Greetings, and welcome to the Powell Industries Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mark Roberson, 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 2019 second quarter results. With me on the call are today 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 May 15. 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 8, 2019 and therefore, you're 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 considered 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 these 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 CEO, Brett Cope.

Brett?.

Thanks, Mark, and good morning, everyone. Thank you for joining us today to review our fiscal 2019 second 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.

Powell continues to experience strong activity for new orders with $197 million in new bookings in the second quarter of fiscal 2019, an increase of 14% from $172 million in the first quarter and up 39% from $142 million in the second quarter of fiscal 2018.

The second quarter bookings was our best bookings performance in a single quarter since the fourth quarter of our fiscal 2014 just as the downturn in the oil and gas market started.

The robust level of new awards this quarter contributed to our second consecutive quarter of backlog expansion, growing by $75 million or 23% sequentially over the first quarter of 2019, with a total backlog of $397 million at the end of the quarter.

The increase in orders maintain the heightened pace of activity that we experienced last quarter and again, was driven primarily by domestic activity from our core oil, gas and petrochemical markets, particularly in refining and petrochemical projects and infrastructure upgrades.

In addition, we continue to see improved activity from our international markets. Last year, as we have previously noted, these markets largely lagged the recovery that we started to experience in the US.

However, over the last two quarters, our Canadian and UK teams have been successful at securing new awards and contributing to the growth of Powell's backlog. Also during the second quarter, we received several moderately sized project awards valued between $10 million and $15 million.

These larger awards were received from customers across in number of our end markets including one large project from the utility market sector. Several quarters ago, during the downturn, we highlighted our project mix trends with some orders being engineering only awards.

We are pleased to share with you today that these earlier efforts have started to benefit the company. During this past quarter, Powell has been able to leverage these engineering only orders into full scope electrical distribution projects from our customers.

Our strategy to leverage our engineering capability in support of our clients' needs, helping them to finalize their front end engineering for projects that had encountered capital constraints for full funding has come full circle and added to our strong bookings performance during the quarter.

These projects now only require limited engineering and will convert to full revenue faster than projects of equivalent size and complexity. These projects highlight the core strength of our brand.

We believe that by staying close to our customers during early phases of project planning, collaborating on the design of the project utilizing our extensive engineering capability and experience, both our customer and Powell are inherently more likely to benefit over time.

While our current backlog provides excellent momentum for the second half of fiscal 2019, we are actively focusing on execution and factory loading in the second half of the year.

As our backlog grows and project planning work by our end customers and their engineering partners is executed, we expect to receive increased customer requests to pull forward in schedule.

And we also expect to receive customer requests to adjust schedules out, partly due, for example, the changes in the final design of the project, which in turn alter the electrical distribution solutions that are manufactured and integrated by Powell. We encountered a similar challenge in several of our divisions as we entered the second quarter.

Working with our customers, we are able to pull several projects forward in the production schedule, which helped improve the utilization of our people and facilities.

While this is common in our industry, mostly caused by the ebb and flow of our market cycle, it does tend to create additional obstacles with respect to visibility and our ability to solidify our production profile. Operational performance across most of our divisions improved during the quarter when compared to the first quarter.

With the increased backlog, we have started to hire both to meet the increased variable labor needs as well as adding to our engineering and project management teams across the company.

As we continue to build our resources to support our customers and execute our backlog, the efforts to improve our operating efficiency and productivity, which have in prior periods been somewhat masked by lower volumes and factory utilization challenges, are initiatives that we will continue to apply, ensuring that we are managing our SG&A and cost structure as efficiently and as effectively as possible.

Looking ahead, we continue to see strength in our core industrial markets, and inquiry activity remains strong across all of our operations. This effort includes ongoing engineering and cost estimating for several large projects.

We anticipate that as we compete for some of these larger projects, pricing pressure will become more relevant in the coming quarters. We are also mindful that competition for several of these projects is based on a new dynamic.

The global landscape of engineering firms are competing in new combinations of partnerships as well as individually pursuing new market segments for regional expansion.

Powell solutions are installed around the world, and our unique ability to design, manufacture and integrate custom electrical distribution solutions is as relevant a value proposition today for any project that we participate in globally.

In closing, we continue to carefully monitor our manufacturing facilities and utilization due to the uncertainty around the timing of the order cycle and subsequent project execution and required delivery dates. The increase in our backlog and increased factory volumes give us the opportunity to drive favorable cost efficiencies.

When combined with our focus on execution and prudent growth in our fixed costs, we expect to improve full year gross margins over fiscal 2018. In the first half of our fiscal 2019, we've been awarded over $360 million in new orders.

We are pleased to have gained the market confidence of our valued customers and are confident that the Powell team will execute successfully. Our current backlog provides excellent momentum for improved performance and a stronger second half of fiscal 2019.

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. As Brett mentioned, overall, it was a solid quarter demonstrated by both strong orders activity as well as favorable operational leverage across most of our Powell locations, enabling the business to deliver positive results. With that, let me begin with a summary of our 2Q results.

For the second quarter of fiscal 2019, we reported net revenue of $124 million, a $22 million increase compared to the second quarter of fiscal 2018. This favorability is a reflection of the continued strengthening across most of Powell's core end markets.

Compared to one-year ago, domestic revenues increased by 36% or $26 million to $97 million for the second quarter of fiscal 2019. This upward trend in our domestic market is driven predominantly from our core industrial based business.

International revenues generated from both our foreign operations as well as export shipments from our domestic locations were lower by 12% or $4 million to $26 million versus the prior year as the international sector is strengthening, but at a slower pace when compared to the domestic markets.

Revenues generated from our industrial sector increased by 30% or $21 million to $92 million in the second quarter of fiscal 2019 compared to the prior year, driven in large part by the oil and gas and petrochemical end market demand.

Additionally, revenues from our municipal sector increased by 46% or $4 million to $12 million in the second quarter of fiscal 2019 versus the same period a year ago.

Revenues from the utility sector were lower by 11% or $3 million to $20 million in the second quarter of fiscal 2019 compared to the second quarter of 2018 due primarily to orders timing. We had solid margin performance across most of the business segments.

The gross profit as a percentage of revenues for the second quarter was 16.2%, an increase of 400 basis points compared to one-year ago. Gross profit increased by $8 million to $20 million on higher plant volume, project timing and improved operating leverage across most of our global facilities.

Selling, general and administrative expenses were $17 million, 14% of revenues, which was down 190 basis points versus the prior year and lower sequentially by 70 basis points. The team remains diligent in managing overhead costs while continuing to focus on addressing the critical resource requirements necessary to fulfill the order book.

In the second quarter of fiscal 2019, we recorded net income of $1 million or $0.08 per share compared to a loss of $3.3 million or $0.29 per share in the second quarter of fiscal 2018. Bookings in the quarter were the highest in over four years, led by the oil and gas and petrochemical end markets.

New orders placed during the second quarter of fiscal 2019 was $197 million, $55 million or 39% higher than a year ago and $25 million higher sequentially. Our book-to-bill ratio finished the second quarter of 2019 at 1.6 compared to 1.4 in the second quarter of the prior year.

This resulted in further strengthening our backlog position, ending the second quarter of fiscal 2019 at $397 million, $97 million higher than a year ago and $75 million higher versus the prior quarter.

The business generated very strong operating cash flow in the second quarter of fiscal 2019 at $17 million, an improvement of $13 million versus second quarter of fiscal 2018 and has improved by $37 million year-over-year through the first six months of fiscal 2019.

This year-over-year favorability is driven primarily by the cash flow generated from our working capital efficiency led by our accounts receivables position versus the prior year.

Excluding restricted cash at the end of our second quarter, we had cash and short-term investments of $72 million, which was $23 million higher than our fiscal 2018 yearend position and higher by $10 million sequentially. Long-term debt, including current maturities, was $1.2 million.

As we move into the second half of fiscal 2019, we anticipate continued strength versus the first half on stronger plant loading driving operational efficiencies across the factory landscape.

With the end-market inquiry activity strengthening, we are positioning the business to execute on the second half order book and focus on optimizing late 2019 and early 2020 capacity.

Notwithstanding the typical challenges of project timing and mix, we remain optimistic that the continued growth and quality of our backlog will result in a return to profitability for the business in fiscal 2019. At this point, we'll be happy to answer your questions..

[Operator Instructions] Our first question here is from Jon Tanwanteng from CJS Securities..

It's Pete Lukas for Jon. You touched on it briefly in the prepared remarks, but within the $197 million orders you received, just the approximate breakdown from large, small and medium.

And is the majority of that revenue, do you expect to see within the next six, nine or 12 months? How does that kind of break down?.

So it was what I would - of the $197 million, there were three projects we noted in the prepared comments that were in the $10 million to $15 million range. The balance of it is what I'd call and have called in other quarterly discussions, base business, maybe moderately a little larger than base. I sometimes quantify base $1 million to $3 million.

I don't have an exact number. We had a fair amount of projects kind of in the $4 million to $5 million range this past quarter. And then I also noted on the engineering only orders, those were roughly about 10% of the core makeup. Those are jobs we've worked on the last couple of years with some customers, helping them get the design done.

But they couldn't release the whole project, and some of those funding came through. So when you look at execution on that quarter, a lot of it is - there's a fair amount of looking into 2020 already, which is why we, in the prepared comments talk, about some of the utilization kind of still challenging us as we get into Q4 this year.

So the engineering only works will book a little quicker, but the bulk of the revenue is fairly spaced out kind of six to 12 months..

Great. Helpful.

And as far as order rates, have they been sustained heading into the June quarter at all?.

So the inquiry activity is pretty solid. Always hard to predict the base business, how often and frequent? What the rate is going to be. I think going forward, these large projects start to get more in focus over the next 12 months, and they take a lot of time to estimate. So when I look at the load in the team, there's a lot of rework on these jobs.

And over the last six, 12 months and for the next six to 12 months, I think that load is just going to get bigger, and the competition gets bigger for these bigger jobs. So the inquiry activity is good. I think we'll continue to see a good level of base business with these bigger projects.

They come into focus, and they also provide a little bit more uncertainty..

Great. And last one for me.

Do you think there been an acceleration in momentum for Gulf Coast spending or simply a continuation of the trend with some lumpiness in there?.

I think looking back over the last 12 months, there's been acceleration especially if you look at the gas driven and maybe gas derivative type projects, not just the pipelines, the core LNG facilities. But then you got the methanols, and you got your derivative chemical jobs along with some debottlenecking of existing plants.

That's - again, back to the prepared comments, I look at the last quarter, some of those jobs, both refining and petrochemical, our existing facilities doing some minor expansions and debottlenecking so very much gas driven..

Your next question is from John Franzreb from Sidoti & Company. Please go ahead..

Mike, in your prepared remarks, you actually said something that kind of caught my attention. You said that pricing competition would become more prevalent or relevant, I can't remember exactly which word you used, in coming months.

I was surprised by that because I would think that with the order profile improving and things getting better that it would actually be the opposite, especially when you - I think last quarter, we discussed the more the engineering shifts around the job, the better it is for you.

Could you kind of reconcile, I guess, my thoughts there and so that I understand why you would say that?.

Yes, sure. Sure, John. I think when you think about pricing here, domestically, the base business still seeing a good level of still healthy pricing levels.

When you think about some of the international markets, you just aren't getting we aren't seeing as many calories per job there in order to win these jobs and when the volume might give a point of price. But overall, it's still pretty healthy given the demand of the end markets, so it's really isolated to certain markets in different regions..

John, its Brett. Let me make just one color comment or two. When you get these larger jobs - couple of questions last couple quarters people asked about the Shell Kitimat job out in Canada. That's a great example of a draw. Everybody asks about it, but it draws a lot of attention from the competitors.

So the bigger jobs typically gets just more attention from everybody globally..

I guess since you brought up this topic, you mentioned also in your prepared comments, I forget which one of you, that you're hiring again. I remember in the past that, especially I guess in Canada, that hiring was something of a challenge and caused some acute problems.

Can you talk a bit about ability to attract good labor? What kind of pace you're hiring at? Just some color there and some - maybe some confidence around that..

Yes, yes. So one of the first disciplines that we always hire to is the engineering talent. Its core to our brand, and its core to the execution when we start to ramp up. I watch the stability of that group, how our tenders go out, how we get acceptance levels, quality of the engineer that we're bringing in.

This cycle has been interesting in that we are attracting very good talent, and our retentions have been very good. I have a theory that it kind of goes to my prepared comment of this mix of an engineering company is different this time around.

Domestically, we have a lot of new companies coming in from the Far East, either in partnerships or playing more directly. So part of my theory is it's changing the labor need on the engineering partner side.

You're not having the big - there are some hiring's going on here in Houston with the engineering talent, but it doesn't feel like it was last cycle. So our retentions have been very good, and that follows in Canada and also in the UK.

Where we are having some challenges, I would say, on maybe some of the more specialty positions out and some of the manufacturing ops, the Gulf Coast probably being the area that there's a lot of demand for welders and different trades people with all the facility builds going on. So that's an area that we fight a little bit.

But so far, we've been able to find successful ways through that challenge..

Great. I'll get back into queue. Thanks guys..

[Operator Instructions] The next question here is from Jon Braatz from Kansas City Capital. Please go ahead..

You mentioned in the commentary that you pulled some orders forward to close some production gaps in the second quarter and does that open some gaps in the third quarter? Or are your order flows strong enough that that's really not going to be an issue as we look forward?.

No, it does create some holes, and we're trying to optimize utilization with this ramp up in resources. The team did a really good job. As we entered Q2, we talked about it coming out of Q1. The team will work with the customers and you see follow on effects.

So now you get this upside anomaly in the second quarter with these engineering orders kind of coming back. We look and see how those fit in, and what do we still need to do to close the holes, really kind of more towards the end of Q3 and Q4 at this point.

But more so the US and Canada, those are the things we're working on right now to try to eke every little bit out we can from the second half..

When you look at maybe the size of the holes relative to what you were looking for originally in the second quarter, are the holes diminished a little bit, the third quarter holes and the fourth quarter holes?.

I think the third quarter is quite a bit diminished. The fourth quarter, don't know, maybe on par with the second quarter or a little less at this point..

There's still a little capacity that we have to fill with some book-and-build volume, Jon, in the fourth quarter. But given the inquiry activity, we think we've got a path there, yes..

Okay. One last question. In April, we had somewhat of a favorable election result in Alberta, and it looks like things may be moving more towards some resource development and activity up in Canada. Obviously, there's an October election, federal election in Canada.

But are you seeing any positive movement as a result of maybe some changes on the political front beyond LNG Canada? Are you seeing more activity, more interest in developing some of these resource projects, energy projects?.

Jon, we were there the night of the election, Mike and I, along with some of our team that week. And so we were all talking about the election results and the speech that the Alberta elect-premier gave. And that specific call out to the go [ph] back to Quebec that night, if you saw that speech.

But yes, I think emotionally, there's a lot of talk about, can some of these pipelines get going? They have a really constrained resource issue there in Alberta. You get that going, you got a lot of follow on projects. So I'd say the sentiment has clearly shifted with the election. I think the voters spoke loud and clear about what they want.

If the country can get together, I think they have a real chance to do some wins east to west in Canada. And we'll look to try to support as best we can, and certainly has the potential for some upside in the future..

Okay, all right. Thank you very much..

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments..

Thank you, operator. While we see continued challenges around factory loading, project timing and project mix in the second half of our fiscal year, we believe we are well positioned to deliver on our growing backlog. Powell continues to be in a strong financial position.

Our balance sheet provides us with significant optionality [ph], flexibility and confidence to support the increase in our backlog that provides excellent momentum for improved performance later in 2019. I would like to thank our over 2,300 talents and employees for their enthusiasm and exceptional service to our customers.

Their strong focus on safety, commitment to innovative product offerings and pursuit of growth opportunities gives me great confidence that Powell is on the right track to return to profitability in 2019. Thank you for your participation. We appreciate your continued interest in Powell and look forward to speaking with you next quarter..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation..