POWL
#Thank you, and good morning, everyone.
We appreciate you joining us for Powell Industries conference call today to review fiscal year 2018 second quarter results.
With me on the call today are <UNK> <UNK>, Powell's Chief Executive Officer; and <UNK> <UNK>, Chief Financial Officer.
Before I turn the call over to management, I have the usual housekeeping detail to run through.
If you didn't receive an e-mail of the news release issued yesterday and you'd like one, call our offices at <UNK>-Lascar, and we'll get you one.
That number is (713) 529-6600.
Also if you'd like to be on e-mail distribution for press releases for Powell, please relay that information to us.
There will be a replay of today's call.
It will be available via webcast by going to the company's website, powellind.com, or there will be a telephonic replay ---+ will be available until May 16.
And the information on how to access these replay features is provided in yesterday's earnings release.
Please note that information reported on this call speaks only as of today, May 9, 2018, and, therefore, you're advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading.
As you know, this conference call includes certain statements related to the company's expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements.
These risks and uncertainties include, but are not limited to, competition and competitive pressures; sensitivity to general economic and industry conditions; international, political and economic risks; availability and price of raw materials; and execution of business strategies.
For more information, please refer to the company's filings with the SEC.
Now I'd like to turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
Thank you for joining us today to review our fiscal 2018 second quarter results.
I will make a few comments, and then I will turn the call over to <UNK> for more financial commentary before we take your questions.
The second quarter of fiscal 2018 was highlighted by a significant increase in orders when compared to the run rate of new bookings over the last few quarters.
The increase was largely driven by improvement in our base business and primarily from the U.S. domestic market.
The quarter included 2 projects over $5 million and 1 larger project over $10 million awarded to Powell from the power generation market.
Also during the quarter, our aftermarket services group experienced strong bookings and revenue growth.
Over the past few quarters, demand for services, parts and brownfield project support that largely declined during the downturn has continued to show increasing activity across our businesses.
Data activity remains robust.
We've begun to see increased inquiry levels across a variety of end markets, including ongoing strength from the utility distribution, commercial and municipal sectors.
We've also seen a slight pickup in smaller infrastructure upgrade projects in the downstream oil and gas refineries as well as petrochemical manufacturers, including fertilizer and ammonia plants.
In our core oil, gas and petrochemical markets, the U.S. and Middle East continued to be our most active geographical areas, while Canadian and offshore activity levels have yet to see a return to historic levels.
In terms of project size, we are now starting to see planning for projects of increased scope and scale that we have not seen since the decline of our market several years ago.
We are supporting several larger scale projects with engineering designs and cost estimates.
We are tracking the final investment decisions by our customers on these projects and any future awards will likely be later this calendar year or into 2019.
Operationally, we have started to add to our workforce in the U.S. to meet increased demand while our operations in Canada and the U.K. remain stable.
All of our teams continue a strong focus and attention on providing a safe workplace for our employees, customers and supplier partners.
Continuous learning and promoting best practices across the organization are even more critical as several of our operations have started to increase manufacturing activity.
We have and continue to leverage investments we have made in process and systems to increase the utilization of our resources and also maximize production capacities.
Utilizing a common process and tool set allow us to continue to move complex substations or a lineup of switchgear between engineering teams to ensure we are able to meet customer need-by dates.
These same tools also give Powell an increased flexibility to share capacity across multiple facilities.
This increased capability is a strategic advantage to our model in North America, and we will continue to leverage and benefit from this unique capability as the market improves.
As we move into the second half of 2018, our focus continues to be on cost control and project execution as we start to incrementally scale up our labor force in advance of the impending increase of business activity.
In addition, our commitment to research and development, coupled with proactive investments in property, plant and equipment, continue to enhance service and product quality, production efficiency and safety, and we continue to advance strategic opportunities to add value.
For example, several quarters ago and in advance of improved market activity, we announced the consolidation of our service organization under a common leadership team.
Our teams have begun to renew our existing U.S. and international service center capabilities to determine how additional service centers, located in key geographic regions, will improve our response time to provide critical electrical repairs in our customers' facilities.
As a result, we have opened a new service center in the U.S. during the second quarter and started selective hiring to correlate with the increasing order flow.
In summary, we believe the challenges we have faced in the past and the preemptive efforts put forth in response to those challenges will position us well as market demand improves.
We have the most talented employees in the business.
They are motivated in good times and bad and continue to be committed to our customers.
We appreciate their support toward Powell's future success.
With that, I'll turn the call over to <UNK>.
Thank you, <UNK>.
Revenues decreased by 3% or $3 million to $102 million in the second quarter of fiscal '18 compared to the second quarter of fiscal '17, but were up 13% or $11 million over the first quarter of fiscal '18.
Here are some comparisons to last year's second quarter.
Domestic revenues decreased by 5% or $4 million to $72 million.
International revenues increased by 3% or $1 million to $30 million.
Our international revenues include both revenues generated from our international operations as well as export revenues from our domestic operations.
The increase in international revenues resulted from an increase in export projects.
Gross profit as a percentage of revenues decreased to 12% in the second quarter fiscal '18 compared to 15% in the second quarter fiscal '17.
Gross profit decreased by $3 million to $12 million.
Selling, general administrative expenses were $16 million, unchanged from last year's second quarter.
However, SG&A as a percentage of revenues increased slightly from 15% to 16% due to lower revenues.
We recorded a benefit for income taxes of $1.8 million in the second quarter.
In the second quarter fiscal '18, we recorded a net loss of $3.3 million or $0.29 per share compared to a loss of $800,000 or $0.07 per share in the second quarter of fiscal '17.
New orders placed in the second quarter of fiscal '18 were $142 million compared to $100 million in the first quarter, resulting in a backlog of $300 million compared to a backlog of $260 million at the end of the first quarter and $228 million a year ago.
For the 6 months ended March 31, 2018, revenues decreased 11% or $23 million to $192 million compared to the same period a year ago, primarily due to a reduced project backlog at the beginning of the current fiscal year.
Gross profit as a percentage of revenues decreased to 12% compared to 14% in the first 6 months of fiscal '17.
Gross profit and margins continue to be negatively impacted by our reduced volume, resulting in under absorption of our manufacturing facility cost, and the continued effect of competitive price pressures.
Gross profit and margins were also negatively impacted by cost incurred on oil and gas project for which change orders have not been finalized.
Selling, general and administrative expenses were $32 million, unchanged from a year ago.
SG&A expenses as a percentage of revenues increased from 15% to 17% due to lower revenues.
We recorded an income tax benefit of $2.8 million for the first 6 months of fiscal '18.
For the 6 months ended March 31, 2018, we reported a loss of $9 million or $0.78 per share.
For the 6 months ended March 31, 2018, cash used for operating activities was $11 million.
Investments in property plant and equipment totaled $2.8 million.
At March 31, 2018, we had cash and short-term investments of $69 million compared to $95 million at September 30, 2017.
Long-term debt, including current maturities, was $1.6 million.
Looking forward, we continue to expect a net loss in fiscal '18.
However, we anticipate our second half results to show improvement over the first half as new customer orders have strengthened as anticipated.
At this point, we'll be happy to answer your questions.
Pete, it's <UNK>.
So we just had OTC here in Houston recently, the big Offshore Technology Conference.
It was one of the lowest attended shows in a while.
The weekend before, the Houston Chronicle ran an article, and I'm sorry, I can't remember the author, but I thought it sort of summed up.
The theme of the article was offshore's ready when shale gas falters.
I don't know if that answers your question.
We're certainly engaged with the majors, kind of watching what they're doing.
If you look at the Gulf, a couple of these folks are looking at big investments and some have gone to tiebacks versus sort of the topsides piece.
So hard to say, I don't think it's in the near term, at least 12 months for lack of a better answer.
And I just continue to see weakness in the near to midterm.
Pete, when you look at it, we have shown some growth in our gross margins over the last 2 or 3 quarters, it's been slow.
It will continue to improve based on our current outlook, that when you're looking at the mix of projects in our backlog, there is a wide variety of price levels that we're seeing.
So it's going to be, as anyone that's followed Powell, a little bit bumpy as we continue forward.
There's going to be some quarters that we'll show progress and then there could be some that we actually fall back some.
So it really is much on the price side as it is on the cost side right now.
The majority orders are what I would call, Pete, base business, sort of the ---+ I always kind of say 1 to 3, but maybe in the second quarter, a few more of the 4s up into the 5s.
A healthy mix of what I'll call new ---+ call it greenfield or expansions.
But also something we didn't see last couple of years in the downturn was that brownfield business that sometimes you notionally expect, it started coming on last fall during the start of our first fiscal and became stronger in the second quarter.
So it did make up good portion of that increase.
<UNK>, I don't have an exact percentage, but they are spilling over into '19.
There are a lot of short cycle orders, be it smaller nature.
We've been talking last couple of quarters about the auction and the overall size of the job we're pursuing.
The second quarter is sort of an epitome of that.
A lot of small project work, very happy to have it, also creates a lot of challenge for the operational teams because you don't get the same leverage as you did when you have a larger project.
So a lot of work to do for the teams.
A fair amount helps fill in some of the gaps as we see Q4, but definitely booking into Q1 and Q2 deliveries for next year ---+ over next year.
Well, we've been talking a lot about it sort of watching what's happening, and a lot more active conversations on supply chain and doing what we can to protect on inflationary causes into the contracts and making sure that we understand our costs when the contract comes in to when we actually are going to do the materials buy, so actively spending more time as a team looking at that.
Sure.
So in the second quarter, <UNK>, my comments were really more tailored to the manufacturing side.
The service center I mentioned is new.
We're preparing to hire as we kind of work that strategy.
But the adds in the second quarter really more of the manufacturing facilities.
So it's a mix of some additional fixed cost, folks are in the factory, full-time folks as well as some contract work to handle the short-term increase on the assembly side in our factories.
No.
Most of the adds, <UNK>, were here in Houston and focused on our media voltage product lines.
So we watch them very closely because they can have an impact, of course, on the whole delivery cycle.
If you look at the second quarter, we've taken a lot of smaller projects and we've committed deliveries and then the big project comes in a roll on it and what seems to happen all along is big projects they will come along.
And if we're fortunate to win, there's always a phase of consolidation on delivery schedules.
So from a scheduling standpoint, they can impact the company dramatically and it's critical that we keep them on the radar in terms of our funnel meetings.
None of the ---+ really over the last couple of quarters, they ---+ it starts with budgetary estimates and they ---+ companies do their refinements to the engineering firms as well as the owner during their own refinements of what their returns are going to be on the project.
So the last 6 months, it's kind of 1 and 2, and now we're picking up a few more to do the estimates on.
None of them are officially funded, but the amount of work sometimes leads to, okay, it's getting more real.
And from that look out, it's looking like late this year, the next year that we really got to be cognizant of when this might be funded and balance our chances of success in the award and how we plan our production capacities.
Well, so historically in our peak times, I would tell you a large project would be in excess of $20 million, $20 million, $25 million, maybe upwards as high as $50 million.
During the last couple of years in the downturn, a large ---+ what we would call a large project has shrunk, to kind of more to the $10 million to $15 million level.
The really large megaprojects after the LNG wave, which came after the petrochem wave of '14 and '15, those all just in our core markets disappeared as well as the offshore market, which was the earlier question.
As far as the margin structure, the larger projects tend to be more complex.
They do fit our model better because we have a very strong advantage with our engineering capability.
So sometimes these projects have a little bit of work to do, and that is where Powell shines because of our ability to aid the engineering house of the end user and getting the project over the goal line for final design and implementation.
So they tend to be a little bit more competitive, but they're also tend to be a little bit more complex and then fine.
And again, that fits us pretty well.
A couple of big picture events have been happening over the last year or so.
One is there's been some consolidation announcements of deals in the refining and in the chemical industries, most recently Marathon looking to buy the old Tesoro.
And I wonder if that along with changes in the rules at the EPA have had any ---+ or do you envision them having a positive effect on your end markets going forward, either the consolidation of the industries or the EPA rules.
So Rich, it's <UNK>.
Yes, we've been watching the consolidations.
Very familiar with both Marathon and Tesoro and the example you cited, both know Powell.
We've done work throughout their ---+ both of their corporations.
I don't know if the consolidation presents any sort of new opportunities, some of the work that's been ongoing for the last couple of quarters again that we didn't really see on that core refining market for Powell was that infrastructure upgrade.
That has come back, not in spades.
We're not back to where we'd like to be or where the market was historically in its peak, but that definitely has come back the last couple of quarters.
And so it would be interesting to see what happens on the consolidations and how they manage the different feedstocks that they produce.
And will that take certain streams in or out.
How will that affect the pipeline of distribution markets.
I mean, some of that will be interesting to watch.
One of the growth aspirations by some of these folks, Motiva is another one here in the Gulf Coast that just had separation with Aramco and Shell, and there's a new set of folks that's kind of driving that strategy.
So it is very ---+ it's something we do watch and talk about.
It's ---+ those gyrations can have ---+ affect on our planning.
As far as EPA rules, any time the government comes out, there was a big desulfurization.
There's been a couple of those over the last 10 years.
Every time that comes out, that typically requires quite a bit of power on the distribution side within the facility, and those can have an upside effect in our markets.
<UNK>, so yes, we're tracking that, of course.
It's a big consolidation on the supply side with our competition.
I do not believe ---+ I certainly don't know sitting here today the official word, but we're still doing business with both as independent entities, ABB and GE separately.
I think it's next month or so is sort of the rumor in the industry as that kind of progresses.
And I'm just deciding what I think I hear from the field.
So pretty sure that's not closed as of today.
<UNK>, clearly, we're watching whenever there is a merger or acquisition like this size.
There is the opportunity for businesses that would be duplicate or would not fit with the new owner's strategy.
But at this point in time, until ABB actually have that control of those assets, there is not any official word as to what there may be wanting to do with some of the GE assets.
But it is something we're watching and something that we will try to stay close to.
That is the rumor, but we're not a part of the process, so I don't know whether there's any changes to that or not.
Thank you, operator.
The second quarter presented some encouraging signs for Powell by way of increased bookings.
As we enter into the second half of this year, we will continue to invest in our workforce, our facilities and our research and development programs as we prepare for the uptick in project activity over the coming quarters.
Powell's financial position remains strong.
We look forward to an exciting future for the company, emerging from this downturn and leading Powell into a period of higher level operational performance.
Thank you for interest in Powell and we look forward to speaking with everyone next quarter.
