POWL - NASDAQ

Welcome to the Powell Industries Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2023 fourth quarter and full-year 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 available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until December 13. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, December 6, 2023, 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 2023 fourth quarter and full-year results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. We ended our fiscal year on a strong note as the Powell team delivered another great quarter to close out one of the best years in the company's history. The sharp recovery of our industrial end markets led to $1.4 billion of orders in fiscal 2024, by far the most we have ever recorded in a 12-month period and twice that of the prior year. The demands that the sharp recovery have placed upon our team members continue to be significant, including tremendous front-end effort from our sales and estimating teams as well as our project leadership teams as we ramp activity across all of our operating groups. I am incredibly proud of the entire polite performance. It is in years like these of elevated project activity delivering on time and on budget that we earn and build on our reputation with our customers as a reliable, trusted partner as we continue to differentiate ourselves from our competition. Revenue in the fourth quarter grew 28% to $209 million, while revenue for the full year grew 31% to $699 million. Strength across our core industrial end markets, particularly within LNG as well as in our utility and commercial and other industrial market sectors drove the substantial growth compared to the prior year. Mike will provide additional details on our revenue growth by market sector in a moment. We recorded $171 million of net new orders in the fourth quarter which reflects our previously communicated expectation that order activity will remain healthy but returned to a more normalized trend compared to previous quarters. We also delivered a gross margin in the fourth quarter of 24.9%, which is an increase of 430 basis points year-over-year. While our margins have certainly benefited from these higher volumes, our productivity initiatives as well as strong project execution and subsequent closeouts are all helping to support significantly improved margins compared to recent years. We are confident that these measures, combined with our quality backlog can support gross margins above our fiscal 2023 targets set in the high teens and deliver margins consistent with total fiscal 2023 levels in the low 20s for fiscal 2024. On the bottom line, we recorded earnings per diluted share of $2.17 in the fourth quarter, roughly 3 times higher than the prior year, and $4.50 per diluted share for the full year, which was roughly 4 times higher than fiscal 2022. Our backlog remains incredibly strong at just under $1.3 billion. It was roughly unchanged sequentially but has more than doubled the $592 million from one year ago. We continue to feel confident that our current backlog is comprised mainly of projects that speak to Powell's core competencies both the nature and scope of the project mix and our backlog are core to what we do best, and we are confident that we can deliver every dollar of our backlog on time and on budget. We previously discussed some of the capital improvement projects that will facilitate both incremental capacity as well as improved production efficiency in several of our facilities. In the fiscal third quarter, we initiated an expansion of our Houston facility located along the Gulf Coast to support the rise of our backlog, while also helping us remain competitive on our schedules for future business. Work on the expansion largely concluded in November, and we are now productively using the expanded capacity. As far as staffing levels are concerned, availability of quality labor, while always front of mind is less of a headwind today than it was in recent quarters. This is in large part due to the hard work of our human resources team as they have developed creative personnel solutions and continue to ensure our manufacturing floors remain adequately staffed. The availability and cost of certain engineered components remains a challenge. Though overall, the inflationary environment and costs of most raw materials have certainly moderated. The challenges that came with a period of lower project activity immediately after the pandemic, followed by the inflationary environment, required that we prioritize execution and identify efficiencies across the organization. Today, we are enjoying the benefits of those efforts, while the largest markets we serve have enjoyed a strong recovery. Coating activity remains robust across most market sectors. We continue to see favorable opportunities within LNG, gas pipeline, and the gas-to-chemical end markets. We've also been pleased with overall activity within the renewable markets of hydrogen, biodiesel, and related biofuels, such as sustainable aviation fuel as well as carbon capture and sequestration. We envision these markets being larger contributors to our financial results going forward. Additionally, we continue to capitalize on opportunities within our commercial and other industrial sector. Data centers have been and remain an active area of growth in this sector. Expanding our market breadth has been a focus across the business and our ability to leverage our products and expertise into a fast-growing market like data centers is a perfect example of these efforts. Critically, this is a market in secular growth that reduces the cyclicality of our order book and is a perfect complement to our core industrial markets. Our near- and medium-term priorities remain unchanged as we enter fiscal 2024. We are focused on growing our electrical automation platform, expanding our existing services franchise, and diversifying our product portfolio, either through tangential applications that complement our existing offerings as well as expanding the scope of our product catalog into new electrical technologies. We expect our R&D spending to increase in 2024 as we work toward this end. In summary, we are entering fiscal 2024 with roughly $1.3 billion of backlog, which provides durable and predictable project schedules to build upon. We continue to see healthy levels of project activity across our end markets and believe that the fundamentals supporting our core industrial markets remain favorable and robust. We've also taken successful steps to unlock operational efficiencies, improve staffing levels, and optimize our procurement of raw materials, all of which have had a significant positive impact on our profitability. We are confident that our execution and our strategic initiatives, coupled with favorable industry dynamics will support another successful year for Powell. With that, I'll turn the call over to Mike to walk us through our financial results in greater detail.

Thank you, Brett, and good morning, everyone. I will begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2023 results. Revenues for the fourth fiscal quarter of 2023 increased by 28% to $209 million compared to the fiscal 2022 fourth quarter of $163 million and improved sequentially by $16 million, with strong growth across our core industrial, oil, and gas, and petrochemical market sectors. Net orders for the fourth fiscal quarter were $171 million, $87 million lower than the same period one year ago on a challenging year-over-year comparison as we secured a large LNG order in the fourth quarter of fiscal 2022. In general, the industrial end markets remain active, specifically within the LNG gas to chemical and hydrogen end markets. We also continue to see sustained commercial activity across our utility as well as the commercial and other industrial market sectors. As a result of the strong revenue performance offset by a healthy but moderate orders cadence, our book-to-bill ratio was 0.8 times in fiscal fourth quarter. Reported backlog at the end of our fiscal fourth quarter was $1.3 billion, $701 million higher versus the end of fiscal 2022. The substantial increase in the order book was across the majority of our market sectors, oil and gas, petrochemical, utility as well as the commercial and other industrial end markets. Overall, we're very pleased with the total year orders performance across the business and the resulting backlog position as we enter our fiscal 2024. Compared to the fourth quarter of fiscal 2022, domestic revenues of $171 million increased by $38 million or 28%, while international revenues also increased by 28% to $38 million on higher volume across all of our international locations. From a market sector perspective, revenues from our oil and gas and petrochemical sectors grew 56%, largely driven by higher LNG and petrochemical revenues. In the fourth quarter of fiscal 2023, the utility sector was higher by 8%, while the commercial and other industrial sector was higher by 13% versus the prior year. This year-over-year growth was offset somewhat by the traction sector, which was lower by 52% as we successfully completed a large municipal project in Canada in the first half of fiscal 2023 combined with softer commercial order activity in this sector throughout fiscal 2023. We reported $52 million of gross profit in the fiscal fourth quarter of 2023, which was higher by $19 million or 55% versus the same period in the prior year. Gross profit as a percentage of revenues increased by 430 basis points to 24.9% of revenues in the fourth fiscal quarter compared to one year ago. The higher margin rate is in large part the result of favorable volume leverage and productivity initiatives, strong project execution, and subsequent closeouts as well as the pricing actions that have been aimed at offsetting inflationary pressures as we continue to navigate through a challenging supply chain landscape. Albeit negligible, the margin rate also benefited from two order cancellations, which generated $1 million of gross profit or an incremental 35 basis points to the margin rate in the quarter. Selling, general, and administrative expenses decreased by $1 million or 5% in the quarter versus the prior year, attributable to lower fiscal fourth quarter variable performance-based compensation expense. SG&A expenses were $20 million in the fiscal fourth quarter or 9.8% of revenue compared to 13.2% of revenues a year ago on both volume leverage and lower expenses in the fourth fiscal quarter of 2023. These results demonstrate our continued focus on cost management while also focusing on the critical resource requirements necessary to execute on the order book. In the fourth quarter of fiscal 2023, we reported net income of $26.4 million generating $2.17 per diluted share compared to net income of $8.7 million or $0.73 per diluted share in the fourth quarter of fiscal 2022. We generated $77 million of operating cash flow in the fiscal fourth quarter, driven by early cycle advanced payments on the projects added to the order book over the past couple of quarters in addition to generally strong working capital performance across the business through this period. CapEx spending during the quarter was $3.8 million with the capacity expansion at our offshore facility in Houston attributable to a large portion of the spending during the quarter. Now recapping our total year fiscal 2023. Revenues of $699 million increased by $167 million or 31% compared to fiscal 2022. Orders were $1.4 billion, nearly double fiscal 2022 orders of $718 million, led by the strength in oil and gas and petrochemical end markets coupled with the sustained market activity in the utility sector as well as the incremental growth in all of the other end markets. Gross profit as a percent of revenues grew 510 basis points year-over-year to 21.1% or $148 million demonstrating continued success in offsetting inflationary headwinds and supply chain challenges, while also leveraging higher volume and productivity initiatives throughout fiscal 2023. Considering these factors, in addition to the quality of our backlog, we do anticipate that we can maintain this profitability level on a total-year basis in fiscal 2024, and notwithstanding the lower volume and profitability impact resulting from seasonality in the first fiscal quarter of 2024. Selling, general, and administrative expenses were higher by $8 million versus the prior year. Overall, net SG&A expenses as a percentage of revenues were lower versus the prior year by 200 basis points at 11.3% of revenues in fiscal 2023 versus 13.3% in the prior year. We reported net income of $54.5 million or $4.50 per diluted share compared to $13.7 million or $1.15 per diluted share in the prior year. During fiscal 2023, we recognized $0.38 per diluted share of gains from unusual items which include order cancellations and a noncash tax credit resulting from the reversal of a valuation allowance previously established in our United Kingdom entity. Total year fiscal 2023 operating cash flow generated was $183 million versus a cash usage of $4 million in the prior year. At the end of fiscal 2023, we had cash and short-term investments of $279 million, $163 million higher than our fiscal 2022 year-end position reflecting the growth in our backlog and the associated advanced payments for the large industrial projects combined with strong working capital management. As we navigate through the coming fiscal year, we anticipate that our cash balance will continue to build as a result of the large projects in backlog before cash levels plateau and ultimately recede somewhat towards the middle or the back half of fiscal 2024 as a direct result of increasing working capital requirements in order to support project execution. The company holds zero long-term debt. Finally, in October 2023, we entered into a third amendment of our credit facility with Bank of America and included Texas Capital Bank as an additional lender under this agreement. Combined, this amendment increased our facility capacity to $150 million from the previous ceiling of $125 million. As we utilize this facility solely for commercial letters of credit, we felt that this was a prudent action in order to ensure our continued success across our end markets. Looking forward, we remain optimistic that the commercial momentum across our core end markets will remain robust throughout fiscal 2024. We are also encouraged by the profitability resulting from the operating leverage as well as the commercial levers implemented over the past several quarters, and will remain acutely focused on executing our growing backlog as we navigate through fiscal 2024. As we continue to assess the impact of these levers and associated quality of our backlog, a notwithstanding the typical project challenges of timing and mix, we anticipate our total year margins for fiscal 2024 to be similar to what we experienced in fiscal '23. Considering these variables, in addition to the strong commercial outlook across most of our end markets as well as our liquidity position and the strength of our balance sheet we are confident that we can sustain the solid results that we've delivered in fiscal 2023 and continue this into fiscal 2024. At this point, we'll be happy to answer your questions.

[Operator Instructions]. Our first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Thanks for taking my questions. Congratulations on a great quarter. I'd like to start with the booking profile. The incoming order book of $171 million, if I compare it to the 10 years prior to fiscal 2023, you're roughly doing about $150 million of incoming order book. But we just came off two consecutive quarters of over $500 million of bookings. Can you kind of put into context what the opportunity profile looks like, what you would expect the booking profile look like in the coming year?

John, thanks for the comments and the question. It's Brett. Yes. I appreciate the leading on the question on the two previous quarters. A little bit of timing, of course, in that Q3, what was going to book, and as we went into Q4, we were very pleased with the $171 million net for the quarter. When I look at what made up in the sectors in the quarter, it was kind of on average with the core oil and gas, good strong utility content in the fourth quarter, along with a good contribution to the new sector that we're reporting out in the commercial and industrial market. As I look forward, I think that the cadence continues. There weren't any mega projects in the Q4 given the run we had in the previous three quarters to Q4. But that said, in my prepared comments, activity is still robust. There's -- in fact, you asked a question, which I was thinking about as we prepared for today, you asked me a question a call or two about are we at halftime or where are we at relative to that. I'm going to hold my answer on that last call. There's still a lot out there. We're very engaged. Timing is a little bit more uncertain given the run we just went through over the last 12 months to 18 months, but there's still a lot in front of us.

Okay. And just to narrow it down, you mentioned also in the press release and in your prepared comments that we should be cognizant about the seasonality of Q1 versus Q4. And looking back, again, pre-COVID normal seasonal revenue declines I eyeball it to be around 15% or so in Q1 versus Q4, but we've had some real strong bookings. How should we think about the seasonality on a sequential basis this year versus historical norms?

This is Mike. I'll take that one. Given where we are with our backlog, very healthy backlog, as we talked about in the prepared comments, I would -- I'd kind of calibrate that a little more aggressive than the typical 15% that we've seen historically, probably somewhere in the 10% range this coming year?

Got it. I'll just ask one more question and then get back into queue. The gross margin profile has been outstanding in the last couple of quarters. But you've kind of indicated that fiscal '24 should be more like a full-year tally versus a full-year tally. What's the primary counterweight that makes it tougher to hold the second half 2023 gross margin on a go-forward basis?

The big one is just timing quarter-to-quarter. So, as we framed up the prepared comments that Mike shared in his remarks, the project business is always timing. So even with the backlog that we have, there's still challenges quarter-to-quarter on timing holds on projects, changes where can we pull things in and move slots, that fundamental part of our model never changes even with the rise in the backlog. So Q4, looking back over the number of years, that you profiled this morning, we do well give the timing of when our fiscal lays against the end of the calendar year, construction schedules, and people are getting things done and closeouts. But Q1, definitely, both on the factory side or productivity and some ramp downs and ramp-ups and then just timing of people in the office, getting things done and signed in the house is always a challenge from the November to end of the year run.

And if I could add, John, if we calibrate on our trailing 12-month rate of gross profit, to 21.1%, ex unusuals, 20.8%. That's kind of the range that we're looking at going into 2024, the low 20s. That's what we're targeting the business at.

Our next question comes from John Braatz with Kansas City Capital. Please go ahead.

Brett, can you talk a little bit about the LNG landscape going forward? Are there still big projects being planned? And maybe what about additional capacity being added at current -- at existing facilities. I read a lot about new LNG facilities, but I guess sometimes I get a little confused what's possible and what's not. Can you discuss a little bit about what the LNG opportunities remain?

Yes. Thanks, John. So, as I mentioned a couple of times last throughout the last couple of calls, really, really pleased with Powell's position and where we stand in the market on the domestic LNG landscape. I don't think there was a project last year that happened that we weren't involved with in some capacity, including the ones that certainly that we brought home and booked. As I look out, there are a number of LNG expansions and some Greenfields that are still sitting out there. Comment earlier there to Mr. Franzreb, that there's still some uncertain timing circumstance around it. But if I go back two years prior to the way that we started a year ago last summer, the cost out, the estimating and working with engineering firms, very, very active on a lot of these to size them up with the engineering partners and the end clients. And then you add into that, the growing business around hydrogen. We're seeing a number of those opportunities. They're sizable. And then there's -- on the renewable side, around batteries and how those are going to get applied to a very -- from utility scale all the way down to the EV drive and the IRA money, we're seeing a number of process plants as well in the future. So again, some kind of the same sort of comment around timing, scope, what's right for Powell. But again, the activity is very broad, much more broad than it was just LNG two years ago, but we feel pretty good about all three sectors looking forward.

Brett, in your conversations with your clients, 2024 is going to be an election year and I don't know who's going to win, who's going to lose. But if we have a executive branch has a little bit more friendly towards oil and gas. Would you see any significant change in the capital spending programs of your oil and gas clients under a new regime?

I don't -- I mean I think long term, John, it certainly could have an impact. It does have administration, but there's always a time phasing to it. If I go back to the administration change, that happened in the last election, there was more regulation put in place. I mean there just simply was. We saw products go on hold, there renew environmental studies and redo’s on the engineering side. We can see it all the way down to the design and how they're going to power the facilities from having on-site turbines to putting all-electric designs. So, a lot of impact studies were done and it reworked some projects. We are starting to see again, not whether you believe it's good or not, we are starting to see some projects with more of the IRA credits leaking into some of the projects right now. So yes, I think clearly, if we have an administration change, it will have an effect if it turns parties from the current regime, I think it would have an impact on the core oil and gas stuff longer term, for sure.

Okay. Mike, you talked a little bit about your cash flow and the cash balances are at $279 million, and you expect them to build a little bit here before fading in the second half. But -- when you look at the $279 million, how much of it, if I could say, is yours as opposed to cash advances?

John, really quick, it's Brett. Let me -- I just realized I missed the back part of your question, capacity. We are looking at an additional expansion in '24. So, we did the one in '23, we're looking at a production capacity at one of our facilities in '24, and we'll report on that in Q2.

And John, to address your question, this is kind of the rule of thumb for us. We typically earmark about 15 or so percent of revenues to working capital. This new facility that we just entered into that I spoke about in the prepared comments that requires us to hold $60 million of liquidity at any point in time. So, you kind of do that math and you get a number in the range of $200 million.

The next question comes from John Franzreb with Sidoti & Company. Please go ahead.

Yes. I guess just a little bit about the tax rate on a go-forward basis. What kind of tax rate should be building into our models for fiscal 2024?

Yes. We're building in an ETR of 24% on a global basis, John.

Okay. And what's the CapEx budget? What was the final CapEx budget for 2023 and you expect to win in 2024?

We spent $7.8 million in 2023. A large portion of that, as I mentioned, was the offshore capacity expansion. In 2024, as Brett mentioned, we are considering some other capacity initiatives that could move the number as we navigate through the early part of '24.

What should be the baseline number then excluding the expansion maybe?

Typically, I would say probably $4 million to $5 million would be our typical spend per annum. But then you have some of these other anomalies that you have to put on top of that.

Okay. And I guess maybe just 1 more question about the cadence of revenue recognition in 2024. You typically have a fair amount of the book business flow through, but -- we talked about the seasonality in the first quarter and the seasonality of the fourth quarter. Did Q2 and Q3 look similar? Or is there an improving profile as the year progresses?

Yes. I think if you looked at the kind of the trajectory of past fiscal years, I don't think we would see a different trajectory. First quarter will be softer than the other three, and then it will ramp up 2Q, 3Q and then 4Q is typically the strongest quarter of the year.

Yes. And then we talked about that I want to call -- you asked a question about spikes, John. I don't it's pretty level laid out the way we kind of entered kind of finished up '23 and kind of the planning pretty steady as it goes, just following the trends. So...

And I guess one last question, if I may. Are you still seeing a fair amount of small book and turn jobs flow through the P&L? Or is this all project-based work? And does that impact the margin profile at all one way or the other?

We absolutely remind all of our operating units to take care of all our customers. Those small jobs and whether they are a service-led quick turns because there was an event at a facility that needs quick attention on the service side or a gear-only job one or two sections. Absolutely, we don't lose sight of those at all. And we're constantly reminding everybody to not just chase the big ones.

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

Thank you, Dave. As you've heard from both Mike and me this morning, we are very pleased with our fiscal 2023 and the fantastic financial performance that the Powell team delivered. I'm extremely proud and appreciative of every one of our employees and how they are meeting the challenge the market has presented to our company. Based upon the markets that we serve, we continue to believe that fiscal 2024 will be another strong year for Powell. With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you next quarter.