Greetings and welcome to Powell Industries' Fiscal 2019 First Quarter Results 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 Harrison with Dennard Lascar Investor Relations. Thank you. 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 first quarter results. With me on the call are Brett Cope, Powell's CEO; and Mike Metcalf, Powell's CFO. Before I turn the call over to management, I have the usual details to cover.

There will be a replay of today's call, and it will be available via webcast by going to the Company's website, powellind.com, or a telephonic replay will be available until February 13. The information on how to access these replay features was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, February 6, 2019, and therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any 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'll turn the call over to Powell's CEO, Brett Cope.

Brett?.

Thank you, Natalie, and good morning, everyone. Thank you for joining us today to review our fiscal 2019 first quarter results. I will make a few comments, and then I will turn the call over to Mike for more financial commentary before we take your questions.

In many respects, not much has changed over the past 60 days or so since we shared our 2018 results.

As anticipated, during our fourth quarter earnings call, Powell's order activity showed a marked improvement with $172 million in new bookings in the first quarter of 2019, up from $78 million in the fourth quarter of 2018, an increase of 120% sequentially and 72% year-over-year.

Within the quarter, we did see improved international activity for new bookings from our core markets. Our international markets have generally lagged the U.S. recovery that we experienced through most of our 2018.

Our first quarter order performance helped to strengthen our backlog to $322 million, an increase of 24%, both year-over-year and sequentially, continuing an upward trend that meant modest growth across most of our end markets. We are also beginning to see modest growth across more of the geographies in which we compete.

Most notably, our core oil, gas and petrochemical customers continued to plan for larger projects. We experienced a slight increase in the size of several awards made to Powell during our first quarter. We received several projects valued at $10 million during the first quarter, including one project over $20 million.

Based on current production schedules, most of these new awards will begin to convert to revenue later this year, but will not be completed until the first half of our fiscal 2020.

While the last few years have been extremely challenging, our strategy to optimize the efficiency of our operational teams, including our efforts to train and improve upon the execution of our processes, systems and tools has proven to be successful.

Likewise, remaining committed research and development initiatives has helped Powell's competitive position. We have proactively and successfully developed new and improved products to meet or exceed required electrical specifications.

And we have tackled new and updated energy and building code requirements, improving our designs and our engineering processes to ensure that our power control rooms are second to none. We are pleased that many of our newer investments that were launched during the downturn are now considered to be the products of choice by our customers.

As previously discussed, we are beginning to benefit from a slow but steady market improvement. However, our manufacturing facilities still face some short-term challenges around factory loading and utilization.

In closing, while our near-term visibility remains challenging, we continue to be encouraged by the favorable demand environment, recent project award momentum and the continued strength in the level of client engagement and inquiry activity, particularly from our core oil and gas and petrochemical markets.

And as a sign of better things to come, our first quarter orders in backlog growth should bode well for a stronger second half of fiscal 2019, and provides momentum for improved performance into 2020.

We continue to be in a strong financial position, and our balance sheet provides us the flexibility and confidence to support continued growth in our backlog.

I would like to thank our employees who spent considerable time and effort optimizing our base business, targeting quality project opportunities and delivering the best that Powell has to offer our customers. With that, I'll turn the call over to Mike to provide more detail around our financial results before we take your questions..

Thank you, Brett. In the first quarter of fiscal year 2019, we reported net revenues of $109 million, a $19 million increase, which was 21% higher than the first quarter of 2018. Compared to one-year-ago, domestic revenues increased by $30 million to $90 million. This upward trend in U.S. revenues reflects the continued market recovery.

We experienced year-over-year strengthening across most sectors in our business, with the industrial sector showing significant improvement with approximately 30% revenue increase over the prior-year period that was primarily driven by oil and gas and petrochemical end market demand.

International revenues generated from both our foreign operations as well as export shipments from our domestic locations decreased by $11 million versus the first quarter of 2018 to $19 million as we continue to experience softness in the international sector.

Gross profit increased by $4 million from the first quarter of 2018 to $15 million in the first quarter of 2019. Gross profit as a percentage of revenues increased 170 basis points to 13% in the first quarter compared to a year-ago.

This year-over-year improvement in gross profit was driven in large part by higher volumes as well as favorable project mix and operating leverage across our domestic manufacturing footprint. Selling, general and administrative expenses were $16 million in the current quarter, flat to a year ago.

However, SG&A as a percentage of revenues decreased by 350 basis points to 15% of revenue versus the same period last year. This SG&A position is a reflection of our strong cost management focus across the business, while maintaining the core capabilities that are important to our customers as the volume continues to grow.

In the first quarter of fiscal 2019, we recorded a net loss of $2.7 million or $0.23 per share compared to a loss of $5.7 million or $0.49 per share in the first quarter of fiscal 2018.

New orders placed during the first quarter of fiscal 2019 were the highest in over three years, recording $172 million into the order book compared to $100 million in the first quarter of fiscal 2018, resulting in a current quarter backlog of $322 million.

This compares to a backlog of $261 million at the end of the fourth quarter and $260 million a year-ago. Our book-to-bill ratio finished the first quarter of 2019 at 1.6 compared to 1.1 in the first quarter of last year.

In the first quarter of fiscal 2019, cash generated by operating activities was $9 million, an improvement of $23 million compared to operating cash flow in the first quarter of fiscal 2018. This favorable year-over-year improvement was driven primarily by the cash flow generated from our accounts receivables position.

Excluding restricted cash at the end of our first quarter, we had cash and short-term investments of $62 million, which was $12.6 million higher than our fiscal 2018 year-end position. Long-term debt, including current maturities, was $1.2 million.

Looking forward, we anticipate some variability across the fiscal 2019 quarterly landscape, which will be challenged by the timing of project execution in new order bookings.

With current market activities strengthening, we expect an improvement in our second half results over the first half as our end markets continue to grow, driving new customer orders, increased volume, favorable plant utilization and other operational efficiencies.

As we previously communicated, we anticipate that earnings will improve to breakeven or slightly better in fiscal 2019. At this point, we'll be happy to answer your questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti. Please proceed with your questions..

Good morning, Brett, and welcome to Board Mike..

Thank you..

Hey, John..

Brett, I just want to start with the opportunity pipeline as you see it today.

You've realized a lot of the large jobs that you expected in the first quarter that were pushed out from the fourth quarter, what's the remaining pipeline look like as far as large jobs that you can realize in this fiscal year?.

John, going back to the last couple of quarters, the U.S. activity started a little over a year ago improving on the inquiry side, and all that's in the numbers. So it was really a U.S. story in 2018 and a lot base business. And we still see the growth in the larger orders still being very slow and modest over the next couple of quarters.

We did have some upside in Q1, some large orders, which is what we pointed out in the prepared comments. Comment on the international market, it generally lagged last year, and although we could see the inquiry activity picking up last couple of quarters, it's now starting to the point kind of where the U.S. was a year ago.

So we're seeing Canada and the UK factories in the markets they support starting to catch up, if you will..

So I guess in context, how many large projects did you have in fiscal 2018? And what would you think would be a good hit ratio in fiscal 2019?.

Remember, we talked a couple of calls – a couple of quarters then a question came up, large in the downturn had a new definition. Historically, going back before the downturn, large for Powell could be $30 million to $50 million. Over the last couple of years, we really saw the magnitude of the larger jobs dropped to $10 million to $15 million.

So last year, a handful. All of fiscal 2018, I think we pointed out a couple of quarters where we had one or two that kind of got over that $10 million mark. Q1 did have more than we experienced. And then in the previous couple of run rate in quarters, I think there's still a few more out – looking out in the next year or so.

And there's still some bigger jobs that we're going to compete on the Kitimat LNG, but it's – bigger the job right now draws a big crowd..

Okay. Fair enough. And Mike, you mentioned in your comments, I guess, some concerns about project variability.

Could you just elaborate on what your concerns are there? Is this an issue of deliveries? Is this an issue of capacity utilization? Just what were you referencing in that?.

Yes, no, John. What I was referring to is, and I know you're familiar with the business, the nature of the business, the cycles of the business, as we're winning these orders today, a lot of those won't be convertible until early next year. You'll see some revenue this year, but they'll be – a lot of it will fall into next year.

So it's really dependent on the order timing and the execution in the shop and in engineering and the timing that, that landscape provides the business..

Okay, guys. I’ll get back in the queue. Thanks for taking my questions..

Thanks, John..

Our next question comes from the line of Jon Tanwanteng with CJS. Please proceed with your questions..

Good morning, gentlemen, and looking good on the orders, and congrats on the bigger one.

Just to be clear, are either of those large orders, the $10 million and $20 million one, hitting in this fiscal year at all? Or are those for next year?.

As Mike kind of commented Jon, some of that will hit the engineering, some of the early revenue milestones, but the larger the job, the bulk of it will start to ship more into Q1, Q2 of 2020 on delivery.

Overall, timing, as we kind of got in 2017 and 2018, timing of the award and timing of the execution is something we kind of – it's still an issue, still something we're working with. And so trying to maximize utilization in the short-term, while still trying to understand the needs of our clients for on-site dates.

Still pushing to the right a little bit..

Got it. That’s helpful. And can you comment on the margins on those larger orders? I know historically, they've been better for you.

But you also mentioned that as these large orders come to the market, a lot more people are competing for them, just any insight on how those margins are relative to your historical or your expectations? Or any other color would be helpful?.

Well, I would answer the question like this. When the market is improving and kind of more like we'd like it to be, and the way it was before 2014. And oil and gas job that has an urgency to it.

Typically, the engineering packages might not be as defined, so there is more working together with the client over the course of the project, which creates some opportunity to – for us to optimize the design and improve upon it, which helps both parties, the customer and Powell.

In the downturn, the commercial markets and what we might – or even a generation job, typically as not as much variability in that job, so it doesn't usually benefit us as well. They're, quite frankly, a little simpler in the design, and so there's just less engineering requirement in terms of our model with the custom approach on the engineering..

And so this was more the latter?.

So the jobs that we're referring to are more in our core. There was a one in the commercial side in Q1, but the comments around the core are some larger jobs. So we're seeing a lot of gas, but there's still some oil production jobs in there as well..

Okay. Great. That’s helpful. And then in previous calls, you have mentioned a pretty big gap in Q2 in terms of factory loading and scheduling that you need to fill.

Did you make any progress in filling that up at all? Was that what you were referencing, Mike, in terms volatility in the quarters?.

Yes, we still see Q2 a little soft, Jon, with respect to the plant utilization. But clearly, with the orders – coming off a great orders quarter that we saw and building the order book, the second half of the year looks like it's filling in a little better..

Okay. Great. And then once you back out those larger orders that you guys have been – that was mentioned, you get kind of back down to that 130-ish, 140-ish order run rate that you had previously been at before that the whole in the last quarter.

Can you just comment on the rate and activity in the small-size to medium-size project market? What's going on there? You mentioned that international is coming back a bit. Does that mean that the U.S.

is coming off a little bit? Or is something else going on there?.

Well, Jon, it's Brett. I think the U.S. market, as we saw all last year, and my turn base business, continues to be holding for now. I think looking into the inquiry activity level, we continue to be successful. The pipeline and the work going on estimating would indicate there's still a reasonable pipeline in the U.S.

The international markets are still lagging. So trying to get those orders in-house and get the utilization and the factories up and running. It is improved from Q1, so it raises our confidence on the back half of the year for the company as a whole. But still fighting. The markets there are a little behind and a little tougher yet..

Okay. One last one for me.

Are you sized correctly with the capacity and the amount of technical area that you have on hand to really ramp the revenues when these larger orders?.

Absolutely. We look at that very closely, again, given our model, custom engineered, it's – really is the strength of Powell. We have a lot of engineering talent in Powell, very proud of that. The teams have done very well to add the resources as we've seen the ramp coming.

It does create a little interesting dynamic as the market sort of getting going and you're trying to maximize utilization because you have these cycles in the front end of the business and then you're trying to get the job into the building materials into the factory. So that's unique to our remodel.

But so far, we've been very proud of our teams with going to get the talent and haven't seen any big issues there..

Okay, great. Thanks a lot guys..

You bet..

Thanks..

Our next question comes from the Jon Braatz with Kansas City Capital. Please proceed with your question..

Good morning, Brett and Mike..

Hey Jon..

Good morning..

Brett, there's a number of large LNG projects coming to the market shortly, LNG Canada, Arctic LNG and a number in the Gulf Coast.

What kind of opportunity is that for Powell? Are these potentially big orders? And I guess the other question is, have you seen anything – have you received any contract awards associated with these new LNG facilities?.

So Jon, in the past, what I'll call the first wave of LNG, yes, we participated in a number of the jobs. Some of them are still in construction mode and trying to get into first gas. You're right. There is absolutely this wave of second LNG. But there's also the derivative of that, what I'll call the petrochem and the methanol market as feedstocks.

But yes, the LNG is drawing a crowd. There's a million charts and analysts looking at it. Kitimat, I mentioned already, we talked – I think I had a question last quarter on it. But there a lot of others in FERC and FID planning through the EPC process. And we're doing a lot of inquiry and budget support and cost out on all these jobs as they progress.

And I don't have a crystal ball on all the jobs that will go forward, but there's a lot out there being planned. Will they all go forward? I guess, personally, I would be surprised, but there are – there's a lot going on..

Well, inherently, is a large LNG project equivalent to a large petrochemical plant in terms of what you may be awarded?.

It can be, in my experience, there's so many different technologies on the LNG patents, if they use a certain LNG – there's only so many processes that they'll go license the technology from to do the compression side of the LNG. So somewhat I see it depends on that and how much medium voltage, which still is one of our core drivers that it required.

So it might, it's hard for me to say it's exactly one to one to a large ethylene project, which is high liquids content. But it can. It just depends on what process they implore in the design of the facility..

Okay, all right. The other question Brett is, obviously, you've talked about the international markets weaker than the domestic markets.

Any explanation for this sort of the disconnect between the two markets?.

Well, if you look at where our factories are Canada and the UK. And the UK, of course, is an IEC design that supports a much wider, long-distance range geographically. I mean, Canada, monetizing the resources, the discount for the Canadian crude to the West Texas and Brent. I mean we can talk about geopolitics there and monetizing the resources..

Yes..

We talked a little bit about east side and making some progress in utility and commercial and that's gone well and continues to move along at a modest pace. But there has been – we are seeing some improved oil and gas conditions on the west side, even ahead of the gas projects..

Okay..

We're on their oil production. So that would be my characterization of Canada globally, just coming off the cycle..

Okay..

I think starting to see some FPSO recovery in our core markets, in those markets that do have FPSO, as you're seeing some increased activity in the Middle East. And then of course, we're – being in the UK, we're watching that market very closely and know what the dynamics are, and there's a lot of unknowns still today..

Yep..

So we're waiting like you guys to see how it kind of pans out..

Okay, all right. Thank you..

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

Good morning, everyone. A couple questions on the backlog.

What is the mix of that at this point? In other words, roughly speaking, what percentage is oil and gas, industrial, utility and so forth?.

So, John it’s Brett. Most of 2018, historically, our oil and gas would run a larger percentage, probably dropped to more 50% core and 50% everything else. And that was the run rate through 2018.

I don't have the exact number, but would guess that probably ticked up a little bit to the core with the first quarter strength of our markets in the oil and gas, both here and international. When you get into the international markets, we're probably more oil and gas, petrochemical on average then we are in some of the other markets.

Although we do compete in utility and commercial, maybe less so when compared to the U.S. as an average..

Okay.

So if we put it all together, oil and gas is probably what 60% of the backlog or so?.

I think we're probably on our way back up to that number..

Okay. Good.

And is the backlog a firm backlog? What's the potential for that being reduced or canceled? Do you have – obviously, you have signed contracts, do you have deposits that are forfeited in the event of cancellation? How firm is that backlog?.

I think it's pretty firm. I mean, can a customer cancel over convenience or something happen in the project? It could happen in our history of the company. Once these projects are going, history shows us that it just doesn't happen. You can never say never.

And we might have the occasional job over within a couple year period where we see something happens with the customer or a smaller – the balance sheet is weaker, smaller capitalized customer that might have some issues, but very, very rare does that happen. So I think pretty firm. And do we get deposits? We do milestone billing.

There's a negotiation on each job to make sure we're trying to get the cash flow, at the very least, neutral with our customer to have a fair approach to the market..

Yes, and John, this is Mike. The new 606 rev rec rules really stipulate that in order for it to be in backlog, it is a firm order contractually. So it is definitely a firm order backlog..

Okay. That's helpful.

And I guess finally, the big order over $20 million, what type of order was that? What industry is it in? And what kind of project is it?.

It's in our core. And it was a gas-driven project..

Yes, but it's some kind of pipeline or something?.

It's a facility job..

All right. Good. Congratulations. Thanks..

Thank you..

Mr. Cope, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

Thank you, Christine. Although it has only been a short while since we reported our year-end 2018 results, and as I noted earlier in my prepared remarks, we are encouraged by the continuing upward trend of our core markets. Our first quarter orders in backlog provide excellent momentum for improved performance later in our 2019 and into 2020.

While our near-term visibility remains challenging, we are confident that the longer-term growth drivers and electrical distribution equipment remains firmly in place. I would like to thank our valued customers and our supplier partners for their continued trust and support of Powell.

And to our employees, never have I been more proud to be part of an energized motivated team of people, focused on success of our customers. Powell's can-do spirit is alive and as strong as ever. Thank you for your participation. We appreciate your continued interest in Powell and look forward to speaking with you next quarter..

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