Stephanie Smith – Dennard Lascar Associates, Investor Relations Mike Lucas – President and Chief Executive Officer Milburn Honeycutt – Vice President, Controller and Chief Accounting Officer.

John Franzreb – Sidoti Brent Thielman – DA Davidson John Tanwanteng – CJS Securities Tom Spiro – Spiro Capital.

Greetings and welcome to the Powell Industries third-quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Stephanie Smith. Thank you. You may begin..

Thank you, Matt, and good morning, everyone. We appreciate you joining us for Powell Industries’ conference call today to review fiscal year 2015 third-quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the web. Before I turn the call over to management, I have the normal details to cover.

If you did not receive an email of the news release issued yesterday afternoon and would like one, please call our office and we will get one to you. That number is 713-529-6600. Also, if you would like to be on the permanent email 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 website at www.powellind.com, or a recorded replay will be available until August 12, 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, August 5, 2015, and therefore, you are advised that time-sensitive information may no longer be accurate as 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 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 Milburn Honeycutt, Vice President, Controller and Chief Accounting Officer. I will now turn the call over to Mike..

Thank you, Stephanie. Good morning, everyone. Thank you, again, for joining us today for a review of our fiscal 2015 third-quarter results. As you heard in the introduction, Don Madison is not able to join us this morning. Don unfortunately had a death in the family and is out today. So our thoughts and prayers are certainly with him.

We’ll follow our usual format this morning. I’ll make some prepared comments at the beginning, we’ll turn the call over to Milburn for financial details, and then we’ll take Q&A. During our third quarter, we realized revenues of $177 million, our highest revenue and earnings level in the past several quarters.

The order rate was also better-than-expected at $193 million boosted by two large projects. These included a U.S.-based LNG terminal project and a Canadian pipeline project, which combined was roughly one-third of our quarterly orders. Backlog is also up sequentially and up over prior year.

During the third quarter, we made significant progress in working through the project costs and efficiency issues that have impacted our results in the first half of the year. Our focus continues to be on operational improvement, project execution and maintaining customer schedules.

Our Houston operations of have improvements in both revenue and margins. We are progressing through a significant backlog of projects from last year’s robust order demand, especially from the large petrochemical projects. In Canada, we’ve shipped the remaining projects that were under costs pressure from our commitment to hold customer schedules.

As discussed in the last couple of calls, we are in a short transition period of low production loading in Canada until the next group of eHouses starts to ramp near the end of the fourth quarter.

We continue to conduct rigorous reviews on these newer projects to ensure that engineering, operational efficiencies, costs and project timelines are in line with expectations, and we do anticipate incremental improvement in our Canadian facility during the balance of this year, and we’ll have a strong backlog as we enter into fiscal 2016.

Although order rates have held up well and current backlog is solid, fiscal 2016 will be a challenging year. As we’ve said for a couple of quarters now, the extended period of low oil prices has significantly reduced capital spending in the energy markets. We’ve seen a decline in new inquiries in both the number and the size of these opportunities.

Our backlog is healthy, but the quotation activity is slowing, the mix of products is changing, and pricing is becoming more competitive. Our order rates generally lag the reduced capital spending levels of the energy markets, and we do expect to see a decline in order rates over the coming quarters.

We’ve adjusted our workforce to match production levels, and we’ll maintain our critical investments in professional and skilled people. Let me offer a few comments regarding specific markets. First, offshore production market continues to be very difficult. We see no major offshore project awards before late 2016 or early fiscal 2017. U.S.

petrochemical markets changed little from our last report. While there are a few smaller project opportunities, most of the large projects have now been awarded. There is some discussion regarding a second wave of investment in petrochemical, but we have not yet seen any sign nor timeline as to when or if these projects will receive funding.

The pipeline markets held up well for most of this year; however, with the drop in oil prices and the reduction in drilling activity and well completions, we expect to see this market to slow as we enter into next year. The LNG export market remains a significant opportunity for Powell.

We closed a large LNG terminal project order during this recent quarter, and there is still a few U.S. projects moving forward. The utility market contributed nicely to our third-quarter order activity, and we expect to see continuing opportunities from this sector.

Investment in distribution infrastructure has been restrained for an extended period, and it seems utilities have decided they can no longer wait to make these investments. Overall, our oil and gas market outlook remains consistent with last quarter.

A recovery in this market is difficult to predict as the global supply and demand economics remain weak. Due to the timing lag of our typical project awards, we expect reduced oil and gas capital spending to impact our order rates in this, the fourth quarter and well into 2016. I’ll now turn the call over to Milburn to discuss the financial details..

Thank you, Mike, and good morning, everyone. Revenues increased 17% or $26 million to $177 million in the third quarter compared to the same quarter in fiscal 2014. Domestic revenues increased by $49 million or 57% to $134 million in the third quarter.

The increase in domestic revenues was primarily driven by our production efforts on various large petrochemical projects. International revenues decreased to $23 million or 35% to $43 million.

This decrease in international revenues was driven primarily by the substantial completion of several large projects in Canada and various international export projects produced in the U.S. compared to last year.

Gross profit as a percentage of revenues decreased to 18.6% in the third quarter of fiscal 2015 compared to 19.7% in the third quarter of fiscal 2014.

This decrease in gross profit was primarily driven by inefficiencies from our production efforts and incremental costs required to maintain our customer’s schedule, as well as the overall mix of projects.

Selling, general and administrative expenses decreased by $5 million to $18 million in third quarter due to a reduction in performance-based compensation, personnel and administrative costs, as well as reduced bad debt and sales commission expenses.

SG&A expenses as a percentage of revenues decreased to 10.2% during the third quarter compared to 15.3% in the third quarter a year ago. In the third quarter of fiscal 2015, we incurred approximately $1.4 million in restructuring and separation costs.

We recorded a provision for income taxes of $5.2 million compared to a provision of $2.2 million recorded in the third quarter of fiscal 2014. The effective tax rate for the third quarter was 42% compared to an effective tax rate of 43% for the same period a year ago.

In the third quarter of fiscal 2015, we reported net income of $7 million or $0.60 per diluted share compared to net income of $2.9 million or $0.24 per diluted share a year ago. Excluding third-quarter restructuring costs, net income for the third quarter of fiscal 2015 was $8.4 million or $0.71 per diluted share on a non-GAAP basis.

On a year-to-date basis, for the nine months ended June 30, 2015, revenues increased 3% to $14.6 million or $14.6 million to $500 million compared to the same period a year ago. Gross profit as a percentage of revenues was 15.7% compared to 20.6% in the first nine months of fiscal 2014.

This reduction in gross profit is primarily due to higher production costs and the inefficiencies from our production efforts to meet our customer schedules resulting from our increased volume, as well as the margin on the overall mix of projects.

Selling, general and administrative expenses decreased by $8.5 million or 12.6% to $58.3 million compared to the first nine months of fiscal 2014, primarily due to a reduction in performance-based compensation, personal and administrative costs, as well as reduced bad debt and sales commission expenses and overall cost savings measures.

In the nine months ended June 30, 2015, we incurred approximately $2.7 million in restructuring and separation costs. We recorded a provision for income taxes of $10.6 million for the nine months ended June 30, 2015, compared to the provision of $10.2 million for the same period a year ago.

Included in the current year provision is a Canadian valuation allowance, which was partially offset by the release of an R&D tax credit reserve as discussed during our second-quarter earnings call.

For the nine months ended June 30, 2015, we reported net income from continuing operations of $3.1 million or $0.26 per diluted share compared to net income of $17.2 million or $1.43 per diluted share a year ago.

Excluding the tax charges and R&D credits that occurred in the second quarter, as well as our restructuring and separation costs during the year, our net income for the first nine months of fiscal 2015 was $10.2 million or $0.85 per diluted share on a non-GAAP basis.

New orders for the third quarter were $193 million, resulting in a backlog of $518 million compared to a backlog of $499 million at the end of the prior quarter and $477 million a year ago. At June 30, 2015, we had cash of $63 million compared to $103 million at September 30, 2014.

For the nine months of fiscal 2015, cash generated from marketing activities totaled $18.6 million. Investments in property, plant and equipment was $34 million. Through June 30, we have repurchased 363,000 shares of common stock for a total of $12.5 million at an average price of $34.50 per share.

The amount remaining under the Company’s current share repurchase authorization is $12.5 million, which is scheduled to expire on December 31, 2013. Also, during fiscal 2015, we paid dividends totaling $9.3 million. Long-term debt, including current maturities, totaled $2.8 million.

Looking ahead, based on our backlog and current business conditions, we expect our full-year fiscal 2015 revenues to range between $635 million and $665 million, revised from our previous guidance of $625 million and $675 million.

And we expect adjusted earnings to range between $1.25 and $1.40 per share compared to our previous guidance of $1.25 to $1.50 per diluted share. Our earnings guidance excludes tax adjustments and restructuring and separation charges. Year to date, we recorded $2.2 million in restructuring and separation costs net of tax.

At this point, Mike and I will be happy to answer your questions..

[Operator Instructions] Our first question comes from line of John Franzreb from Sidoti. Please go ahead with your question..

Good morning guys..

Good morning John..

Mike, can you just bring us up to speed on the Canadian facility? Do you think all the operational issues are behind you now that you are maybe at a more temperate production rate? Any more clarity there would be helpful..

Sure. So just as a reminder, we had a lot of projects that had margin pressures under them earlier. All those projects have now shipped. So during this summer period, we have a very light loading but a very healthy backlog. That backlog begins to hit the manufacturing floor late this quarter and into the first quarter.

We feel much better about those projects. There’s been a lot of actions taken to make sure all the experience we’ve had up to this point and our demonstrated capabilities and all that’s properly costed into the projects. There is a lot of activities going on to do cost out actions on those.

There will be a much more balanced loading once we get these projects ramped up than we had in the past. Not quite as spiky as before. So I think we got those operational issues behind us. We feel very good about where we are. We have to demonstrate it. We have to prove it, but I feel a lot better about the project activity that’s coming along..

That’s great news. And you mentioned the backlog. Could you talk a little bit about the Company’s backlog overall? Is there pricing pressure? What’s the margin profile look like on that backlog? Any kind of clarity there would be helpful also..

There is a bit of a margin pressure in the backlog kind of driven by two main factors. One is the mix, so we’re seeing a little stronger utility activity as the oil and gas piece softens. So typically the utility market is lower margins in the oil and gas market. So we have a market mix issue taking place in the backlog.

And on the oil and gas side, we are seeing some price pressures due to the slowing spending levels out there, just projects getting more competitive..

Okay.

And lastly on the SG&A line, the $5 billion drop year over year, can you just talk about how we should be thinking about that line going forward? What’s the reset maybe we should be using?.

Yes, John, this is Milburn. Yes, we did have some favorable benefit in the quarter from a couple of things that we don’t anticipate continuing. So the reset really for the fourth quarter right now is more in line with where we were in the second quarter.

So, as a percentage of revenues on lower revenues, that would put a little pressure on the SG&A percentage..

Okay. Thank you very much. I’ll get back into queue..

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

Hey, good morning..

Hey, Brent, good morning..

You mentioned Canada. You’re coming into next year with a stronger backlog.

Is it your expectation that things are going to kind of trail off there as well as you move through kind of fiscal 2016?.

Yes, and it’s really – it depends on the timing of this backlog. So it’s loaded up pretty heavily in the first, second quarter. We’ll get some of that out. But one of these projects actually extends into 2017.

So I think you’ll see heavier loading first and second quarter, trailing off a little bit more in the third, and then a little bit more in the fourth..

Okay. Great. And then I guess just looking at this last quarter.

If you pull out these large projects you referenced in the orders is, I guess, the more typical size work and the kind of book and burn work off for you, or have you seen it there yet?.

Yes, we had a really good utility quarter this quarter that helps shore some of that up. So if you take the two large projects out, it would have been – the large projects are still a win, but if you did ignore those, it would have been down slightly over the second quarter.

Oil and gas down a little bit more, but we have a really good utility quarter..

Okay. Okay. And then just one more and kind of back to the previous question in terms of the mix and kind of pricing environment.

Based on what you guys are kind of seeing today and booking today, can you still think you can get back to kind of that 20% gross margin, or is that going to be tough to get to at this point?.

That’s certainly the goal for mid-next year. It is certainly our goal..

Great. Thanks, guys. Good luck..

[Operator Instructions] Our next question comes from line of John Tanwanteng from CJS Securities. Please proceed with your question..

Hi guys, thanks for taking my questions.

Hello, Jon.

Just heading into the September quarter, do you expect the gross margins to sequentially be higher as you kind of ramp back up in Canada and you are out of that low margin business now?.

No, Jon, this is Milburn. We are actually anticipating lower revenues in the fourth quarter. Third quarter we pulled in a lot of work to meet our customers’ scheduling requirements.

And so on that lower revenue, we are actually anticipating the margins to be slightly lower in the fourth quarter from where they came in at the third quarter with the lower revenues, which will offset some of the operational efficiencies we talked about as well..

Okay. Got it. And then, Mike, just on the June quarter, I thought this quarter was actually supposed to be more on the challenging side, especially given the break in Canada production. What was the delta between your expectations and what actually happened? I mean, you had some pull in utility.

Was that all of it, or was there actually –?.

Actually here in the Houston operations, our operational improvements, we got a lot more revenue pulled in and recognized this quarter than we anticipated. So we did pull some out of the fourth into the third. That’s why we’ve held basically the revenue guidance for the year because the second half still looks like it did.

We just had some favorable timing things at the end of the quarter. In this lumpy project business, there’s always projects being pushed out and always some being pulled in. I can tell you there is probably more pressure now to pull in. So we are – if we can, we would continue to try to accelerate work wherever we can..

Got it.

And just on the overall backlog in orders you’ve seen trending through August, it may be early, but what sort of revenue does that support through fiscal 2016?.

downstream, refining, pipeline. But we kind of view the oil and gas market as being down 25% to 30% on spending levels. And it’s a significant part of what we do, but it’s only two-thirds of what we do. The other third of our markets, utility and industrial, we see as flat to modest growth.

So, if you kind of take a blended average of our markets, we’re looking at markets down probably in the 15% to 20% range next year. Given that healthy backlog we are going to go into the year with, we don’t anticipate revenues to be down that much, but maybe more in the 15% to 20% range. Those are general market outlooks.

We’re in the detailed work right now then to overlay our project funnel on that. A couple of large LNG projects that could still move forward. There’s some Middle East activity that’s very interesting and is there going to be any developing upside on the downstream side because of low oil and gas prices.

So we’re not done with all that, but maybe those framing comments will give you a little bit of color at least how we are thinking about next year..

Yes, that is very helpful.

I’m sorry, you said down 15% to 20% in the markets that you’re in, and then is that applicable to your revenues?.

Revenues won’t be down that much because of the healthy backlog we’re going to go in. I don’t want to put a specific number on it, but I would say it’s not as down as much as the market. Maybe revenues are down more in that 10% to 15% range..

Got you. Got you.

And then just any plans for the cash other than buybacks?.

Not at this point. We are continuing to put smaller capital investments into our facilities, particularly anything that drives cost savings, productivity or efficiency gains. But we’ll anticipate continuing the dividend piece, and we’ll make a judgment call on the share buyback once our current program expires..

Okay. Great. What was the ending cash in the quarter? I just didn’t see it..

$63 million..

Got you. Thank you very much, guys..

Thanks, Jon..

Our next question comes from the line of John Franzreb from Sidoti. Please proceed with your question..

Mike, you just touched on it.

The restructuring actions you are undertaking, can you just provide a little bit of color as to what you’re doing and what you’re anticipating cost savings are from the actions and also the timeline for realizing them?.

Sure. There was probably two big pieces to it. The biggest piece is employment reductions, which are predominantly behind us. We approach those on a location by location business by business basis depending on order rates in backlog.

So we believe we’ve got most of that action behind us, and we’ll continue to monitor market conditions going into next year. The other one is now that we’ve completed the expansion in Canada, we had a leased facility that had some of our teams off-site.

And now that we have that space and a slower market in Canada, we’ve consolidated all that back into our new facility. So we had a lease write-off in Canada..

So all those actions, you know, are already hitting the P&L right now?.

Some of them were. Most of the employment actions took place in the second quarter. The lease impact was really late in the third quarter. On an annualized basis, there’s a couple of million bucks worth of savings there..

Perfect.

And what should we be thinking about a tax rate going into the fourth quarter?.

Depending on the mix across the countries and the international mix, somewhere in the low 40%s is where we’re looking at..

Okay. Perfect. Thank you very much, guys..

Thank you, John..

Our next question comes from the line of Tom Spiro from Spiro Capital. Please proceed with your question..

Tom Spiro, Spiro Capital. Good morning..

Good morning, Tom..

Good morning, Tom..

Mike, first a question about how you folks are going to be thinking about employment levels. In this period of great uncertainty, you’re going to work through the backlog.

Is your thought at this point to try to maintain the staffing levels for the business that you hope will recur a year or two or three down the road on the theory that these are now trained and experienced folks and you don’t want to lose them, or are you going to have to tighten the belt more than that and let some of these experienced folks go?.

We believe in most locations, we’ve throttled that, and that’s exactly the point, Tom. It is a balance of getting the right costs and right employment levels for how long we think this extended recovery will take place. It is done on a business by business, location by location basis. We have not laid any percent reductions or anything across Company.

We’re judging that based on how are order rates are holding up, how does the backlog look and what’s the loading of that backlog..

I see. And secondly, the question of acquisitions, again it’s a time of uncertainty and difficulty within the oil and gas sector. On one hand, it may encourage you to kind of pull back from acquisitions and hunker down. Or on the other hand, you might say some of the potential targets out there may be available at better prices.

The dollar is strong versus the euro. I was kind of curious what your posture with respect to acquisitions will be over the next year or two..

Yes, we’ve got a good funnel we continue to look at. Frankly, with the operational challenges we’ve had, we probably haven’t put a lot of attention to that right now. But we are continuing to build a funnel of ideas and opportunities and vet those. I think if the right thing came along, we are not adverse to that at all..

Okay. And lastly, the pipeline business up in Canada, I think there was an oil spill up there a couple or three months ago, and I was curious whether that still might cause some of the pipeline work in our backlog to be delayed or might diminish the opportunities up there that we had hoped to seize..

Yes, we saw that, too, and we’ve heard nothing either on existing projects or proposed projects whether that impacts timing at all. We’ve heard no impact from that yet..

Okay. There are no further questions at this time. Ms.

Smith, would you like to make any further remarks?.

This is Mike Lucas. I’ll just wrap it up by thanking everyone. Again, very much appreciate your interest, and thank you for joining us, and we’ll talk to you at the end of the fiscal year. Goodbye, everyone..

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