Natalie Hairston - Dennard Lascar, IR Brett Cope - CEO Don Madison - CFO.

Pete Lucas - CJS Securities John Deysher - Pinnacle Capital Management.

Greetings and welcome to the Powell Industries Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston with Dennard Lascar Investor Relations. Thank you, Ms. Hairston. You may begin..

Thank you, Operator, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year 2018 third quarter results. With me on the call today 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 didn't receive an e-mail and news release issued yesterday, you would like one, please call our offices at Dennard-Lascar we will get back to you. The numbers is 713-529-6600.

Also, if you’d like to be on 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 available via webcast by going to the company's website powellind.com or a telephonic replay will be available until August 16.

The information on how to access these replay features is provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, August 08, 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.

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 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'll turn the call over the Brett.

Brett?.

Thank you, Natalie, and good morning, everyone. 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. Powell's fiscal third quarter results are highlighted by improvements in both operational performance and market activity across our domestic operations.

Our improved revenue and gross margins are a result of increasing volumes as well as improvements in operating efficiencies. During the quarter, we continued to make steady progress towards completing lower margin projects that were booked under more extreme competitive pressures throughout last year and into early 2018.

We experienced continued strength in these bookings. Market strength again is primarily from the U.S. Notable in the quarter was increased activity from downstream and midstream markets.

However, as we reported over the last several quarters, new orders continue to be driven largely by an overall increase volume of small brownfield and maintenance projects. We are experiencing modest activity for larger orders with only a handful of awards in our third quarter over $5 million and only one project over $10 million across the Company.

We continue to be encouraged by improved bidding activity across a variety of end markets. We've also seen the planning for several larger projects continue to move towards key milestones. We continue to be prudent in today's market environment.

We are unafraid of pushback or even turn down projects with unreasonable commercial liability or contracts with complicated and risky payment terms.

While these situations are less prominent in a recovering market, we intend to maintain our focus on mitigating burdensome operational and financial risks, and we'll continue to exercise a balanced approach to risk management. Internationally our operations are executing well considering they continue to experience challenging market conditions.

There are some underpinning pockets of activity emerging, including East Canada, and the Middle East. We expect that these markets will remain sluggish over the next few quarters but see potential improvement in mid to late 2019. We continued to add to our U.S.

workforce during the third quarter, selectively hiring certain positions with increases to both fixed and variable costs to address the increasing activity in production demands at specific locations.

However, while necessary but still difficult, we took the action to make small reductions in the balance of our workforce during the quarter, sizing the teams to current market conditions. We remain diligent in managing our collaborative structure and are becoming more adept at shifting our work between North American facilities as needed.

We did begin to notice a moderate uptick in material prices from our suppliers during the quarter, particularly as it related to the proposed Section 232 tariffs on aluminum and steel.

While we haven't had difficulty to date in securing the components we need, we have seen the uncertainty around the proposed tariffs and anticipation of regulatory action become a backdrop for higher prices. As a result, we have experienced a wide range of increases across our metal commodities ranging from 10% to 40% over the last six months.

We expect further volatility until the full impact and duration of the tariffs become clear. Looking ahead, our focus continues to be on incrementally scaling up our labor force and advance or increase business activity.

We expect to see larger scale engineering designs and cost estimating work continue and are tracking several final investment decisions by our customers.

Our strategic investments in research and development, prudent investments in manufacturing equipment, and our ability to leverage our systems and processes continue to enhance Powell's suite of capabilities. Our focus on safety, service, and product quality have and will continue to serve us well. I could not be more proud of our people.

They are the reason we have successfully navigated these last few difficult quarters and are now more than ever demonstrating our core values that will help lead Powell to success in the future. With that, I'll turn the call over to Don..

Thank you, Brett. Revenues increased 42% or $36 million to $122 million in the third quarter of fiscal '18 compared to the third quarter of fiscal '17. Sequentially, revenues increased in both the second and third quarters of fiscal '18 by 13% and 19% respectively.

Revenue growth is from increased domestic activity, domestic revenues increased by 66% or $36 million to $91 million. International revenues were $31 million unchanged from a year. Gross profit increased by $9 million to $18 million in the third quarter. Gross profit as a percentage of revenues increased to 15% compared to 11% a year ago.

Gross profit and margins are improving due to the increased volumes and better utilization of our manufacturing facilities. Selling, general and administrative expenses as a percentage of revenues decreased to 13% from 17% last year due to higher revenues.

SG&A expenses increased $1 million over last year to $16 million primarily due to the timing of variable performance-based compensation. We recorded a provision for income taxes of $388,000 in the third quarter.

At third quarter fiscal 2018 we recorded income of $301,000 or $0.03 per share compared to a loss of $3.2 million or $0.28 per share in the third quarter of fiscal 2017.

New orders in the third quarter of fiscal 2018 totaled $139 million compared to $91 million a year ago primarily to the increased demand from our customers in core oil gas and petrochemical markets. The order backlog at the end of the third quarter was $316 million compared to $300 million at the end of the second quarter and $233 million a year ago.

For the nine months ended June 30, 2018 revenues increased $13 million to $314 million compared to the same period a year ago primarily due to improving market conditions and increase order activity. Gross profit for the first nine months of fiscal 2018 increased by 4% to $41 million.

Gross profit as a percentage of revenues was 13% for both nine months periods. Selling, general and administrative expenses increased to $48 million compared to $46 million in the first nine months of 2017. SG&A expenses as a percentage of revenues was 15% unchanged from a year ago.

We recorded an income tax benefit of $2.4 million for the first nine months of fiscal 2018. For the nine months ended June 30, 2018 we reported a net loss of $9 million or $0.76 per share.

For the nine months ended June 30, 2018 cash used of operating activities was $26 million primarily due to the increased working capital requirements needed to support factory activity and revenues. Investments in property, plant and equipment totaled $4 million.

At June 30, we had cash and short-term investments of $55 million compared to $95 million at September 30, 2017. Long-term debt including current maturities was $1.6 million. Looking forward, we anticipate our fourth quarter earnings results to show continued improvement over the third quarter.

However, we continue to expect to report a net loss for fiscal 2018. At this point we’ll be happy to answer your questions..

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

It's Pete Lucas for John.

You touched on the bid in the prepared remarks, but could you comment a little - expand a little bit on the order trends heading into the September quarter with its kind of focusing on how margins have improved off the bottom that you saw in the last few quarters?.

So, yes on the comments the most recent quarter pleased with the order performance, but again characterized by overall smaller. So, not anchored by larger projects that we've seen in the past and while we're still tracking them. Heading into the next couple of quarters, it’s all about timing. We are tracking some larger projects.

I still think there's a little bit time to fully materialize as we track through final funding by the oil and gas companies if they get to the return they want they pull the trigger. So, still a little bit of uncertainty but really characterized by timing.

And then can you give us any update on the sale of the GE industrial unit and how you see that impacting your business?.

Well it happens, they got the approval and went through with it and we seen on the emails change over from GE to ABB. Nothing in the short-term, I don't have any - day to day I haven’t seen any change in the way we've been working with. The historical GE team has now transitioned and we’ll continue support them like we have in the past..

And last one from me, any update on the CFO search?.

We got a partner that's helping us progress through the search and I think it’s moving along..

[Operator Instructions] Our next question comes from the line of John Deysher with Pinnacle Capital Management. Please proceed with your questions..

I was just curious if you are starting to see the impact of tariffs on steel and aluminum and if so how you're positioning your business to deal with those?.

John, good morning, its Brett. Yes we are feeling some effects we've been watching it closely now since they were announced and watching the supply chain react to it and certainly trying to do what we can through supply chain and through our pricing the pass-through what the market will bear.

In my prepared comments we see a wide range of effect on the different models that we buy but it’s important remember that every project we do is custom. So the range of metals that we buy can vary significantly.

For instances you take like carbon steel, structural steel that we use to build the base of our onshore design, it comes in a lot heavier when you get a offshore design. It really ranges depending on the complexity, the weight of the equipment going in can affect how much will use.

The blast requirements so it’s a scalable variable that we have to work through every project. So it is hitting us and so far we've been I think relatively successful in trying to mitigate it, but it is also a headwind that will have some effect although minimal at this point on the bottom line..

So if I hear you correctly so far you've been able to pass through the price increases to the customers because of the custom nature of the work?.

Basically to-date we thought again our prices are fixed based on the contract you took in the past, but what we've been doing to-date is looking at all sort of supply channels because not all supply channels are going up. We do not buy direct from the mill of from the norm.

We buy through distribution and so we are having to do that much more effort to shop to distribution to mitigate the increases. A lot of the increases are anticipation of their cost increase as opposed to their actual cost increase to date..

So, final question.

So, you anticipate being able to do that going forward or do you anticipate margins perhaps feeling the impact in the coming months?.

In the current situation, we are factoring that into our pricing decisions. But again, keep in mind that it's a competitive market and the market will set the final price. But we are having some success passing this forward and future contracts - contracts that we're currently bidding to date.

And we will continue to mitigate it through our supply channels, but to say that it'll be 100% successful completely mitigating it is unlikely. There was likely to be some impact, the degree of the impact is hard to predict at this point in time, but I would say it was probably going to be in the low single digits overall..

And that will happen probably in fiscal 2019 I would guess?.

That would be my anticipation as well..

Mr. Cope, there are no further questions at this time. I'd like to turn the call back over to you for any closing remarks..

Thank you, Operator. Over the last several quarters, we have realized that improvements in our backlog and we have also demonstrated discipline in our cost structure through a very challenging period and are emerging stronger and more confident in our ability to tackle the future as our markets improve.

As we close out this fiscal year, we will continue to execute on our strategy while investing prudently in our workforce, our facilities and our research and development programs to position Powell for the future. Powell's financial position remains strong. Thank you to our customers, employees, and our supplier partners.

We look forward to an exciting future for the Company. We appreciate your continued interest in Powell, and we look forward to speaking with everyone next quarter..

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