Natalie Hairston - IR, Dennard-Lascar Brett Cope - President & CEO Don Madison - EVP, CFO & CAO.

John Franzreb - Sidoti & Company Pete Lucas - CJS Securities John Dasher - Pinnacle.

Greetings and welcome to the Powell Industries Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now pleasure to introduce your host, Natalie Hairston, Dennard-Lascar Investor Relations. Thank you, Ms. Hairston, you may begin..

Thanks operator and good morning, everyone. We appreciate you joining us today for Powell Industries' conference call to review its fiscal year 2017 fourth quarter results. We would also like to welcome our internet participants listening to the call that is being webcast. Before I turn the call over to management, I have the usual details to cover.

If you did not receive an e-mail of the news release issued yesterday afternoon and would like to get one, please call our offices at Dennard-Lascar Investor Relations and we will get one to you; that number is 713-529-6600. Also, if you want to be on the e-mail distribution release for Powell 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 powellind.com or a replay will be available by telephone until December 13. 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, December 6, 2017 and therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

The conference call includes certain statements relating to the Company's expectations of its future operating results that may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements may 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 more information, please refer to the Company's filings with the Securities and Exchange Commission. With me on the call are Brett Cope, Powell's Chief Executive Officer; and Don Madison, Chief Financial Officer. Now I will turn the call over to Brett.

Brett?.

Thank you, Natalie, and good morning everyone. Thank you for joining us today to review our 2017 fourth quarter and year end results. I will make a few comments, and then I will turn the call over to Don for more financial commentary before we take your questions.

2017 presented Powell with a mix of both operational accomplishments and performance challenges as across many of our key customer markets. The spirit of Powell is demonstrated immediately after the landfall Hurricane Harvey. Several of our U.S.

and Canada facilities teamed up to assist key customers whose critical Gulf Coast operations had been paralyzed by flood damaged equipment. Powell capacity sharing and supply chain capabilities were highlighted during this crisis which showcased the strength of our frontend engineering, manufacturing and electrical service teams.

Notably, we were able to turnaround certain projects in maximum days which otherwise would have taken weeks or months. This collaboration was across the Board, our employees, customers and suppliers, full resources to get these devastated facilities back up and running quickly without jeopardizing safety.

As a result of Hurricane Harvey, we lost 8 to 10 days of production at our Houston factories. This negatively impacted our results for the quarter. However, we are very proud of the response by our employees mobilized to help those, whose homes were damaged, both through donations and hands-on rebuilding efforts.

We are also proud of our employee's response to our customers. Powell came through these storms as a team; we were able to generate goodwill with our employees, as well as goodwill with our customers and suppliers. I would like to personally thank each and every employee for their courageous efforts during Harvey and our collective recovery.

This crisis epitomized our can-do spirit of who we are; a world-class producer that embraces complexity through our custom engineered solutions. After 70 years plus in business, it's in our nature to make it right for our customers and employees. Overall, 2017 proved to be a challenging year.

Price and volume were definite headwinds for Powell resulting in drastically reduced backlog and working through uneven production loads across most of our facilities.

Despite slower than anticipated market activity, we awarded a respectable number of projects but their scope and scale was and continues to be significantly smaller than in the past couple of years. We did however deliver on several successful internal initiatives during 2017.

Continuing the efforts that we started in 2016 we further strengthened the utilization and optimization of our business systems, improved scheduling and manufacturing efficiencies, and improved collaboration between our functional teams.

Our confidence to deliver the most complex of projects on-time and on-budget for our customers has never been higher. In keeping with our commitment to innovation, we developed and launched several new strategic products in 2017. With the goal of looking for ways to boost operational efficiency, reduced costs and further improved cycle times.

Powell released its first wave of intelligent sensor based modeling [ph] products this year which give our customers real-time data on the health and status of their electrical systems. We launched both new and redesigned products for our medium and low voltage MCC and IEC product lines.

Benefits of these newer designs include reductions in equipment footprint, reduced weight and designs that support better efficiency and manufacturing and increase electrical and safety performance for our customers and their facilities. And finally, we aggressively attacked new energy code requirements being adopted in North America.

These new requirements significantly increased the energy efficiency and will require new designs for pre-fabricated electrical substations in the U.S. and Canada. Now, let's look ahead to 2018. As we entered the first quarter, I'm pleased to report that trends in customer activity have modestly improved when compared to six to nine months ago.

The competitive pricing pressures we experienced throughout 2017 have somewhat subsided. A stronger economy and more stable upward trending energy prices are bringing new planning and development work for the custom electrical distribution systems that are ideal for Powell.

We see customer momentum slowly building for the funding of higher quality jobs ranging upto $3 million, largely product [ph] upgrades that have been postponed over the past two years.

In addition to improved market conditions, we have started to drive product quality by leveraging the confidence in our execution and improved cycle times, as well as a slight shift toward more selective opportunities during the bidding process which will improve the quality of our backlog overall.

If current customer activity continues to gradually increase throughout fiscal 2018, we expect to just show our year-over-year order improvement from 2017 which should position Powell for an improved fiscal 2018.

Powell remains a financially healthy company, and relative to our weaker backlog our teams have continued to perform well and deliver solid project execution.

We will with measured optimism accept any tailwinds to help us along the way and although modest, our receipt volume activity and quality indicators suggest we may have finally seen the turning point towards a more stable world market environment in fiscal 2018. With that, I will turn the call over to Don.

Don?.

Thank you, Brett. Revenues decreased by $35 million to $95 million in the fourth quarter of fiscal '17 compared to the fourth quarter fiscal '16. Compared to last year's fourth quarter domestic revenues decreased by $36 million to $63 million, and international revenues decreased by $1 million to $32 million.

The decreases are the results of the decline in our project backlog as we complete existing projects and continue to see lower demand from our customers in our core oil, gas and petrochemical markets.

Gross profit as a percentage of revenues decreased to 11% in the fourth quarter of fiscal '17 compared there to 20% in the fourth quarter of fiscal '16. Gross profit decreased by $15 million to $11 million. This decline in gross profit was primarily due to lower revenues, market price pressures and the underutilization of our manufacturing facilities.

Selling, general and administrative expenses decreased by 12% or $2 million to $15 million in the fourth quarter of fiscal '17. However, SG&A expenses, as a percentage of revenues, increased to 16% due to lower revenues. In the current quarter, we recorded a benefit for income taxes of $1 million.

In the fourth quarter of fiscal '17, we recorded a loss of $5.1 million or $0.45 per share compared to the income of $5.5 million or $0.48 per share in the fourth quarter of fiscal '16. New orders placed in the fourth quarter of fiscal '17 totaled $112 million, compared to $91 million last quarter and $111 million a year ago.

Order backlog at year end totaled $250 million compared to a backlog of $233 million at the end of the third quarter and $291 million at the end of last year's fourth quarter. For the 12 months ended September 30, 2017, revenues decreased 30% or $169 million to $396 million compared to fiscal '16.

We entered fiscal '17 with a weak order backlog and to press market conditions and continue to experience lower demand from our core oil and gas, petrochemical customers. Gross profit, as a percentage of revenue, decreased to 13% compared to 19% in the fiscal '16.

Gross profit was negatively impacted by reduced production volumes resulting in under absorption of our manufacturing facility cost and competitive price pressures. Gross profit was negatively impacted by the increased volume in municipal transit projects which typically yields lower margins due to market competition.

In addition, we experienced execution challenges on certain municipal transit projects. Selling, general and administrative expenses decreased 18% or $13 million to $62 million in fiscal '17 compared to fiscal '16, primarily due to cost reduction efforts that we took in fiscal '16 in response to our adverse market outlook.

SG&A as a percentage of revenues increased to 16% in fiscal '17 compared to 13% in fiscal '16, primarily due to lower revenues. In fiscal '17, we incurred $1.3 million in separation and restructuring costs as we continue to reduce our overall cost structure to better align our cost with anticipated and production requirements.

In fiscal '16, we incurred approximately $8.4 million of separation costs due to the restructuring of our senior management team and reductions in our workforce. We recorded a income tax benefit of $7.4 million in fiscal '17 compared to the income tax provision of $2.3 million in fiscal '16.

Effective tax rate for fiscal '17 was 44% compared to an effective tax rate of 13% for fiscal '16. The effective tax rates for both fiscal '17 and '16 were favorably impacted by the lower tax rate in the UK, as well as the utilization of net operating loss carry forwards in Canada that were fully reserved with evaluation miles [ph].

In fiscal '17, we recorded a net loss of $9.5 million or $0.83 per share compared to net income of $15.5 million or $1.36 per share in fiscal '16. Reduction in income compared to the prior year was primarily due to depressed markets conditions and competitive price pressures. For fiscal '17, cash provided from operating activities totaled $37 million.

Investments in property, plant and equipment was $3.6 million. At September 30, 2017, we had cash, short-term investment and restricted cash of $120 million compared to $98 million a year ago. Long-term debt, including current maturities, was $2 million.

As Brett mentioned, we enter our fiscal '18 with moderate signs of market improvement when compared to six months ago in terms of price pressure, project quality and order volume.

While it is unclear whether these positive trends are sustainable, if current customer activity continues to gradually increase throughout fiscal '18, we will end the year with a stronger backlog which will position Powell for an improved fiscal '19.

However, by entering fiscal '18 with a weak backlog both in terms of volume and quality, we will need to continue manage production gaps in many of our facilities. And as a result, we expect to report a net loss for fiscal '18.

Despite the challenges we face from an earnings perspective during fiscal '18, we will continue to focus on managing our cost structure and maintaining our strong balance sheet. At this point, we will be happy to answer your questions..

[Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti & Company. Please proceed with your question..

Don, sorry, I got in a little bit late so I might have missed this.

Can you quantify the impact Hurricane Harvey had on fourth quarter results?.

So John, we talked about it hitting at about two weeks' worth of production at the three Houston based facilities, all three facilities were for hit.

The facilities themselves came through the storm pretty well, we did have a number of employees with some pretty dramatic stories and we've worked pretty hard together as a team to get everybody back to work and then our supply base.

And then we added some facilities and customers that were hit, so we did a good job recovering revenue, I look at some of the incoming needs against some of the -- all the moving and shaking puts and takes and things that were going on and trying to recover. It was in excess of $1 million and -- but Powell did come up with an exact number..

Moving onto your outlook for 2018, I guess I'm kind of looking directionally what we should expect.

Are we at the low point of the revenue stream and should we think about half of [Technical Difficulty] or is the depth and duration maybe deeper than I was expecting?.

John, I'm sorry, you cut out.

Can you repeat your question?.

Sure.

Looking into fiscal 2018, I want to -- I'm curious we're at the bottom of the revenue profile and also think about the loss profile for the company be -- will be worse -- more pronounced in the first half or closer to breakeven or above in the second half?.

So, it's hard to say we're at the bottom of the revenue side.

If you recall last couple of quarters, one of the big headwinds in '17 were shifts in our loadings and that really -- Q3, if I look at Q3 last year, really had a lot of customers come in and move production schedules on us and our ability to respond in a really tough market was extremely hard, it's always as hard in the project business.

So that -- I think still continues today, maybe slightly to a lesser degree as we end Q4, it's still a concern and the overall quality of the backlog as we talked about the overall volume and things that were just really tough, competitive price still tough now but some of that still in that backlog and if things move around or shift, it will impact us going forward.

Market wise, as we hit the end of Q4 and kind of start at Q1, base business definitely improved. Off the bottom pricing slightly better than it was six to nine months ago, so that bodes well but the key is to hopefully maintain that.

My concern in the near-term is just still a lack of larger projects; so base business is up off the bottom, we're seeing some good health there but still not a lot of $10 million plus type opportunities although as I commented, we are seeing some things in the engineering houses that could bode well for late this year or into '19 if they become funded..

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

Can you talk about the relationship with GE and how the sale of its industrial group will impact the next year or so?.

The actual impacts are unknown.

GE is a significant customer to Powell, since the acquisition of the medium voltage line some 10 plus years ago; I think today we've got a very solid relationship with GE and they are a big channel for us in the commercial market, not so much in the heavy industrials and oil and gas core market, balance [ph] -- but what the actual impact will be, what is carried over, how are things inspect; it's something we are watching closely and as ABB takes control of that unit, we've got an ongoing relationship with them as well in other business, so we'll see come mid-year when they get through all of their due diligence..

Can you also quantify maybe a little bit more the degree of margin improvement that you are seeing for new orders going into backlog and discuss about how long it will be before you work through some of the lower margins projects out of the current backlog?.

I guess my answer on the pricing is knowing -- look, folks that might be listening in, it's off the bottom and it's more than a point. I'll let Don add some comments.

From a cycle standpoint, it is on the frontend only, I wouldn't expect to see the blend in the backlog for another four or five months before we see how it comes out of the backside but my expectation is it will come out as good or better operationally..

Pete, I guess the only thing I would add to that is, the backlog that we currently have in place today will substantially be completed by the end of our second quarter.

The work that we're booking today is what we're dependent upon as far as the third and the fourth quarters, and so this kind of goes back to John's question as well, we do expect to see first -- second half over first half improvement but it is all based on what's yet to come relatively to orders..

And last one for me, I just want to sure I heard it, right; you talked a little bit about larger projects and hoping to get funding there and maybe see something in '19; is that kind of how we should think about larger projects? Given the current price of oil, are you seeing any benefit from that?.

Again, like you guys, we're looking for the correlation and the matching as well.

It does seem in the last quarter from my own visits around some of the engineering houses around the world; there is funded feed activity, that process where they are hiring the engineering houses to design the projects, they go through a lot of cost reductions from where they get funded.

So some of these projects are being designed; initially it seems very large, I guess I would believe they are going to get little down depending on what's to oil and what everybody believes but it's a first refreshing sign to see some of these houses hiring engineers and doing more than what ifs and actually scoping out some jobs that could bode very well if oil does support those fundamentals in the future..

Our next question comes from the line of John Dasher with Pinnacle. Please proceed with your question..

I just had a couple of quick questions. What are the plans for the cash, I think you said it was $120 million. I think that's or Euro plus in cash.

I know you pay a dividend which is bigger than sustainable for the foreseeable future but are there any specific plans for the cash or what are thinking about in terms of the use of the cash, be it buys backs or potential acquisitions or anything along those lines..

Well, at this point in time -- John this is Don Madison. From a cash perspective, we do need to be cautious from the standpoint that as the market rebounds and our revenues begin to rebound; we will need to have some reserves to fund on working capital.

In a project business, a lot of our cash over the last year came from reductions in working capital which will need to be replaced once we see the volume improvements.

From the other -- but from beyond that we are looking is to how we can improve the business long-term from a growth and strategic perspective, we have taken evaluations of different opportunities but we are being selective from an acquisition standpoint to make sure that what we do is a strategic value, the compliments what we do and where we want to go across the world.

From a share repurchase standpoint, yes, we did won a couple of years ago; it has been discussed from time to time with our Board but at this point in time there are no plans for share repurchase..

And my follow-up, in terms of the acquisitions obviously you're suffering from the single downturn; I would guess some of your competitors are as well. It sounds like you're fairly active on the acquisition front, actually evaluating properties..

Put it this way that we've had discussions to say that we're relatively active; it all depends on a reference point..

John, this is Brett.

So, you know, I've just completed my first year in the role of CEO and certainly those discussions for me with the Board had been -- had been had, we continue to have them, we're involving the management team and as well as some others in the company to talk about what geographic and strategic areas we've been talking about for the last couple of years, makes sense, and talking about what we should do in '18, '19, '20 going forward.

So there are active discussions but that's kind of all the further we've got into this point..

I mean, I'm not exaggerating that the money is burning a hole in your pocket but you know, you don't want to look back in two or three years when the cycle has turned and you say there is -- well, we should have brought that company or this company and really it will -- has generated some growth because of those acquisitions..

We couldn't agree more with you.

So far the process by looking at where do we really think as Don said, strategically enhances the technology side where we think we really play nice, the project side geographically, where should we expand our footprint, you know, both important future avenues for Powell that we'll talk about and we'll see how the next couple of quarters go but as Don said, we're also focused in the short-term, I think she heard that we can -- this is truly turnaround in the market because you sustain on the space business, we stay focused on the operation, I think that's strongly a knee reviewer in '18..

[Operator Instructions] There are no other questions in the queue. I'd like to hand the call back over to Brett Cope, for closing comments..

Thank you, Doug. During 2017 the teams across Powell worked hard to find tuner operations to prepare for the next level of market expansion. And we have to oversell that company that is supported by a streamline infrastructure and by our workforce of highly skilled, energetic and empowered people.

While we will continue to monitor our operating costs, we plan to continue to invest in our workforce, our facilities, and our research and development programs, and the target opportunities that couldn't be as Paul's geographic footprint or enhance our strategic capabilities.

Rest assured, Palace Foundation is solid and we look forward to a future of not -- just returning to our previous levels performance but exceeding it. Thank you again for your interest in our company. And we look forward to speaking with everyone next quarter..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participating. You may disconnect your lines this time and have a wonderful day..