Natalie Hairston - IR Brett Cope - CEO Don Madison - CFO.

John Franzreb - Sidoti & Company Jon Tanwanteng - CJS Securities Jon Braatz - Kansas City Capital.

Greetings and welcome to the Powell Industries First Quarter 2018 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, Natalie Hairston, Dennard-Lascar Investor Relations. Thank you. You may begin..

Thank you and good morning, everyone. We appreciate you joining us today for Powell Industries' conference call to review fiscal year 2018 first quarter results. With me on the call are Brett Cope, Powell's Chief Executive Officer and Don Madison, Chief Financial Officer. 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 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 e-mail distribution for Powell releases, please relay that information to us.

There will be a replay of today's call available via webcast by going to the company's website powellind.com or a recorded replay will be available until February 14. 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, February 7, 2018 and therefore, you are advised that any time sensitive information may no longer be accurate at the time of replay listening or transcript reading.

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 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 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 fiscal 2018 first quarter 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.

I will start by saying that very little has changed over the past 60 days or so since we shared our 2017 results and discussed the challenges facing our operational and financial outlook for 2018. As we have reported over the last few quarters, inquiry activity across a variety of end markets has been and continues to be steady across the company.

We continue to see mild strength in the utility distribution and commercial sectors, along with a slight pickup in smaller infrastructure upgrade projects in the downstream oil and gas refineries.

Across the geographies where we are active, we’re experiencing varied levels of activity with more strength in the US and Middle East and less so in Canada and offshore. And overall, the size of the projects in today's environment tend to be smaller in scope and scale when compared to levels prior to the downturn.

We are however seeing increased front end engineering and design activity. While it is doubtful that this increase in planning work will receive funding decisions that would benefit our fiscal 2018, it does raise sentiment for improved project activity.

Operationally, across all of our divisions, we are very confident in our ability to deliver for customers across a range of project size and varied complexities.

As we move forward in 2018, we are focused on the following; continuing efforts building on progress made in 2017 to further optimize our investment in processes and systems that yield incremental improvements in our ability to execute and control our costs, review and make prudent investments in plant and equipment that enhance productivity, quality and safety and take steps that will help us build momentum across the business such as in our aftermarket services, where we have taken steps to position Powell for growth by increasing training, relocating and adding new service centers in select geographic markets.

Despite current market conditions, growth in spending within our core oil and gas markets will return. Powell remains a financially healthy company and we believe that the challenges we have faced in the past and the efforts put forth in response to those challenges will position us well as market demand improves.

We have the most talented employees in the business motivated and committed to our customers and Powell’s future success. With that, I'll turn the call over to Don..

Thank you, Brett. Revenues decreased by 18% or $20 million to $90 million in the first quarter of fiscal ’18 compared to the first quarter of fiscal ’17. Compared to a year ago, domestic revenues decreased by $26 million to $60 million and international revenues increased by $5 million to $30 million.

These changes are the result of the mix in our backlog and emergency response work that we completed following Hurricane Harvey. Gross profit, as a percentage of revenues, decreased to 12% in the first quarter compared to 14% a year ago. Gross profit decreased by $4 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 increased by 3% or $500,000 to $16 million.

SG&A, as a percentage of revenues, increased to 18% due to lower revenues and a slight increase in costs over the prior year. The company's first quarter results include the impact of the recently enacted tax reform. The law includes significant changes to the US corporate income tax system, including federal corporate rate reductions from 35% to 21%.

In addition to the rate reduction, the first quarter was also impacted by $450,000 one-time non-cash charge to earnings, resulting from a re-measurement that reduced the future value of deferred tax asset. For fiscal ’18, we expect our effective tax rate will be approximately 25%. In future years, the new legislation will benefit Powell.

However, in our first quarter, the legislation reduced net income by approximately $1.2 million or $0.11 per share. In the first quarter of fiscal ’18, we recorded a loss of $5.7 million or $0.49 per share compared to a loss of $300,000 or $0.03 per share in the first quarter a year ago.

New orders placed during the first quarter were $100 million, resulting in a backlog of $260 million compared to a backlog of $250 million at the end of the fourth quarter and $271 million a year ago. In the first quarter, cash used by operating activities was $14 million. Investments in property, plant and equipment totaled $2 million.

Excluding restricted cash at the end of our first quarter, we had cash and short term investments of $73 million compared to $95 million at September 30, 2017. Long term debt, including current maturities, was $2 million.

Looking forward, we continue to expect to report a net loss for fiscal ’18, however if new customer orders materialize as expected, we anticipate our second half performance will show improvement over the first half. At this point, we'll be happy to answer your questions..

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

I’d like to start a little bit on the backlog.

Could you talk a little bit about the pricing of the jobs in the backlog, landscape and how that's playing out right now?.

So looking back a year ago, John, kind of second quarter of ’17, in the third quarter, price pressures bottomed.

It was kind of -- in the third quarter, fourth quarter and into our first quarter, we started reporting back that we were off the bottom on pricing and some of the market price pressures that we really saw hopefully bottomed out a year ago, have improved and into our Q1 here of ’18, have maintained what we saw in Q4.

So that's the momentum that we’ve seen in the last 12 months..

But John just to clarify, while we believe we've turned the corner on the market price levels and we're seeing improvements, we're still nowhere back to where we were prior to the downturn, but the momentum is positive..

Okay.

And staying with the backlog and order book, how should we think about higher commodity costs and the impact of that going forward on the orders that you’ve already spoken?.

So these are -- a lot of the projects are smaller. We do a lot of the forward look on commodity planning, pretty good history of covering those costs.

When projects extend beyond six months to a year, we do work with our customers and the engineering companies to put in inflation factors depending on when we're actually buying the material through the design process. And so if you look at copper and aluminum and some of those materials that we do watch, we do address those in the contract phase.

If we don't think the project cycle will be shorter than six months. .

The projects we currently have in the backlog are very short cycle. That is the challenge that we have when you’re looking at the current fiscal year. To a certain degree, many of our factories are living hand to mouth with what they book this week moving in the engineering next week.

So the cycle times that we're working on these small projects are very quick, so the exposure is limited just from that perspective as well..

Our next question comes from the line of Jon Tanwanteng from CJS Securities..

The first one is just orders down sequentially.

Can we read anything into that, given the commentary on how you see positive momentum in order and quoting activity? Is it just more of a timing thing or is there any other story beyond that?.

More timing. They are smaller so we are seeing this kind of 1 million to 3 million type base business, still the lack of the more significant larger orders, more the planning phase, but in terms of what we're seeing in the short term just timing in Q1..

The holiday period I'm sure impacted the time..

And then just the sequential downtick in your cash position, just give us a little more color on that and how that’s with the working capital needs?.

It's the exact same issues that we had about a $25 million spike in accounts receivable at the end of the quarter. That spiked cleared early in January. It was just a timing issue with the calendar year..

[Operator Instructions] Our next question comes from the line of [indiscernible] from Pinnacle Capital Management..

A quick question on the impact of the tax legislation. I think you said it was 1.2 million.

Did that go through the P&L in the first quarter and if so where was it?.

Basically, it did go through the P&L in the first quarter. It was in a reduced benefit in our tax provision. Part of it being the 21% versus the previous 35%. The balance of it was the one-time adjustment for the deferred tax assets.

But yes, our provisions benefit that we had in the first quarter on the pre-reform legislation, we would have had a $1.2 million larger benefit..

Okay. So it was on the tax line that appears. Okay. And on the SG&A, I'm just a little confused as to why the absolute amount went up. I know, it was only by 3%, but your sales were down 20 million.

Why exactly did that go up?.

It clearly was just a timing issue between what was flowing through our expenses in the current quarter versus a year ago. When you're looking at our outlook for the current year, I see the SG&A being in line with last year.

We do have some inflationary pressures and the larger question is going to be what impact are selling costs, variable expenses related to order growth and backlog growth might impact the company in the second half of the year..

And I guess kind of a bigger scope question, GE sold, as you know, their utilities equipment business to ABB back in September.

I was just wondering if there's any intelligence that you have regards possible sales of divisions or where are they with that particular property as far as you know?.

John, certainly, we’re aware of it. We're tracking it like a lot of folks out there. To the best of our knowledge, it's not closed yet. Until it's closed, we won't see any communications from ABB. Certainly, I haven't had any with GE. We're just treating it as business as usual. GE is one of our good customers right now..

So that transaction is not closed?.

No..

What's the estimated timing at this point?.

Well, if you read the press releases from ABB, I think I might be a little dated here.

I think their CEO said, they thought mid-calendar year this year?.

Mid-2018. Okay..

Our next question comes from Jon Tanwanteng from CJS Securities..

Just two quick follow-ups. Any comments on the capital spending plan announced by Exxon and if you think that peers are going to follow suit any time soon and what that means for you, either ’19 or beyond, number one. And number two, maybe similar commentary on the IPO of Saudi Aramco and if you have exposure to this market, then how much..

So, first on the Exxon, yes, we're aware of -- very good customer of Powell, where some of their spending plans and some of the feed work we referred to we've been involved with. So we're tracking those, what the plans are and how we can best participate if they fund that.

So a lot of that is still in the planning work relative to what we do, some of that money goes to exploration of land and other things are doing for some of these jobs, but a lot of them aren’t fully funded. On Aramco, Middle East -- Saudi has been a good market for Powell, both in the NC and the IC arena.

A lot of installed base there, again a market and we track very closely with what Aramco is doing, especially some of the in country content requirements that they want to drive for 2021, they call it IKTVA.

So we are also very engaged with Aramco, trying to understand how Powell can best participate in the future with where they want to go with that planning..

Don, do you have any historical numbers on how much money -- how much revenue you generated and released either historically or at the current time?.

I do not have it at my fingertips. We have reported the regional revenues in our 10-K. We could pull it out. It is probably low double digits on average, but that is -- could be a data number as well..

Our next question comes from the line of Jon Braatz from Kansas City Capital..

What do you think it might take for the offshore oil and gas business that you’ve participated in the past, what do you think it might take to get that going again and do you see any early efforts in that area from the oil and gas companies..

So if you look at where we, it’s still not a great market for Powell. We are off the bottom in that market as well. There are a couple of jobs last year that we took. There was one down South America, one over in Europe that we participated in, but these are pretty small.

To speculate on the future, Jon, I think the deepwater still has a lot of interest. It just has so much capital to develop.

It's going to take a couple of years for either big reserves to sort of dry up an existing production platform, something significant to happen in the shale side, the seesaw between what the Saudis are doing in the US shale market.

So playing economists for a second, something there has to give or some other big event maybe that we can't foresee in AsiaPac, China ramps up consumption and starts sucking up a lot of capacity.

Something's got to give and in the near term, I just don't -- I don't see enough momentum that at least from what you read, the oil and gas guys, while they're still doing some planning for some potential deepwater in the Gulf, it's not back to anywhere close to where it was three, four years ago..

Let's say the conditions did improve would require new exploration first or are there areas out there that would be ready to go if the time was right and you’d start producing or have some production platforms built?.

Well, like you, I try to read as much as I can about what they're doing. I think there are areas that are ready to go. There's been some rethinking on do they do top sides development or they do subsea type acts to existing platforms. So they're looking at their investment strategies.

We talked about last quarter, so it was the Mad Dad 2 project with BP, they took an entirely different tack. They went completely overseas. A lot of the US based top site guys didn't really get to participate well in that job. Anxious to see how that one executes. They're building that entire one over in AsiaPac and they’ll float it back over here.

So that’s going to be one to watch to see if that somehow might change the future design for that market here domestically too. So, we are on the project. It is an anci-driven project electrically and we’ll have to see. I don’t know. It’s still a lot of capital built on the top side and deepwater..

[Operator Instructions] Our next question comes from [indiscernible] from Pinnacle Capital Management..

Just a follow up on your prepared remarks about capital spending.

Where is the CapEx budget for this year and what are the major projects that it's targeted at?.

John, this year, our CapEx budget is in the $3 million to $5 million range. What we saw in the first quarter was the closeout and carryover of some monies that were committed to last year that just slipped into this quarter.

When you're looking at things that we’re looking in the planning stage and are currently under evaluation, most of them are small projects in the areas of equipment that is end of life and no longer holding quality issues, but basically it is productivity and quality and then there's a couple of small safety issues that we're going to try to address..

There are no further questions at this time. I would now like to turn the floor back over to Brett Cope, CEO for closing comments..

Thank you, Dana. As I noted in my earlier remarks, even though it has been a short window from our last reporting period, the teams across Powell have already hit the ground running in 2018. Our employees are fully engaged in the business and in the success of our customers.

While business conditions still have a ways to go before returning to pre-downturn levels, they have improved from a year ago and Powell’s can do spirit is as strong as ever. Hurricane Harvey devastated several of our customers. It did provide an opportunity across Powell to demonstrate that we are more than ready for the toughest challenges.

Our employees are the best in the business. No one can match Powell’s ability to solve the most difficult electrical distribution need with the same depth of complex engineering and manufacturing capabilities under one roof.

Combine this with a strategic and focused development effort for both new and improved product innovations and an aftermarket services team with a relentless commitment to helping our customers maximize the return on their investments, we believe these strengths and competitive advantages position Powell extremely well for the future.

Thank you for your continued support and we'll look forward to speaking with everyone next quarter..

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day..