Karen Roan - IR Michael Lucas - President and CEO Don Madison - EVP, CFO and CAO.

Jon Tanwanteng - CJS Securities Brent Thielman - DA Davidson Jon Braatz - Kansas City Capital Noelle Dilts - Stifel Peter van Roden - Spitfire Capital.

Ladies and gentlemen, thank you for standing by. Welcome to the Powell Industries’ First Quarter Earnings Conference Call. During today’s presentation all parities will be in a listen-only mode. Following the presentation the conference will be opened for questions. [Operator Instructions] This conference is being recorded today, February 5, 2014.

I would now like to turn the conference over to Karen Roan. Please go ahead..

Thank you, Douglas and good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review fiscal 2014 first quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn over the call to management, I have the normal details to cover. If you did not receive an e-mail of the news release issued yesterday afternoon and would like one, please call our offices and we will get one to you. That number is 713-529-6600.

Also if you want to be on the permanent e-mail 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 by webcast by going to the Company's website at powellind.com or a recorded replay will be available until February 12, 2014, 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, February 5, 2014, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of the new replay listening.

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; and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Mike..

Thank you, Karen. Good morning, everyone. Thank you for joining us today for our fiscal 2014 first quarter results. I’ll make a few opening comments and then I'll turn the call over to Don with the details.

We began 2014 with a solid quarter and a good start to the year with bookings continuing at the pace of recent quarters and revenues and profits in line with our expectations. Our key markets in North America are healthy and are expected to remain strong.

In Canada, the strength in the oil sands market brings us excellent opportunities and our new facility has been very well received by the market. Demand is ahead of expectations. This is the only facility of its kind in Canada with the capability to manufacture, fabricate and integrate all the necessary electrical equipment at a single location.

In the U.S. we’ve booked a number of smaller petrochemical projects this quarter and see capital investment beginning to move forward in this portion of the North American oil and gas market. Liquid pipeline activity also continues to be strong.

The forecast for offshore activity is healthy as projects continue to advance through the planning and development stages and we still expect to see orders in the next phase of offshore development coming in 2015. All of our operations continue to perform well and we are seeing continued gains across the board in process efficiency improvement.

During the last few weeks, we completed two significant transactions, and I’d like to provide you a few more details on these. First, in December, we amended our supply agreement with GE.

As background information in 2006 we purchased the Power/Vac product line from GE and entered into a 15 year supply agreement which require them to purchase all their medium voltage anti-switch gear requirements from Powell. Last year in fiscal ’13, revenues from Power/Vac were less than 10% of our total.

Of that revenue, approximately three quarters of the Power/Vac revenue came through GE and the remainder came through other direct sales channels. Over the past four years, revenues through the GE channel have steadily declined. At the same time, we have continued to grow our business through our direct and alternative sales channels.

We’ve had numerous discussions with various options and growth plans with GE over the past several months but we differed in the amount and form of investment needed in this product line.

After much discussion the supply agreement the contract was amended to allow them to design, manufacture and sell their own line of medium voltage switchgear or purchase switchgear from others beginning in 2015 in exchange for a fee of $17 million.

We believe this decision provided Powell the best long term outcome, rather than continuing the status quo. Powell still retains ownership of the Power/Vac product line, the brand, and all associated intellectual property.

Under this revised four year agreement, both parties remain committed to the Power/Vac product line and GE continues to be an important channel partner for Power/Vac, and our relationship remains strong. Power/Vac has a very strong brand and a long history.

The product gives us access to an extensive installed base and provides operational economies of scale with our Power/Vac product line. We plan to continue to sell service and support to Power/Vac product line to both new and existing customers through GE, as well as our own direct and alternative sales channels.

We expect to accelerate development of alternative sales channels to the market as we have been doing successfully over the past few years. We do not expect any significant changes in profit contribution from this product line.

Second, we made the decision to sell our wholly owned subsidiary, Transdyn, which comprise the majority of our process control systems business segment. Transdyn is a leader in intelligent transportation systems and advanced traffic management solutions.

This market has, over the past several years, required a broader product offering with greater capabilities in traffic control and electronic toll collection. For Powell, this was a non-core investment that we did not want to make.

As a result on January 15, 2014, we sold this subsidiary for $16 million to Kapsch TrafficCom, a global provider of electronic toll collection systems for which the business was a good strategic fit.

We retained certain key strategic operations from our process control systems segment that are focused on electrical power management and other industrial control solutions. These remaining operations will be integrated into our electrical power products business segment. I’ll now turn the call over to Don to discuss the financial details.

Don?.

Thank you, Mike. First, as Mike just noted, in December we amended our supply agreement with GE. This amendment resulted in a deferred gain of $8.1 million the amount of which the proceeds exceeded the unamortized balance of our intangible assets from the original supply agreement.

This deferred gain will be amortized over the four year life of the amended agreement which began on January 1, 2014. The amended supply agreement had no impact on our results from operations for the first quarter of fiscal ’14.

In yesterday’s press release we reclassified the assets and liabilities of Transdyn that’s held for sale on our balance sheet both as of December 31, 2013 and September 30, 2013 and we presented the results of Transdyn as income from discontinued operations, net of tax.

In today’s call, unless noted otherwise, I’ll be reviewing our results from continuing operations which exclude the results of Transdyn in both the current quarter as well as in prior periods. Now for review of the quarter, revenues increased 17% or $25 million to $172 million in the first quarter compared, to the first quarter of fiscal ’13.

Domestic revenues increased by $2 million or 2.3% to $89 million and international revenues increased by $23 million or 38% to $83 million. The increase in international revenues was primarily driven by the expansion of our Canadian operations and the timing of oil and gas construction projects.

Gross profit for the quarter increased by nearly $3 million to $35 million compared to the first quarter of fiscal ’13.

Gross profit as a percentage of revenues decreased to 20.5% in the first quarter of fiscal ’14, compared to 22.1% in the first quarter a year ago, primarily due to the cost and inefficiencies associated with expansion and ramp up of our new Canadian facility.

Selling, general and administrative expenses as a percentage of revenues decreased slightly to 12.6% in the first quarter, compared to 13.4% in the first quarter of fiscal ’13 due to increase in revenues.

SG&A expenses increased by nearly $2 million during the first quarter of fiscal ’14, compared to the first quarter last year, primarily due to increased personnel cost and administrative expenses associated with increased volume.

The effective tax rate for the first quarter of fiscal ’14 was 35.1%, compared to an effective tax rate of 32.5% in the first quarter of fiscal ’13. The first quarter last year was favorably impacted by the utilization of loss carry forwards on Canadian income.

Net income from continuing operations for the first quarter of fiscal ’14 was $7.3 million or $0.60 per share, compared to $7.1 million or $0.60 per share in the first quarter of fiscal ’13.

New orders for the first quarter were $192 million, resulting in a backlog of $455 million, compared to a backlog of $438 million at the end of the previous quarter and $469 million a year ago. For the first three months ended December 31, 2013, cash provided by operating activities was $5 million.

Investments in property, plants and equipment totaled approximately $6 million, of which included $4 million investments and we closed out our facility projects. At December 31, 2013, we had cash of $103 million compared to $107 million at September 30, 2013.

A long-term debt and capital lease obligations, including current maturities, totaled $3 million.

Looking ahead, based on our backlog and business conditions, we expect full year fiscal ’14 revenues from continuing operations to range between $700 million and $750, unchanged from our previous guidance and we are raising our guidance for earnings to include nine months of the deferred gain from amended supply agreement.

We now expect full year fiscal ’14 earnings to range between $2.85 and $3.35 per share. Our guidance excludes the discontinued operations of Transdyn and the associated gain from the sale of the business which will be recorded in the second quarter. At this point, Mike and I will be happy to answer your questions..

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Jon Tanwanteng with CJS Securities. Please go ahead..

Can you just clarify what the revenues from Transdyn would have looked like in the quarter and what the overall gross margins would have been including that?.

The best way is to discuss would be looking at last year. Last year, the revenues for Transdyn contributed $32 million for the year. It was a fairly straight-line business. This year we expected the revenues to be up slightly because of size of the backlog they had.

We entered the year -- closed out at prior year was about $78 million of backlog and that would have pushed revenues up a little bit, but now I don’t have in front me the exact final revenues for the Transdyn business in the first quarter..

Okay, that’s fine. And then I know it might be a bit early, but do you have any idea what the revenue impact of the GE appeal might be in fiscal ’15? I know you say you don’t expect to have an impact on the short term..

At this point in time, our viewpoint is that the contribution of that business will not materially be impacted as a result of the change in channels. The market will drop the volume and that the market outlook for that part of plan remains constant. We may require some additional investments in SG&A as we develop our sales channels.

But at this point in time we even believe that will be relatively modest..

Okay, great.

And then I guess what are GE’s options and then how long do you think it will take for them to get to market with either a third party replacement or on channel design?.

Jon, that’s probably a question you need GE, but just talking about it from an individual experience standpoint, introducing a new product line will normally take several years. The question mark is to how much work they already done? And that’s something we don’t have -- are not ready to..

Okay, and one last one. Traditionally, cash generation for you guys usually comes later in the cycle.

I’m just wondering what that timeline looks now that you’re in the middle of an oil and gas line and you have a new petrochem cycle coming?.

I’m sorry, the question again, Jon?.

Usually, you gave tax generation later in the cycle.

I’m just wondering what that timeline looks like now that you’re in the middle of an oil and gas cycle and a new petrochemical is coming?.

What you’re really asking is when is the end of the cycle. At this point in time, the end of the cycle is beyond the current planning horizon. We think as the market remains very -- we’re very confident in the market for the next couple of years.

So we’re not looking at anything that would be coming to the backend of the cycle and the current planning horizon..

Thank you. Our next question is from the line of Brent Thielman with DA Davidson. Please go ahead..

You guys talked about sort of petrochem opts [ph] to run and oil sands award appreciate some color there.

Anything developing on the domestic refining front and also are you seeing an acceleration investment in maybe some of the other areas like pipelines, LNG or is that a little bit more steady?.

A lot in there - let me take part into some pieces first. I think you’ve asked about oil sands in Canada. That continues to be very healthy for us. We are ahead of expectations in order rates in Canada. And the pipeline is very healthy up there.

It is still a lot of oil production tank farms in the associated liquid pipelines that’s driving a lot of the Canadian business. Petrochem, here in the U.S., this past quarter, the one we’re reporting on, we did book a handful of small projects. By small I mean a $5 million to $10 million.

Some of those are small projects, some of that is early phase work for projects that will have much more potential down the road. Short term on petrochem we are starting to see some movement on that. We have two or three projects that could book in the next couple of quarters, medium sized projects in the $10 million to $20 million dollar range.

So that’s been holding pretty steady and we’re starting to see some early activity in petrochem..

And the last part of that was, anything developing on the domestic refining front in terms of opportunities?.

It’s -- we booked several small and medium sized projects again this quarter, nothing over $10 million. That seems to be pretty steady. We don’t see any big ones on the horizon but there is some good bread and butter business in that $5 million to $10 million range, its holding steady..

And then just a follow up. Anything new developing on the utility front? I think in recent quarters you said you might be seeing some bottoming out there at least..

We built in modest year-over-year increase but it’s pretty modest and it’s tended to being more environmental side of the utilities which drives a lot of power. So we don’t have high expectations for utilities this year..

Thank you. Out next question is from the line of Jon Braatz with Kansas City Capital. Go ahead..

Don, Canada has been very strong.

Can you give us sort of a relative importance of Canada to your operations, maybe in terms of revenue and operating margins compared to your domestic operations?.

Well when you are looking, clearly the Canadian business is still much smaller than what our U.S. domestic businesses are. But clearly it is growing and we expect it to continue to grow and become much more material in the coming years.

Much of the upstart opportunity we’re seeing the current year which has allowed us to hold our guidance from the overall revenue perspective is coming from growth in Canada as opposed to other parts of the world. Margin wise, they are still transitioning and ramping up the business.

Clearly it’s in line with our expectations that they would be bringing -- you got to bring people in, you got to train them and then there is inefficiencies during those early stages as you ramp employees up. We’ve talked about this in the past few years ago when we were ramping up our [indiscernible] facility with the Power/Vac product line.

We’re going through that same step today except it’s just an organic growth. Those costs will be somewhere lumpy but we’re still on track and we expect that we’ll have that facility operating very smoothly before the end of the year.

At that point in time I would expect this to see for same market segments, realizing the projects vary, market segments varies that they will be producing margins very similar to what we produce here in Houston..

Are they, I guess substantially lower? I’m trying to get a sense maybe of what kind of lift we could have in margins as we transition to that more mature base if you want to call it..

I guess the way to look at it at this point in time, I would say that the current quarter was burdened by probably plus or minus $2 million of ramp up cost. That gives you a magnitude of the opportunity. Now that’s not going to go away overnight. That will trend downward over the balance of the year..

[Operator Instructions]. Our next question is from the line of Noelle Dilts with Stifel. Please go ahead..

Mike, I just wanted to follow up on your comments on the petrochemical side. It sounded like you said there were some kind of medium sized projects that you think could be awarded over the next few quarters. In the press release you referenced some larger opportunities.

So could you just talk a little bit more about the timing on the really large petrochem opportunities?.

Yes. They are still working their way through large -- we have kind of tagged that plus 25 million range. There is still 10 or a dozen projects tracking in the queue. Some of these will be busted up into phases, so we may not see it all at once. It might be, some this, this year, some next, but as we said we had a handful of small projects this quarter.

There’s some medium ones is expected in the next couple of quarters and there is some large ones late in the year and early next year..

Okay. And then Don, I guess my question is really when you look at the guidance, obviously you raised the quarter guidance pretty substantially Don and your comment just now, it sounded like you’re attributing a lot of that in higher expectations for the quarter, Canada. But how much is this petrochemical activity playing into the guidance increase..

At this point, I would say the revenue lift to offset the revenues lost by the Transdyn business are coming predominantly from the change in our expectations in Canada. As Mike mentioned earlier on in his comments is that demand there clearly is running ahead of expectations.

In fact it’s creating a good opportunity for us to try to figure out how to ramp the business up even faster than what we planned on. When you are looking at the activity along the Gulf Coast, I would say it’s still what we had categorized in line with our expectations overall..

Can you touch on, in the past you have talked about the challenges associated with finding skilled labor in Canada.

Is that something that, where you’ve seen some relief or is that going to kind of be a factor that limits your growth in Canada?.

I wouldn’t say that we expect it to limit our growth but it is a challenge and it will continue to be a challenge. But I think we mentioned in the last call, one of the big pluses that we have seen is actually the new facility.

That has been a recruiting tool of that -- and retention tool as well, bringing people in and the work environment there is good, particularly for that part of the country and working inside a factory environment versus in a construction yard, particularly this time of the year has helped us out a great deal.

So, I mean not to say, to diminish the challenge in front of us, we’re still probably looking to bring on 100 or more employees between now and the end of the year, but our success so far as we try to ramp up at a controlled rate that we can absorb within the organization, I would say we hit basically all the targets that we have set internally plus or minus two or three employees at the end of each period..

Okay. And one last question if I can squeeze it in.

Can you just touch on the activity you are seeing in the offshore market in the Gulf of Mexico?.

Yeah, offshore still, it’s been steady as it goes. We’ve got two or three very nice projects in the $20 million to $70 million range. We could see some of that activity late this year. It’s going to be a timing question, just which quarter. It will either be late ’14 or early ’15. But it’s a good project and there is activity going on if they’re stalled.

They’re just, they are farther out before the bookings will occur..

Thank you. Your next question is from the line of Brent Thielman with DA Davidson. Please go ahead..

Hey Don, just a quick follow-up.

Depreciation and amortization of $3 million, is that a good kind of run rate going forward?.

Yes, that is. It will probably ramp up a little bit in the latter part of the year as we complete the capitalizations of some of the current projects. But at this point of time for your planning purposes I think that’s not a unrealistic number..

(Operator Instructions) Next question is from the line of Peter van Roden with Spitfire Capital. Please go ahead..

Just talking about your guidance a little bit, the EPS range seems to imply some pretty wide expectations around what you guys think margins will be for the year.

How do you think about that and what are the guideposts that you are trying to hit to end up in the one camp or the other?.

There are fundamental issues that we are dealing with in the current year. One is the historical issue of the project business, the mix of projects during the period, what slides out of the year, what slides into the year. You have a large profitable project that moves from September from December, it can impact the year.

The movement of projects as we’ve talked about in the past can also create some temporary hold that we will have to deal with right now. There is few in the current quarter that we are hoarding [ph] to sale but nothing that I would say is alarming. The other issue which is unique to the current year is the ramp up in Canada.

As I spoke earlier, we probably have conservatively $2 million of which we consider inefficiency cost associated with ramping up that business in the first quarter. We have plans of diminishing that over the year but to me that’s a fairly sizable headwind that we are dealing with as we ramp that business up.

And from experience we know that there will be bumps along the road. So how we deal with those and how quickly we can get that facility where we want it to be from a cost and operating perspective is the unusual issue that we are dealing with in the current year..

Got it.

And then on the cash balance side, does the December 31 cash balance include the GE settlement?.

It includes the first payment. If you look at the 8-K I believe we disclosed it there. There was $10 million paid upon signing, and the balance of $7 million was spread over the next three years..

Okay. And then, so you are starting to push up against a fairly sizable cash balance.

What’s the plan to sort of go out and think about allocating that?.

Clearly, our top priority with that is to use it for growth. There was a couple of things we are doing in there. One is we like to accelerate some of the organic internal product development efforts.

We have just recently created a new position and hired a person to be Vice President of Product Management in our organization to take a fresh look at our product roadmaps and our development plans. So we would like to accelerate internal organic product development efforts. Acquisitions is certainly part of that plan.

We have identified five strategic areas that we would like to accelerate our work in our acquisitions. Frankly the funnel is a bit stale. So we are trying to refresh that. We’ve got some targets we are looking at but nothing I think that will impact ’14. Those are the two big areas for growth, organic product development, acquisitions.

We also are looking at accelerating some capital spend inside the factories, particularly projects that will drive cost savings, efficiency or productivity improvements and we've identified a few of those. They're relatively small but they've got quick paybacks on them. So we are also looking at that as the third area..

Final question.

Was there any onetime items in SG&A this quarter from either Transdyn or the GE stuff?.

No there's nothing that I will call unusual in our cost structure in the current year. That was hell of a lot that warrant changes in your model..

[Operator Instructions] Next question is a follow up from the line of Jon Tanwanteng with CJS Securities. Please go ahead..

My question was answered already, thank you..

My question was answered already, thank you..

My question was answered already, thank you..

My question was answered already, thank you..

And at this time I'm showing no further questions in queue. I'd like to turn the call back over to management for closing remarks..

Well, I appreciate everyone's interest and dialing in today. We always value your interest in Powell. Thank you for your time today and bye for now..

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a reply of today's conference you can dial in the U.S. 303-590-3030 and in the UK you can dial +44-207-154-2833 and enter the access code 4663343. We'd like to thank you for your participation and you may now disconnect..