017 third quarter results. I will make a few comments, and then I will turn the call over to Don for more financial commentary and our outlook, before we take your questions. Our third quarter 2017 results reflect the closing of several larger projects that began over a year ago, and were driven primarily by the LNG gas pipeline expansion projects in the U.S. and Canada. We are now transitioning into a more challenging backlog, that was awarded during the softer oil, gas and petrochemical market conditions that we began to experience late last year. During the quarter, we experienced additional difficulty in planning our production schedules. We have shared during the last few calls, the increased challenges with the timing of award and then post award, changes to the project schedule and required customer on-site dates for our equipment. These changing customer schedules have pushed revenue out of our third quarter and into both our fourth quarter and our first quarter of 2018; and with backlog at lower than historical levels, the ability to move production schedules to respond to these changes is limited. As we have reported over the last several quarters, our operational teams continue to execute and deliver on our customer commitments. While this past quarter was strongly challenged by shifting project schedules, we continue to make incremental improvements that included both process improvement teams, working to help us deliver our solutions, with fewer production hours, without sacrificing safety or quality, and supply chain teams that embarked on collaborative, deep-dive examination of our products with our supplier partners, to further optimize our product cost structure. I would also like to highlight the dedication of our workforce. In a challenging quarter, our manufacturing teams took every step possible, remain cost competitive, while ensuring, we keep our ability to respond efficiently to the backlog that shifted out to the next few quarters. Inquiry activity for new projects continued steady throughout the quarter, and on average, was what we have seen through the first half of this year. We did experience a slight increase in our short cycle demand for parts and our OEM breaker and switchgear business. New orders placed during the third quarter totaled $91 million, compared to $62 million in the second quarter, which also provided a slight increase in our backlog from last quarter. Notable in the third quarter was an offshore module work. We believe the offshore market continues to be one of the more challenging markets for Powell, in which tough market conditions will extend through most of 2018. However, there are a few projects that we are currently in the process of bidding. Our commitment to research and development continues, with a focus on innovation in new products, as well as improving existing designs for improved performance and reduced costs. Year-to-date, we have launched several new products into the market for our switchgear business and we have introduced new automation products, that will help our customers better understand the health of their electrical system and prevent unnecessarily plant downtime. Feedback from select customers and market segments has been positive, and we have experienced early awards. I am very encouraged by our team's focus to accelerate our new product plans, and by the response we are receiving from our customers. While we anticipate Powell will remain under competitive market pressures into fiscal 2018, we are encouraged by the improving market sentiment. We believe that Powell is taking the necessary steps to increase our competitiveness in the current challenging market, while maintaining our ability to provide our customers the highest quality electrical products, solutions, and services, on-time, on budget and supported by a dedicated group of employees, with a relentless customer focus. With that, I will turn the call over to Don.

Thank you, Brett. Revenues decreased by 35% or $47 million to $86 million in the third quarter of fiscal 2017, compared to the third quarter of fiscal 2016. Here are some comparisons to last year's third quarter. Domestic revenues decreased by $39 million to $55 million and international revenues decreased by $8 million to $31 million. These decreases are the result of the decline in our project 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 third quarter compared to 20% in the third quarter of fiscal 2016. Gross profit decreased by $18 million to $9 million. Our Canadian operations continue to see positive improvement in gross profit, that was offset by declining gross profit in our domestic operations, due to underutilization of our manufacturing facilities and market price pressures. Across the company, we benefitted from favorable project execution. Selling, general and administrative expenses decreased by 24% or $5 million to $15 million in the third quarter of fiscal 2017. However, SG&A expenses, as a percentage of revenues, increased to 17%, due to lower revenues. In the current quarter, we recorded a benefit for income taxes of $3.7 million. In the third quarter of fiscal 2017, we recorded a loss of $3.2 million or $0.28 per share, compared to income of $4.9 million or $0.43 per share in the third quarter of fiscal 2016. New orders placed during the third quarter of fiscal 2017 totaled $91 million, resulting in the backlog of $233 million compared to a backlog of $228 million at the end of second quarter and $312 million a year ago. For the nine months ended June 30, 2017, revenues decreased 31% or $135 million to $301 million compared to the same period a year ago. Gross profit, as a percentage of revenue, decreased to 13% compared to 18% in the first nine months of 2016. We continue to see improvements in gross profit from our Canadian operations and from successful project execution. Margins continue to be negatively impacted by reduced volume, as a result of weak oil and gas market conditions, competitive price pressures, and increased volume from our municipal and transit projects, which typically have lower margins. Compared to the first nine months of fiscal 2016, SG&A expenses decreased by 20% or $11 million to $47 million, but as a percentage of revenues, increased to 15% due to lower revenues. In the first nine months of fiscal 2017, we incurred $840,000 in separation costs, as we took actions to further adjust our cost structure. In fiscal 2016, during the same period, we incurred approximately $7.7 million of separation costs, due to the restructuring of our senior management team and reductions in our workforce. For the nine months ended June 30, 2017, we reported a loss of $4.3 million or $0.38 per share. Excluding restructuring and separation charges, we incurred a loss of $3.8 million or $0.33 per share. For the nine months ended June 30, 2017, cash provided from operating activities totaled $27 million. Investments in property, plant and equipment was $2.5 million. At June 30, 2017, we had cash, short term investments and restricted cash of $113 million compared to $98 million at September 30, 2016. Long term debt, including current maturities, was $2 million. In June, we admitted [ph] our U.S. credit facility, which among other things, extended the maturity date to June 20, 2022, and requires us to maintain a cash balance equal to 102% of our outstanding letters of credit, while in a cash collateral period. While in a cash collateral period, the bank provides lower letter credit fees and modifies our financial covenants. A cash collateral period was in effect, as of the end of June, therefore we had $25 million in restricted cash, of which $10 million is for letter of credits that expire beyond 12 months. As previously discussed, we expect to report a net loss in fiscal 2017. We continue to be adversely affected by soft market conditions. However, we believe current conditions have stabilized, and no further erosion in our overall market is anticipated. We expect our fourth quarter orders to be as strong, if not stronger, than our third quarter levels, and fourth quarter revenues are expected to return to the run rate we experienced in the first six months of fiscal 2017. At this point, we will be happy to answer your questions.

[Operator Instructions]. Our first question comes from the line of John Franzreb with Sidoti and Company. Please state your question.

Good morning guys.

John, good morning.

I'd like to start with the deferred revenue in the quarter. Can you just quantify, how much was it -- how much will fall into Q4 versus Q1, and maybe a little background of why the jobs are pushed back?

Well I will start with the why. We talked in the last couple of calls, John, about the mix of some projects being engineering only awards, and some projects coming in and giving us the PO to start, but then coming back and due to capital constraints or project schedules on-site, come back very quickly after the award and change the schedule on us. And our challenge is of course to respond and figure out how to handle that, and it hit us pretty hard in the third quarter. As far as the amount, part of the reason in the Q4, we have increased confidence on what the outlook is there. We started also pushing in the first quarter. Still some holes in the first quarter.

John, we started our first quarter with a stronger production load schedule than we did in our previous quarter. So the confidence level that the revenues are going to kick back up are fairly high. Again, we ask for changes that occur during the quarter. The first quarter of the backlog that scheduled during that period of time, still has holes in it, as Brett said, and there is the risk of the holiday season that impacts us around December. But overall, both quarters are looking better today, than our third quarter looked at this time last quarter and prior to that. So the loading is improving, at least in the very short term.

Got it. And Brett, you mentioned in your prepared remarks, that the current margin profile is more selective of the weakness you saw six to nine months ago. At what point do you hit the low point in the gross margin profile, are we there yet or is there still more pain to bear in upcoming quarters?

John, I don't think we are all the way there yet. I do think, at the inquiry level, incoming customer margin, we continue to see competitive marketplace. I don't it has gotten any worse than the last quarter, which was not any worse than the quarter before that. So that said, there are still projects that are very brutal. Some of it is mix, some of it is just the situation with the customer. So I don't really see an improving environment, and I don't think we are completely through the pain yet.

Other than the transit projects that tend to go out two to three years, most everything in our backlog will have been booked in the current year, at least by the end of September. By the end of September, we will have flushed out probably everything that -- based on the current schedule that was booked in fiscal 2016, other than some transit projects.

Don, when was the low in the pricing environment -- price environment, just over the past year or so?

I would describe it not so much as a point in time. I would say, we have plateaued out, probably around the January-February-March time period. And it has been relatively stable, both in quantity and in overall market price level since then. But every project is unique.

Sure. Sure. Okay, thanks guys. I will get back into queue.

Thanks John.

Thank you. [Operator Instructions]. Our next question comes from the line of John Tanwanteng with CJS Securities. Please state your question.

Good morning gentlemen, and thanks for taking my questions. Do you view this uptick in orders in Q3 and into Q4? Is this the beginning of the recovery at all, or is this simply just the near term stabilization with the recovery not really in sight?

I might lean to the latter part of your characterization. It certainly feels like more like stabilization. The sentiment continues to be more positive. It's hard to see funded projects, but there is more activity around potential funded projects going forward. So I am encouraged by that activity, but it -- of course, it still takes the final investment fund to get the funds flowing. But during the quarter, we did experience part of the return at the $91 million, I will call a little bit more success [indiscernible]. Inquiry level the same, just more successful, in what I would call our core markets of oil, gas and petrochem.

Got it. And are you seeing any strength in the mix of your orders at all? Where are the areas of strength? I know that the bid margins may have been flat from, call it since January. But what are the mix of projects looking like?

In terms of geography?

In terms of project type.

John, let me just put it back a little bit. We have seen more activity with their small projects and across the board, but particularly in the utility space. The one thing that did occur this last quarter, and again, relative to the recent near term, we saw a few more in the $5 million to $10 million range, that were in the core oil and gas space, as Brett was saying, than we saw the previous quarter. But to say that, there is a characterization of a particular trend, I don't think that we can say that.

Okay. Fair enough. And then just a little more color on Canada, you know, the current utilization there, and what the pipeline looks like?

From an operating perspective, those continue to do very well with the work that they have. Their backlog is as weak as we have anywhere across the company. The market up there is tough. They are going to be challenged, as we look beyond our September quarter.

Okay, great. And thanks for the color on the restricted cash. And any update on the use of cash going forward?

We will continue with the strategies we have. We continue to look for opportunities that we could deploy about growing the company from an opportunity standpoint. Nothing has come to fruition to-date, and that we are continuing to focus on the dividends and saving it to have some cash available for if the market does rebound, we need to reinvest in working capital.

Okay, great. One final one, the SG&A was a little bit lower than we expected. Should we expect it to continue at this level going forward, or does that rebound with revenues a bit?

It's going to bounce around a little bit. There are variable costs in there predominantly, in the sales and commissions area. But to say that year-over-year, where we brought it down and that we will maintain it at a lower rate, we will.

Great.

I wouldn't look at any one quarter.

Okay. Thanks.

Thank you. There are no further questions. That does conclude our question-and-answer session. At this time, I will turn it back to your CEO, Brett Cope, for closing comments.

Thank you, Audrey. Our third quarter results reflect the combination of a more competitive market, an increase of customer requested to change the schedules, while maintaining a world class team, to execute on customer commitments. We believe we are starting to see some evidence of improvement, and expect fourth quarter order performance to be on par with or slightly ahead of the third quarter. While we are encouraged by improving market sentiment, we believe customers' 2018 capital expenditure budgets will be the tell-tale sign for future project activity. However, Powell is well positioned to participate in market upturns or rebounds, such as in municipal and commercial markets, that appear to be currently underway. We continue to position Powell for a successful future, and that our strategic focus on operational execution has successfully brought customers back to Powell, as the preferred provider of their electrical solutions needs. I can't emphasize enough, how very proud I am of our team here at Powell. Thank you again for your interest in our company, and we look forward to speaking with everyone next quarter.

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