Good morning, and welcome to the Powell Industries' Fiscal First Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Alpha IR, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2024 first quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be made available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 8. The 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, January 31, 2024, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered 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 future results may differ materially from those projected in these 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. With that, I'll now turn the call over to Brett.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2024 first quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a strong start to our fiscal year as our first quarter was very much a continuation of the trends and strong results we saw in the prior quarter. Despite what is typically a seasonally slow period, we recorded $198 million of new orders, which was sequentially higher by 15%, and in line with our expectations for a more normalized but still strong cadence of project bookings. We also delivered revenue growth of 53% compared to the prior year as we saw broad strength across our petrochemical, oil and gas, utility and commercial and other industrial sectors. Mike will provide additional detail on our revenue growth by market sector in a moment. Our strong revenue growth, coupled with maintaining our focus on both project execution and operational efficiency are all working together to help deliver significantly improved profitability. Our gross margin in the quarter was 24.8%, an improvement of 950 basis points compared to last year and the best first quarter gross margin performance since fiscal 2010. It also puts us comfortably on track to deliver on our previously communicated guidance of gross margin in the low-20s in fiscal 2024. On the bottom line, we recorded net income of $24 million, or $1.98 per diluted share, which was significantly above net income of $1.2 million or $0.10 diluted share in the year ago period. Our backlog remains very strong and was roughly unchanged sequentially at $1.3 billion. We continue to feel confident that our current backlog is comprised mainly of projects that speak to Powell's…

Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2024, we reported net revenue of $194 million, compared to $127 million or 53% higher versus the same period in fiscal 2023. New orders booked in the first fiscal quarter of 2024 were $198 million, which was 7% lower than the same period one year ago as the prior period included a large LNG project booking. As our continued effort on end market diversification continues, new bookings in utilities as well as commercial and other industrial markets improved in the current quarter compared with the first quarter of fiscal 2023. Our book-to-bill ratio is 1.0 times in the current period, maintaining the fiscal first quarter ending backlog at $1.3 billion, $620 million higher versus one year ago and flat sequentially. Compared to the first quarter of fiscal 2023, domestic revenues improved by 60% to $160 million while international revenues were 28% higher, driven by increased project volume across our UK and Canadian facilities. In total, international revenues were up by $7 million to $34 million in the first fiscal quarter. From a market sector perspective versus the first quarter of fiscal 2023, revenues across our industrial end markets maintained the positive momentum. Our petrochemical sector was higher by 26% while oil and gas sector nearly doubled higher by 92%. Additionally, we experienced notable increases in both the utility and the commercial and other industrial market sectors increasing by 43% and 45%, respectively, reflecting our strategic focus on continued market diversification. The traction sector was lower by 39% as this market sector remained soft. Gross profit increased by $29 million to $48 million in the first fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue increased by 950 basis points to…

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys, and congratulations on another great quarter. I'd like to start with the gross margin profile in the first quarter. I'm curious, was there any unusual items in there that kept it at an elevated level in a seasonally weak period? Can you just talk about that, and that, first and foremost?

Yes. Good morning, John. This is Mike. I'll take that one. First, no, there were no unusual non-recurring events in the quarter. We've been very pleased with the margin rates as we exited the last two to three quarters and the margin expansion that we've seen resulting from a lot of the work that the team's done over the last 18 months to 24 months. It's really being driven by the volume and the operating leverage across the business. Really every division has got very, very healthy backlog, and we're seeing really good project execution. So considering these variables, in addition to the size and quality of the backlog, we have more confidence that we'll be able to sustain these margin rates in the low 20s -- low to mid-20s throughout the rest of the fiscal year.

It's excellent results in the gross margin profile. But why couldn't you take a step up in the gross margin profile considering I assumed you had some downtime in the first quarter, why couldn't it improve beyond this threshold on a go-forward basis?

Yes. Right now, we're -- from a capacity standpoint, we're -- like I said, every division is quite loaded, and we're seeing very, very good volume leverage across most every division in the business. Given that volume leverage on our fixed base, we feel pretty comfortable that our range in the low-20s to mid-20s is probably a good range to target.

Okay. Fair enough. And you have a lot of cash on the books. Can you talk a little bit about when you start to draw down on that cash for working capital needs? How should we think about that on a go-forward basis? How do you think about it on a go-forward basis?

Sure. Sure. As I mentioned in the last earnings call as well, we were at $279 million last quarter, and I did mention that we think it'll plateau sometime early to mid-fiscal 2024. I think we're close to that level. And as we begin to execute these much larger projects in the backlog, we'll begin to draw down that cash level, probably mid-year, fiscal 2024.

Any sense of how much cash should be drawn down, Mike?

Yes. Typically, we earmark roughly 15% of the volume level, the revenue level to working capital. So when you think about our backlog at $1.3 billion, roughly 15% of that is going to be deployed for working capital. That's roughly half of the cash. So we would expect to see a lot of that cash drawdown considering no other new big projects coming in to fill the tilt. But a lot of that cash drawdown will occur in mid to late fiscal 2024.

Great. That's very helpful. And maybe, Brett, you could touch in on this. Any thoughts about the administration's freeze on new LNG plants? Does that impact you? Yes or no? Can you just maybe talk about that a bit?

Yes, I mean look, John, per my prepared comment, I wrestle a lot with what word to put in there. It is just for me personally and as the CEO of Powell very oddly timed, and early tea leaves from our customers, kind of the same thing. Do I really think it will I mean stop projects? I don't think so, but it clearly is going to create a little bit more near-term uncertainty on timing given what they've explained, how they -- what -- I don't see much yet as to why they did what they did. Looking at the other folks in this marketplace along with our clients, I think everybody's kind of scratching their head, but they did it and I think we'll just work together and get our way through it as quick as we can.

I tend to agree. Thanks for taking the questions, guys. I'm going to jump back into queue.

Thanks, John.

The next question is from John Braatz with Kansas City Capital. Please go ahead.

Good morning, Brett. Good morning, Mike.

Hey, John.

Good morning.

On the gross margin front, Mike, are you incurring or would you expect to incur as you go forward this year, any overtime charges or expenses in terms of labor?

Yes. Most of the divisions, given my comments on the utilization capacity levels across the business are incurring modest levels of OT as we execute the backlog.

Okay, okay. Well, would you anticipate growing levels of OT going forward throughout the year?

No. No. There's a point of diminishing returns and the operating teams are on that quite strongly, so no. I wouldn't anticipate that.

Yes. Brett, on the big picture front, in terms of what the administration has done, in terms of, obviously it's a political decision delaying these LNG expansions and new facilities. Is there any thought within the industry that maybe the administration not only will delay it, but they will nix these projects for climate change reasons and so on? Is there any consideration of that amongst the industry?

I mean, I -- it'd be hard to say that that that more severe outcome isn't on the thoughts and minds of certainly the owners as they're trying to work their way through their project process in interacting with the government. I wouldn't say that's the case right now. I think everybody feels, at least early on here, that this is a slight slowdown and things will get back on track. It really doesn't seem to be a lot of practical reasons and, if anything, it seems to be, again, not to be a political person here, but it certainly, from where I sit, hurts the States and a global outlook for what we're trying to do around the world. So I got to believe that's being echoed with folks with much bigger positions in this not than myself. And the interactions we've had with our clients and our engineering partners would seem to indicate that's sort of the tenor at the moment.

Yes. Okay. All right. Okay. Thank you, Brett.

Yes.

Next question is from John Deysher with Pinnacle. Please go ahead.

Good morning. Thanks for taking my question. On the LNG front, I realized that we're not going to be canceling any existing projects or expansions, but can you give us an idea of in the backlog, how much of that backlog is LNG related at this point on a percentage basis roughly?

Thinking back to, so we started at the end of 2022, sharing updates in the market. We never really quantified any one job. We really can't, John, but it is, given the size and depth and breadth of what you've experienced with Powell over the years, it's about 25%, 30%-ish, kind of in that range.

25% to 30%, okay, is LNG related, that's helpful. Okay, good. The other question is, you talked about the CapEx expansion of $11 million, I think, for one of the facilities. What is the CapEx budget for fiscal 2024 at this point?

Yes, John, this is Mike. Typically, our normal burn rate in CapEx is roughly $4 million to $5 million. And as Brett mentioned, we are initiating an expansion at one of our facilities here in Houston, that is roughly $10 million or $11 million.

Yes.

Little suspect that timing when that would actually report out, John, just because the permitting process, like always, is kind of like the other conversation we've had today. Whenever you get the government involved, you get a lot of help. So we're working through that now. We're excited by it and get the prospect of where we're going with the things we've shared on the calls last two years about getting some new products out into the market and what the R&D team has been delivering for us.

Okay. When do you expect that $11 million expansion to start? And how long would it take to complete?

Yes. We've started the process. We've got a prime contractor. I think in the next three to four months, we'll probably go a little slower, just as we kind of get through all the permits and we'll use that time to hone in all our final construction costs. So I think in earnest, sort of mid late summer. And once we get going, the build time isn't too long, quite frankly. It's a tilt wall building over there today at the factory and team came up with a really nice plan to go out the backside of the building and put in two really nice bays, adding the room we need for the future. So pretty excited to get going, but we'll just have to get through that permitting process and then sometime mid fiscal next year, we ought to be up and going.

Okay. So it sounds like you won't break ground until late summer and then probably a year or so to complete it.

That's correct. I mean, I hope we can move the permitting process and if that's the case, we are absolutely ready to move quicker. We just have to get through the first three or four months.

Okay. Good. Fair enough. Thanks and good luck.

Thanks, John.

The next question is a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Yes, guys, I'm just curious a little bit about the tax rate. It's a little bit lower than expected in the quarter. Anything going on there that we should be cognizant of?

Yes. John, the lower effective tax rate relative to the U.S. statutory rate was driven by a one-time favorable tax item relative to stock-based compensation. So just to explain that a little further, as you know, our stock values appreciated considerably throughout 2023. And as such, the vesting price is significantly higher than the original grant price. That difference when they actually vested, generated a favorable tax benefit, reducing the ETR percent. So that was kind of a one-time item that was a benefit from a tax perspective in 1Q.

So how should the tax number look on a go-forward basis, Mike?

We are still targeting 24% ETR as we navigate through the remainder of the year.

Great. And Brett, I've asked you this, I think, two quarters ago, and I'm going to revisit the question. What innings do you put the order booking rate at? Let's revisit it now especially in light of how good the most recent quarter was at 198.

Yes. On the gas related comments, I made in the prepared remarks, John, I still feel good. I mean, clearly the uncertainty on timing has ticked up a little bit over the last few weeks. So I anticipate it may draw out a little further. But when I look at the other things that are going on in the energy transition, there's still a lot of activity. Are the uncertainties slowly increasing? Yes, that was the reason for the comment also on the lithium side, this commercial, the industrial has been a great new market as we kind of build new channels and build onto Powell since the post-pandemic. But what, well, just experience is how quick it could spin down as well. So there's still a lot of activity in that segment. Feel good about it in the near-term, but maybe slightly more uncertainty as we go out mid-term.

Okay. Fair enough. Thank you guys for taking my follow-up.

All right.

This concludes the question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks.

Thank you, Gary. As you've heard from Mike and me, we are pleased with our first quarter results and the momentum it provides through the balance of fiscal 2024. And to our incredible employees, well done. I am fortunate and proud to be a part of a group of talented individuals with Powell can do on full display and demonstrating a laser focus on the success of our customers. With that, thank you for joining us this morning. We appreciate your continued interest in Powell and look forward to updating everyone next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.