Stephanie Smith - IR Mike Lucas - President and CEO Don Madison - EVP and CFO.

Jon Tanwanteng - CJS Noelle Dilts - Stifel Brent Thielman - D.A. Davidson John Franzreb - Sidoti Tom Spiro - Spiro Capital Management Larry Brekke - Schroders.

Greetings, and welcome to the Powell Industries' First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to host, Ms.

Stephanie Smith. Thank you, Ms. Smith. You may now begin..

Thank you, Rob, and good morning everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year '15 first quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the web. 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 office and we'll get one to you. That number is 713-529-6600. Also if you would like 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 via webcast by going to the Company's Web site at powellind.com; or a recorded replay will be available until February 11, 2015, 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 4, 2015, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

As you know, this conference call includes certain statements including statements relating to the Company's expectation 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 Officer. I will now turn over the call to Mike..

Thank you, Stephanie. Good morning, everyone. Thank you for joining us today for a review of our fiscal '15 first quarter results. I'll make a few opening comments and then I will turn the call over to Don to review the financial details.

For the first quarter of the new fiscal year, we booked orders totaling $154 million and realized revenues totaling $153 million. Financial performance did not meet our expectations due to the project cost and efficiency issues in our Canadian and U.S. manufacturing facility as we discussed last quarter.

First turning to our Canadian business, let me just recap quickly. The positive market response to our expanded integration capabilities was greater than we originally expected which required a rapid hiring ramp. Training new employees and ramping up operational efficiencies created scheduled delays and missed delivery deadlines.

After our project schedules were realigned last fall, we made the decision to expend the necessary resources to hold these revised customer commitments. The unplanned cost associated with this decision affected us again this most recent quarter.

While we were seeing improvements in factory operationally and generally holding our customer delivery schedules, the associated cost of outsourcing activities, expediting materials and over time will continue as required. Many of the active projects now show significantly reduced margins.

Overall margins will remain depressed until these projects are flushed out of backlog. Secondly, we continue to experience added cost in our Huston manufacturing facility as we work through the backlog created from earlier project delays.

If you recall, we implemented a new suite of software tools in mid-2014 designed to drive efficiency, improve productivity and standardize best practices. We are now confident that these new systems are working and we are diligently moving through the project delays that were created during the system implementation.

We are absorbing some additional expenses to maintain these customer commitments. As a result of both of these issues significant margin pressure will continue through the second quarter. Turning to the markets, like all companies associated with the oil and gas industry, market dynamics are rapidly changing.

The recent decline in oil prices is certainly impacting our customer's cash flows and our capital spending plans. Powell equipment is typically purchased later in our customer's project schedule and once projects have progressed to that point, they are nearly canceled. We currently have a healthy backlog and expect all projects in backlog to complete.

We also anticipate steady order rates over the next few months. Reduced customer capital spending will be more impactful on new orders in the back half of this fiscal year and on revenues in fiscal ’16.

Although all sectors of the energy markets will be impacted by this industry decline, we believe that spending in the pipeline market will be less susceptible to the price of oil. We still expect select projects will move from the engineering phase into award during 2015 both in the U.S. and in Canada.

By contrast the offshore production market has already been hit hard by the drop in oil prices. As we discussed last quarter large projects are being pushed out and we do not expect any new major offshore project awards this fiscal year. In the U.S.

petrochemical market we still anticipate opportunities in this segment through the middle of the calendar year. During this most recent quarter petrochemical bookings remain solid with several new smaller project awards.

However as we’ve mentioned before we believe we have passed the peak of the major electrical equipment awards for the first wave of investment in petrochemical. The LNG export market remains a significant long term opportunity for Powell as LNG export is still in the very early stages of development in North America.

We anticipate a select few projects to move forward but likely on extended schedules. The energy markets as you know are cyclical in nature and Powell is navigated through several down cycles in the past.

We’re confident in our management teams, our business model, our financial strength and our long term growth prospects to whether this market downturn as well. I’ll now turn the call over to Don to review the financial details..

Thank you, Mike. Revenue decreased $19 million to $153 million in the first quarter of fiscal ’15, compared to the first quarter of fiscal ’14, primarily due to the completion of a large international project in fiscal ’14.

Domestic revenues decreased by $8 million or 9% to $97 million in the first quarter and international revenue decreased by $27 million or 33% to $56 million. Gross profit for the first quarter decreased by $14 million to $21 million compared to first quarter of fiscal ’14.

Gross profit as a percentage of revenues decreased to 13.8% in the first quarter compared to 20.5% a year ago, primarily due to incremental cost incurred to hold customer schedules and continued inefficiencies.

Selling, general and administrative expenses decreased by $816,000 in the first quarter compared to the first quarter of last year, primarily due to lower variable compensation expense, partially offset by higher personnel and administrative cost related to our expanded scope of operations in Canada.

SG&A expenses as a percentage of revenues increased to 13.6% during the first quarter compared to 12.6% during the first quarter of fiscal ’14 primarily due to lower revenues.

We recorded a benefit for income taxes of $1 million in the first quarter of fiscal ’15, of which approximately $600,000 related to the retroactive reinstatement of the federal R&D tax credit which expired on December 31, 2013.

In December legislation was enacted which retroactively restated and extended the R&D tax credit for one year through December 31, 2014.

For the first quarter of fiscal ’15 we reported a net loss from continuing operations of $239,000 or $0.02 per share compared to income from continuing operations of $7.3 million or $0.60 per share in the first quarter of fiscal ’14.

Orders in the first quarter were $154 million resulting in a backlog of $506 million, compared to a backlog of $507 million at the end of the previous quarter and $455 million a year ago.

For the three months ended December 31, 2014 cash used in operating activities was $23 million and investments in property plant and equipment totaled $19 million, of which approximately $16 million was for our facility expansion. At December 31, 2014 we had cash of $57 million compared to $103 million at September 30, 2014.

Long term debt, including current maturities totaled $3 million. This past December we announced that our Board of Directors authorized a repurchase of up to $25 million in shares of the Company’s common stock. The repurchase authorization extends through December 31, 2015.

While we did not repurchase any shares during the first quarter, we plan to move forward with the repurchases, with timing and are not to be based on revaluation of market conditions and our business need for cash.

Looking ahead, based on our backlog and current business conditions, we now expect full year fiscal ’15 revenues to range between $625 million and $675 million, primarily due to customer driven change, orders increasing our scope of work on certain large projects that will delay delivery dates and a more conscious view of incoming orders.

We now expect full year fiscal '15 earnings to range between $1.25 and $1.75 per share, due to first quarter results and lower revenue expectations for fiscal '15. At this point Mike and I will be happy to answer your questions..

(Operator Instructions) Thank you, our first question comes from the line of Jon Tanwanteng with CJS. Please go ahead with your question..

Just a couple of quick ones here.

Did you have any deliveries pushed out from the quarter at all?.

No, it wasn't substantial. But as Don had mentioned in some of his opening remarks, we've had some recent change orders come in after the quarter, that will move some revenues around from second to third, third to fourth and maybe somehow to the end of the year but nothing substantial during the first quarter..

And then on the margins, it seems like you took one step forward last quarter and then two steps back in this one.

When do you see the normalization in Canada and margins getting back on track?.

Yes so, in Canada, now that we've taken some of the project hits, many of these project margins in Canada are at breakeven or some are even at a loss. So until that backlog -- till the active projects in backlog flush through -- even when the revenue is recognized, there won't be much margin or little or no margin on those jobs.

So we've got several projects that will flush through over this quarter and a little bit into the third quarter, and then we've got several new projects that are not yet on the factory floor that will be hitting later this quarter.

It's really going to take some of those newer projects getting to the factory floor before we see the margins turn back up..

Okay, great and on a relative basis could you tell us how much the weakness in the quarter was from Canada and how much was from the Houston operations?.

When you're looking at the quarter-over-quarter sequential issues, the big issues between the two operations were relatively flat. If you recall we talked about the -- in our fourth quarter we did have some strong service revenues and some project close outs than benefited the fourth quarter. Those did not occur in the first quarter of fiscal '15.

So when you're looking at the operating results from these businesses, there was not significant changes between two businesses..

Our next question is from the line of Noelle Dilts with Stifel. Please proceed with your question..

So as I stand on what you're just talking about with Canada, it sounds like -- I understand that you've got to get these low I guess zero or locked projects flushed through, but it sounds like since these issues emerged in June, you kind of have consistently underestimated the cost that it would take to meet those deliveries and key customer schedules.

As we look at this quarter, did you have to rely more on outsourcing and subcontractors? What has continued to exceed your initial expectations when you're looking at the cost of these projects?.

Yes, good morning Noelle. First of all, you said some of the schedule impacts. Since we rescheduled the backlog back in the fall, we refer to most part holding those schedules. So it's been more underestimation of the cost to complete those. And it has been significantly labor.

So some of those projects were originally quoted to be done in-house, which we had to outsource. So there's outsourced labor associated with that. In some cases it's been over time to be able to hold those. In some cases it's been expediting cost associated with materials to hold those.

It's mostly been labor related, either outsourcing things we had intended to bring in over time or even in some cases additional contract labor to help support that. Let me just talk a little bit about going forward too with this.

As these newer projects hit the floor, can we be assured that they're going to be any better? We've taken several actions to try to make sure we've got these cost under control and understand them now. At this point we've shipped quite a number of e-houses. It's well over 20 that have been shipped. So we've gained a lot of experience.

We are building that experience back into our pricing and estimating models. We've got a lot of expats up there out of our Huston facility now in a variety of different functions to help bring that expertise in.

We've got several cost out projects, identify on some future work we're expecting to try to take cost out of even the estimates we put together. So there is a whole host of activities going on to help ensure those next projects hit the floor that we’ve got better estimates of those costs..

Okay, so as we look out to your guidance for the remainder of the year, can you maybe give us a little bit of detail, just what you're expecting in terms of -- specifically the projects? Is it cost overruns in Canada and then the Houston issue, what you're expecting in terms of improvement as we look out to next quarter?.

And you’re looking at the profile of results for the balance of the year relative to our guidance. We’re expecting only modest improvement in earnings in the second quarter, with both of the earnings coming in the third and the fourth quarters..

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question..

Just sort of taking look at the guidance. So should we think about Q2 looking similar to Q1 and then kind of materially stepping up in 2H to kind of get to that guidance range.

Is that the right way to think about this?.

Yes. But we are expecting to see some improvement in the second quarter over the first. We’re not expecting a lot but we are expecting a majority of the earnings to come in the second half of the year..

Okay, and then are you beginning to see customers anywhere in the oil and gas arena, and maybe coming back and rebidding work or maybe even looking for discounts on orders you guys have already received?.

There's been a couple of spot enquiries there but nothing I’d say significant yet. We certainly anticipate that going forward -- expecting more pricing pressures to be out there. Awards we expect to close here soon, but taking just a little bit longer to get them closed.

Customers are taking a little extra hard look at those pricing and sharpening pencils before they issue final awards. So we’re starting to see some of that, but again expected to increase over the next few quarters..

(Operator Instructions) Our next question is from the line of John Franzreb with Sidoti. Please go ahead with your question..

I want to focus on the unexpected product. It's not like these issues are new. You’ve added personnel to address them. But you say they’re unexpected.

Maybe a little bit more granularity of why they’re unexpected? Because I think that was the whole point of the whole expansion that these issues wouldn’t recur?.

So we have a pretty structured project review process we go through every month where we sit down and look at what work is still remaining on these projects.

So it is refreshed constantly and they were uncovering additional cost of being able to hold these schedules, work taking longer than we thought it would and happened to throw more overtime or bring in additional labor to cover it.

These are very complex projects and it’s a constant process of refreshing what did we get done and what’s our estimate left to complete. And we put our best estimates into those every month and we just still continue to underestimate the amount of labor it’s taking to hold these schedules..

Maybe it would be helpful if you talk about the orders that are impacting results now. When were they booked? And maybe -- you’ve talked a little bit about the new orders -- $154 million or so.

Will they have the similar problems or is that going to be gone?.

We do expect that it will -- a lot of these orders that have shipped came in, in late ’13 early fiscal ’14. So they’ve been in the backlog for a while.

As I said, I think what we try to constantly do to improve this outlook and accuracy, as we ramped up this facility it is challenging to sort out the cost overruns, what’s just the learning curve proficiency related and did we actually underestimate some of those.

So now that we’ve got several TLs [ph] under our belt that have experience with those, we’re constantly taking that feedback back and building it into our quotation and pricing tools to make sure we have the most estimates upfront of the labor it’s going to take.

And as I said we’re -- we also have just worked through quite a peak load in the facility. Now we still have a lot of work ahead of us, but the load is leveling out a little bit. So as these new projects hit the floor, some of them been re-quoted or were quoted under revised estimating tools. So we think we have better accuracy and estimates going in.

We’ve got the new -- we are using part of the new facility where it’s working in up there. So up to now we’ve actually been working outside on some of these projects. As you can imagine an Alberta winter outside is not the most productive use of time. We’ve been able to move all those projects back indoors now.

Anything new that hits the shop floor will be done indoors. We’re just about done with the outsourcing activities where we’ve used other people’s construction yards to build the buildings. We’ve got a couple more to finish up but everything going forward will be done in house. We’ve got some cost out projects identified.

So even if the quotation and tools are accurate, which we believe they are, we found some areas where we think we could continue to work cost down. So there is a lot of actions going forward to help make sure anything new hitting the floor is in much better shape..

Thank you, our next question is from the line of Tom Spiro with Spiro Capital Management. Please go ahead with your question..

Mike, with respect to Canada and whatever market changes you maybe anticipating up there, do you expect that perhaps later in this fiscal year or going into the next fiscal year you may have to actually reduce capacity for lack of business?.

A significant amount of our business in Canada is pipeline related. We started to see the productions activity slowdown a while ago. So it's -- the pipeline piece we think is going to be a little less susceptible. We have a couple of projects that we think will move to a work stage over the next quarter or two.

And depending on when those come in and the timing of those delivery schedules, we think we can keep that, maybe not at current capacity levels but certainly sufficient enough..

Thanks and Don, a question I asked a call or two ago I'll ask again that, do you have any concerns about the quality control and warranty reserves, particularly with respect to these tough jobs that have been coming out of Canada?.

The way that we do our inspection internal before we ship products and in fact almost everything that we deliver is also customer litmus tested in our facility. The risk there is relatively low..

Our next question is from the line of Larry Brekke with Schroders. Please proceed with your question..

Just few questions. A little bit on the resources in Canada.

This obviously is lasting a longer than probably most of us anticipated but do you think you have enough resources out there from a managerial -- or ex-pat community, or your employee should I say -- employee base? Do you guys spend much time there? Can you give us a sense of how close are you really to all these problems?.

This is Mike. I'm up there every other month, just about and we've got regular phone calls. So we are up there quite frequently. Our Chief Operating Officer, Neil Dial spent probably the last 30 months prior to the holidays up there. We're quite close to that activity in Canada..

Okay, so in searching through your bookings, the $154 million in bookings, it was 20% down year-over-year. Can you kind of peel the onion a little bit? Is that a weakness we should read into it or is this something unique to your operation? And then maybe break it down a little bit by international versus domestic.

If we were to look at book-to-bill of one, is that a representative of the mix?.

Yes, it wasn't weak. It's actually pretty close, very close to our internal targets we were looking for out of the first quarter. I don't have the breakdown of domestic and international but we had a really good bookings month. Utility was actually surprisingly strong. I wouldn't call that trend yet, but we had a very good activity from utility.

Petrochem held up very well and we did book one offshore project that came in a little earlier than we had anticipated. There was also some refinery and pipeline in there. So the mix -- I wouldn’t say significantly different than what we've seen in the other quarters with the exception of utility was probably a little stronger than the norm.

But I don't have the breakdown here in front of me of domestic and international..

Our next question comes from the line of Jon Tanwanteng as a follow up with CJS Securities. Please go ahead with your question..

It may be a bit early but from what you see now, do you think the LNG and the pipeline opportunities you're seeing is good enough to support growth in fiscal '16? And maybe is Keystone a factor in that at all?.

We have not considered keystone in that outlook at all or any plan of this going forward. There are other pipeline projects we've been tracking for a while that we do think will go forward. In fact we've meetings as late as last week that seem to be very optimistic that a couple of those pipeline projects are going to go forward.

What was the other segment you did ask about Jon? You said pipeline and?.

LNG. Just wondering if those areas are going to be able to support overall growth..

Yes, so LNG, there are a couple of the U.S. projects that look like they're moving forward. We don't expect them to be cancelled or pushed out significantly, but will probably take a little longer to get closed. Right now it's a little too early to call if that's enough to sustain growth for next year.

Certainly the way it's shaping up, if orders come down in the second half and that it starts to impact revenue, that's going to put some headwinds in our business going into '16. But it is a little too early to call how deep and how long might this downturn be. Let me just kind of remind everyone what our cycle looks like through a market downturn.

By the time our customers get to the point of requesting quotes and issuing orders for electrical equipment, they are pretty far along in their commitments to that project, which really means we lag a bit the market downturn. Roughly six months from when the markets turn we see it start to show up in the order rates.

And then as I said once the orders are in-house there is not a lot of revenue upfront, there's a little bit on the engineering side till drawings and documentation is all approved and then revenues typically start three to six months after the order is received. So we do lag.

We’ve got a little bit more time than say like an oilfield services company to respond to this. We expect orders to hold up for a few more months and then whatever capital spending reductions customers will make will start showing up in the last half of the year. So we have a little bit more time to watch this thing unfold.

We’ve got a very healthy backlog. We’ve got a lot to get done in the next two quarters, almost three quarters to get out the door and our focus is very much on executing the backlog we’ve got..

Thank you. We have a question. It is a follow up from the line of Noelle Dilts with Stifel. Please proceed with your question..

So again, I understand this is a little bit early, but as you look out to the back half, how much are you expecting orders to be down at this point?.

You’re going to put us into a situation of trying to guess it by quarter. We think we’re going to have a very solid second quarter bookings and then we got it down sequentially second to third and third to fourth. Okay? So little too early to try to put a percentage on it.

But what -- our outlook is kind of solid next quarter and then sequentially down for the next couple. And….

So if you had to guess kind of back half over first half, do you have an estimate there?.

Noelle, let’s look at it this way. We started this year with a very healthy backlog of over $500 million. I think it’s likely that we will see some reduction in that backlog by the time we get to the end of the year starting next year, but at this point in time we think that we will still have a very strong backlog going into our fiscal ’16.

It may not be quite as good as ’15, but it’s not going to be appreciably less..

At this time, I’ll turn the floor back to management for closing comments..

Well, I just want to thank everyone for joining us this quarter. And we’ll certainly keep you posted. It's a very dynamics time as everyone knows in the marketplace. So we’ll be watching that very closely. I appreciate your interest in Powell, and some very good questions this morning. Thank you all for your time and we’ll talk to you next quarter.

Bye-bye..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..