Ken Dennard - IR, Dennard-Lascar Tom Powell - Chairman, President and CEO Brett Cope - Chief Operating Officer Don Madison - Chief Financial Officer.

John Franzreb - Sidoti & Company Roresa Mojo - D.A. Davidson Tom Spiro - Spiro Capital.

Greetings and welcome to the Powell Industries Second 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.

It is now my pleasure to introduce your host, Ken Dennard, Dennard-Lascar. Please go ahead, sir..

Thanks, Kevin. And good morning, everyone. We appreciate you joining us for Powell Industries’ conference call today to review fiscal year 2016 second quarter results. We’d also like to welcome our internet participants listening to the call that’s been simulcast live over the web.

Before I turn the call over to management, I have the usual details to cover. If you didn’t receive an email of the news release issued yesterday afternoon and would like one, please call our offices at Dennard-Lascar and we will get one to you. That number is 713-529-6600.

Also, if you want to be on the email distribution list for Powell releases, please relay that information to us. There will be a replay of today’s call, it will be available via webcast by going to the Company’s website, and that’s powellind.com or a recorded replay will be available by telephone, and that’s until May 11th.

The 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, May 4, 2016 and therefore, you are advised that time-sensitive information may no longer be accurate at of the time of any replay listening or transcript reading.

As you know, this conference call includes certain statements, including statements related to the Company’s expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements.

These risks and uncertainties include but are not limited to competition and the 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. Now, with me this morning are Tom Powell, Chairman, President and Chief Executive Officer; Brett Cope, Chief Operating Officer; and Don Madison, Chief Financial Officer. I’d now like to turn the call over to Tom..

Thank you, Ken. Good morning everyone. Thank you for joining us today for a review of our 2016 second quarter results. I’ll make a few opening comments and then I’ll turn the call over to Brett and then Don for more commentary, before we take your questions.

While the overall market conditions continue to be down, I’m particularly pleased for the operational results from our Canadian operations. And across the Company, we’re seeing results from our focus on solid project execution and cost reduction initiatives.

Powell has historically found the ways to meet our customer obligations even during difficult business conditions. This time around, it’s no different from past cycles, and I appreciate each and every Powell employee for their efforts to do what is right for our customers and the Company.

Powell prides itself on customer service, supporting existing and new customer relationships, and prepare itself to bring our expertise to project opportunities when and where they are needed. Growth in oil and gas capital spending will return and when it does, Powell will be in a solid position to perform.

We have a strong balance sheet, great products, modern facilities, and the most talented and motivated employees in the business. I’ll now turn the call over to Brett to discuss some of our operational improvement initiatives and some additional color on our end markets.

Brett?.

Sure. Thank you, Tom and thanks to everyone participating on today’s call. Overall, our markets remain difficult, yet we are working diligently to manage our businesses through this challenging period. By making some tough decisions, we’ll be able to lower costs to correspond with reduced project activity and subsequently lower revenues.

We have cut expenses throughout the Company’s operations over the past several quarters while we continue to further streamline our operations and increase productivity.

As far as cost management, we have taken proactive steps to adjust our workforce to our anticipated production requirements and our most recent actions have been to lower fixed costs by reducing the corporate office headcount by about 15%.

We are also reviewing our products and where possible reducing the manufacturing costs through designed improvements and are leveraging our supply chain. We continue to look closely at our product designs for additional efficiency improvements through the factory.

Finally, we’re starting to look for cost improvements that do not detract from our value proposition of offering differentiated solutions to the market. Over the past five or ten years, our customer needs have changed. We need to ensure that our offers match with the market values. As Tom mentioned, Canada was a highlight during the second quarter.

We posted better than expected results from our Canadian operations due to the material productivity savings from improved project execution, operational efficiency initiatives and cost reduction activities. The UK also performed well in the second quarter.

In the U.S., the opportunity funnel was narrowing as competition continues to intensify during these soft market conditions. While there are projects available, they tend to be smaller in nature and we’re seeing increased price pressure from new bookings. We expect this trend to continue in 2017.

Strategically, we are targeting future growth in markets where we have not had a strong presence historically. These include geographic opportunities to extend the strength of our electrical solutions and to capitalize on Powell’s full breadth of service offerings.

We are also targeting existing markets where we already have a strong reputation and see opportunities to expand our products, integrating solutions and services. Don will provide you with an update on our outlook, but it is important to note that the operational and efficiency obstacles we faced in prior quarters are largely behind us.

Going forward, we’ll continue to focus on navigating the Company through this lower order environment. The duration of these market conditions is impossible to predict, but we expect to experience continued challenges in our markets for the balance of the ‘16 and in 2017. Now, let me turn the call over to Don..

Thank you, Brett. Revenues decreased by 11% or $18 million to $152 million in the second quarter compared to the second quarter of fiscal ‘15. Domestic revenues decreased by $14 million to $107 million and international revenues decreased by $4 million to $46 million due to reduced number of large projects in our backlog.

Gross profit as a percentage of revenues increased to 20% in the second quarter of fiscal ‘16 compared to 14% in the second quarter of fiscal ‘15 due to improvements in our international operations, primarily driven by improved projection execution and reduced cost in our Canadian operations.

Selling, general and administrative expenses decreased by $400,000 to $19 million in the second quarter, primarily due to cost reduction efforts. SG&A expenses as a percent of revenue increased 13% during the second quarter compared to 11% in the second quarter a year ago, primarily due to lower revenues.

For the second quarter of fiscal ‘16, we incurred approximately $3.3 [ph] million or $2.3 million net of income taxes in restructuring and separation costs. In the second quarter of fiscal ‘16, we reported income of $5.6 million or $0.49 per diluted share.

Excluding second quarter restructuring and separation cost, net income for the second quarter of fiscal ‘16 was $7.9 million or $0.69 per diluted share. For six months ended March 31, 2016, revenues decreased 6% or $21 million to $302 million compared to the same period a year ago.

Gross profit as a percentage of revenues was 18% compared to 14% in the first six months of fiscal ‘15 due to improvements in our international operations. Compared to the first six months of fiscal ‘15, selling generation and administrative expenses decreased by $1.9 million to $38 million.

SG&A expenses as a percentage of revenues remained flat at approximately 13% for both six months periods.

In the six months ended March 31, 2016, we incurred approximately $7.1 million or $4.8 million net of income taxes in separation cost as we continue to restructure our senior management team and align our salaried and hourly workforce with anticipated production requirements.

We recorded an income tax benefit of 300,000 for the first six months of fiscal ‘16. Effective tax rate was a 7% benefit, which is favorably impacted by the mix of income from our Canadian operations and the utilization of net operating loss carry-forwards in Canada.

Additionally, the effective tax rate was favorably impacted by $800,000 due to the retroactive reinstatement of the R&D tax credit. For first six months, we reported net income $5.2 million or $0.45 per diluted share. Excluding restructuring and separation charges, income for first half fiscal ‘16 was $9.9 million or $0.86 per diluted share.

New orders received during the second quarter were $117 million, resulting in a backlog of $357 million, compared to a backlog of $391 million at the end of the prior quarter and $499 million a year ago. At March 31, 2016, we had cash $57 million compared to $44 million at the beginning of the fiscal year.

During the first six months, the fiscal ‘16, cash provided by operating activities totaled $25 million and investments in property, plant and equipment totaled approximately $1 million. Also during the same period, we paid dividends totaling $5.9 million and repurchased $3.7 million of Company stock to complete our share repurchase program.

Long-term debt including current securities totaled $2.4 million. Looking ahead, based on our backlog and current business conditions, we expect full year fiscal ‘16 revenues to range between $520 million and $560 million, unchanged from our previous guidance.

And we expect adjusted earnings to range between $0.80 and $1.10 per share compared to our previous guidance of $0.65 to $1.05 per diluted share. Our earnings guidance, excludes restructuring and separation charges. We recorded $4.8 million in restructuring and separation costs net of tax in the first six months of fiscal ‘16.

And we continue to evaluate additional restructuring that maybe needed to align our operating costs with market conditions. In closing, Powell has a strong financial position. At the end of our second quarter, our working capital totaled $175 million of which $57 million worth cash.

Over the next six months, we expect our cash balance to continue to increase as we complete many other projects currently in process. We have virtually no debt and have nearly $60 million available under existing credit agreements.

We are well-positioned to manage the business through the depressed capital spending cycle, especially in our core oil and gas market. At this point, we will be happy to answer your questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Jon Tanwanteng from CJS. Please proceed with your question. .

Good morning. This is actually Robert [ph] filling in for Jon.

Can you talk about the recent uptick in energy prices and if that’s affected your customer discussions in a positive way? Or said another way, do you still expect the same amount of pressure on orders and pricing versus where you were two to three months ago?.

Let me give a high level overview of that and then Brett, maybe, you want to add a little bit of color on it. But when you’re looking at our market, keep in mind that we lag all the industry, we come in at the back side of cycle.

So, even projects that may go forward and extensions in the near-term, you’re probably looking another year down the road before we’ll start seeing activity and then another 3 to 4 quarters after that before you’re starting to generate any significant amount of revenue.

So, when you’re looking at the short-term impact of price levels of the oil, clearly it’s a positive indicator. But as far as the impact in our markets, it’s going to take some time and will take even more time before you start seeing any benefit to Powell.

Brett?.

Yes. No, we haven’t seen any change in the activity as far as -- being with customers and coating activity, I think the market is still looking to squeeze as much as it can out of the supply chain to bring the profitability of these projects in line. .

Thank you.

We’ve heard that utilities around the cost of capital spend increase, have you seen that at all and is that built into your guidance?.

Utility distribution markets, we have seen improvement over the last couple of years. From an activity standpoint that continues to be stronger in the last couple of quarters and we saw in the prior years. But it’s still relatively small projects, still relatively small percentage of our order intake..

I appreciate it.

And lastly from me, can you go into a little more detail regarding the Canadian performance? What went well there and what do you expect or rather do you expect the strength to continue?.

Clearly, from an execution standpoint, we expect the strength to continue.

That’s clearly we’ve talked about the activities that we’ve been -- that’s been ongoing in Canada, the efforts that we’ve taken, the transition in our backlog of roughly two quarters ago and the efforts that we’ve been putting into to ensuring that the execution of those -- that work went affected that the change in this past quarter is the magnitude of the benefit.

Clearly, the direction was anticipated, the magnitude was pleasant surprise, they have worked hard, and they performed well this past quarter. Looking forward, we expect the level of performance from an order execution standpoint to continue, but they will be challenged with volume.

The market in Canada is probably the most depressed of the oil and gas markets that we serve and their backlogs the balance for the year is definitely changing. [Ph].

Our next question today is coming from John Franzreb from Sidoti & Company. Please proceed with your question..

Just going back to the order discussion. Last two quarters, the order take has been north of $100 million but some of the commentary I am just hearing suggest that we should be braced for something little lesser than that.

Is that the case what you’re hearing out there or do you think we stabilized north of that $100 million threshold?.

I don’t want to necessarily comment on the $100 million but I think you will continue to see some lumpiness in our orders. With smaller orders on average, the lumpiness in not as dramatic as it maybe has been in prior years. I think there is still going to be some erratic behavior from quarter-to-quarter.

I don’t believe anyone would want to go out and say that we will have strengthening of orders but at the same in point I don’t think on an average that we’re expecting to see a radical change downwards on average. Bu, any one quarter, it could be up or down..

In regards to the restructuring actions you’ve taken, how much of it is sustainable restructuring actions that won’t require maybe people want to market returns, and can you put in context how much has been taken out that is sustainable? And if that’s reset your breakeven for the Company on a quarterly basis?.

Good question, John, that how much of the cost that we’ve taken out of the business will we have to put back into the business once order volume and revenues increase. There will be a re-hiring effort, there will be a production level employees and supervision, engineers that will have to come back into the business.

I’d like to guess at this point in time, more will have to comeback than will be permanently saved. But, we would attempt to try to take this opportunity as we restructure and we lean out our processes to be able to retain a portion of that even in stronger market conditions.

But, I don’t have a specific number to say that would be permanently retained. Again a lot of that is going to be where the mix of business is across the Company..

Thank you. [Operator Instructions] Our next question is coming from Roresa Mojo from D.A. Davidson. Please proceed with your question..

Really, I just have one question.

What are you guys seeing in power generation, how competitive is it, and I guess what could order of magnitude be?.

Just 24 months ago, generation was a lot stronger. We are seeing some activity increase in the last couple of quarters on the coating side. Competition is definitely, price pressure is definitely increasing. As Don mentioned and we mentioned on our previous calls, on the distribution side, we saw an uptick two to three quarters ago.

Those projects tend to be smaller and they’re not as big as generation. But we are seeing regionally in the states some markets that are stronger than others on generation. We’re doing some work in the UK and we also had some success in Middle East..

Thank you. Your next question is coming from Tom Spiro from Spiro Capital. Please proceed with your question..

Brett, I believe you may have mentioned or perhaps it is Tom, in your opening commentary that over the last five or ten years in your view the customer needs have changed, and I’m not quite sure what you are referring to.

I thought you might elaborate the data on what has changed and what does that mean for Powell?.

Tom, good question. I’m going to try to give you an example of what we’re trying to get out there without too many details because there’s some things there that we’re still getting our hands around.

But as an example, 10, 12 years ago on the documentation side, everyone of our projects requires documentation and the engineering companies which are 99% of the time involved in the chain from the end user to us, used to take care of that requirement. Over the last 10, 12 years, that’s been pushed down to supplier.

So, we’re looking at best practices and how to address that, making sure that what we’re doing positioning and offering to our clients in terms of what we can offer is uniform and best levers throughout the Company. So, we’re trying to in our operational views make sure we’re positioning that right and executing it right.

So, as an example, that’s what we’re doing. We’re looking at our products and integrated solutions with teams and trying to tackle with the same sort of passion..

Also, I took away from Brett, it might have been your commentary that, that the Company is going to be intensifying its focus on overseas expansion.

Did I come away with the right read on what you’re saying there?.

Well, to clarify, there were a couple of markets geographically that we have taken steps into. We talked on previous calls about the utility market and also [indiscernible] that’s an initiative that is going well, and we continue to be actively learning and seeing what we can do to accelerate the rate of success there.

We did take some steps in the Middle East, -- in terms of core oil and gas markets, it’s still a strong area, but it’s also extremely competitive. Don, made a comment here a minute ago about onshore Canada being tough, while the market is still spinning in Middle East, but everybody is playing there. So, it is a tough market.

And we did take some steps in the Far East, but I’d say that’s also a market that has decreased activity, some of the elections are really delaying things there and the funding just looks to be not as strong as it was say a year ago..

Lastly, and this is a really a sort of judgmental kind of a question but with current levels of demand there within the industry how, much excess capacity would you folks guess the industry has today? And I know it’s just a guess..

I assume you’re speaking of the electrical equipment industry?.

Yes, that’s right..

Those that are focused on the hot specifying projects related business, I would suspect that they’re feeling same as we are significant pressures, they are more on the commercial construction, I think [ph] here in Houston should be doing well..

Thank you. Our next question today is a follow-up from John Franzreb from Sidoti & Company. Please proceed with your question..

I guess I might have missed this early, if you said it. Can you just talk about the quarter that just happened, the second quarter, the revenue profile was not better than I expected.

Was it the timing of jobs? You mentioned that Canada outperformed; was it isolated to Canada, can you just elaborate a little bit why the quarter was so good?.

From a revenue perspective, there was some [technical difficulty ] revenues that they come in a little bit, I mean, you’re talking a huge amount, but I would some of the revenues that we previously anticipated would occur in the April, early May period, did get pulled in, and we were able to support the customers’ request in those areas.

So, but I would view that as less than 10% of our total revenues. When you’re looking at the bottom line impact, clearly it was primarily influenced by the cost improvement and efficiency benefits that received from the Canadian business..

Is Canada profitable now?.

Canada was profitable in the second quarter. It actually exceeded our average and was able to pull up the gross profit as opposed to the business that had to be supported..

And regarding the pricing pressures that you mentioned in the early commentary, how much of that impact in the incoming order book? Are you looking at lower gross margin profile and new orders today than you were say six months ago?.

I think the trend has been consistent and it is downward. It is depending on the particular project, continues to shows up from a competition standpoint, which market it’s in.

I don’t want to say that everything is falling off the cliff, but I would say the majority of the projects that we go into ultimately end up with price pressures, either from the engineering front or from competitive levels from the beginning.

There is a lot of rebidding going on where firms are attempting to try to find the bottom as well as justify going forward with their spending. And when you rebid projects, typically that pushes the price levels down.

Do you have comments?.

No, I agree. The degree of rebidding on projects before they release full funding has definitely increased and that creates lots of opportunities for new entrants to the market and just amplify some of the pressures we see. Again, I think Don is right not across the board but we’re seeing an uptick..

And regarding your R&D efforts, how much at this point is dedicated to reengineering current product line to may be maximize efficiencies as far as manufacturing processes or how much is it dedicated to new product development and new market opportunities and new applications?.

We are focusing on both, whether you’re looking at the most recent quarter’s spend, it would be more in improved manufacturability, improved features and improved cost of product that we historically manufactured, but we have invested in and we do have resources that are 100% dedicated to looking and developing new products, particularly in some of the areas we’ve talked about in the past from the close monitoring standpoint..

Thank you. This concludes our question-and-answer session. I’d like to turn the call back over to management for any final comments..

We appreciate your questions today. Thank you for joining us and we look forward to speaking with your again next quarter..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..