Welcome to the Powell Industries 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.

I would like to turn the conference over to your host, Zach Vaughan of 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 2020 first quarter results. With me on the call are Brett Cope, Powell’s Chairman and CEO; and Mike Metcalf, Powell’s CFO.

There will be a replay of today’s call and it will be available via webcast by going to the Company’s webcast powellind.com or a telephonic replay will be available until February 12th. 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 5, 2020, 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 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’s CEO, Brett Cope.

Brett?.

Thank you, Zach, and good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2020 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.

Since it has only been a short time since our year-end fiscal 2019 conference call, I’ll focus on providing an overview of the current quarter and then I’ll share some general observations about our markets.

We are pleased with our first quarter results, particularly in a quarter that is one of our lighter quarters for revenue throughout our fiscal year. As we mentioned on our last call, the first quarter of fiscal 2020 was impacted by the calendar year end seasonality, from reduced work hours through several holiday period.

From a year-over-year perspective, revenues increased $134 million in first quarter, which was 23% higher than the first quarter of fiscal 2019. Additionally, net income improved to $2.8 million in the quarter from a reported net loss in the prior year of $2.7 million.

We attribute this financial improvement to the many commercial and operational actions that have been ongoing across the business for some time.

These include, a disciplined approach of the mix and quality of our backlog as we pursue new orders, a continued focus on operating efficiencies and productivity, robust supply chain initiatives and managing our SG&A and cost structure efficiently and effectively.

As a result when compared sequentially to the fourth quarter of fiscal 2019, revenue decline in the first quarter reflects the seasonal impact of fewer project closeouts as well as the timing of projects and process across our manufacturing facilities. From an orders perspective, Powell booked $137 million of new orders in the quarter.

Our Canadian operation had a notable win, being awarded a large municipal contract, which can be executed over a three-year period. During the last few quarters, inquiry activity has been active with a growing amount of our estimating resources being focused on efforts to support several of larger projects.

More recently, we’re starting to see a number of our customers that are pushing out schedules for new bookings for midsized projects in the $3 million to $10 million range. Over the past 12 to 18 months, these midsized projects have helped support our revenue growth through 2019 and into the first half of 2020.

These midsized projects are important pillars of our business model as we work to fill open capacity in the second half of 2020. As I have noted in prior calls, the funnel of project activity supported and driven by abundant low-priced natural gas remains active, particularly in the Gulf Coast region.

We are pleased to report that Powell’s product quality, people and persistence resulted in the award of a substantial contract supporting the design, manufacture, integration and testing of a Powell custom integrated electrical distribution solution for a large industrial complex being constructed in United States.

This project will span over three years as we design, build and deliver multiple power control rooms in support of the project. This order will be included in our fiscal second quarter orders and backlog reporting. Powell’s international operations continue to show signs of positive recovery versus fiscal 2019.

Backlog supporting our Canadian and UK divisions at the end of our first quarter of 2020 was notably higher, when compared to the prior year. As we navigate through fiscal 2020 and into 2021, our largest operational challenge will be recruiting and retaining high-quality direct labor in an already tight labor market.

We are also actively engaging independent contractors, utilizing overtime and leveraging our supply chain and global manufacturing footprint, shifting work to locations to balance capacity when an economic viable.

We are optimistic that these tactical initiatives and strategic actions will drive improved customer fulfillment and sustainable margins throughout fiscal 2020, and we intend to remain committed to increasing our investments in R&D programs, while maintaining investments in the professional development of our people during fiscal 2020.

Powell continues to be a technology leader in the development and manufacture of electrical distribution products and solutions. We believe improvements to new and existing products will ensure we continue to have a broad portfolio to offer our client base.

Likewise, we know employee satisfaction and engagement directly impacts our continued success around customer satisfaction and retention. Therefore, we are actively investing in employee training and development. In summary, our immediate efforts are focused on filling open capacity in the second half of fiscal 2020.

As we monitor and adjust to increasing delays in customer timelines of midsized projects from our core end markets.

As a significant portion of our revenue is derived from our small to midsize project base, we expect 2020 results to be more lumpy than usual as we continue to execute on our current backlog while also preparing for the longer-term to deliver on recent larger project rewards that will for the most deliver after fiscal 2020.

Therefore, we remain cautiously optimistic of our production capacity in the second half of 2020. 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, and good morning, everyone. In the first quarter of fiscal 2020, we reported net revenue of $134 million, a $25 million or 23% increase versus the same period in the prior year.

Bookings for the first fiscal quarter were $137 million, a 1.0 quarterly book-to-bill ratio, which was all fit in $426 million in first quarter ending backlog, which was a $7 million increase versus the prior quarter.

Compared to one year ago, domestic revenues increased by $16 million or 18% to $106 million driven in large part by a healthy industrial and market demand.

We experienced year-over-year increased value performance across most sectors of the business with the oil, gas, and petrochemical sectors having the most substantial and favorable impact on the results with a 30% revenue increase over the prior year period, while utility was up 20% in traction up 67%.

Compared to the same period one year ago, international revenues, generated from both our foreign operations as well as export shipments from our domestic locations, increased by $9 million to $28 million in the first quarter of fiscal 2020.

Gross profit improved by $7 million versus the first quarter of 2019 to $22 million in the first quarter of fiscal 2020. Gross profit as a percentage of revenues increased 290 basis points to 16% in the first quarter compared to a year ago.

This improvement is driven by higher volume as well as favorable project mix and operating leverage across most of our facilities, globally. Selling, general and administrative expenses were $17 million in the current quarter, higher by $1 million versus the same period a year ago.

However, SG&A as a percentage of revenues, decreased by 190 basis points to 13% of revenue versus the same period last year. In the first quarter of fiscal 2020, we reported net income of $2.8 million or $0.24 per share in the first fiscal quarter compared to a net loss of $2.7 million or a $.23 per share loss in the first quarter of fiscal 2019.

In the first quarter of fiscal 2020, we generated $2 million in operating cash flow. And investments in property, plant and equipment during the quarter was $2 million. Year-over-year, free-cash flow was lower by $9 million, driven by a reduction in the net position of our contract asset and liabilities in fiscal 1Q of the prior year.

At the end of our first quarter, we had cash in short term investments of $121 million, which was $50 million higher than a year ago and $4 million lower than our fiscal 2019 year-end position. Long-term debt, including current maturities, was $800,000. Looking ahead to the full year for fiscal 2020.

We do anticipate variability across our quarterly landscape, driven by both project timing on the larger projects, as well as the softening of inquiry activity for the smaller to midsized projects across our oil, gas, and petrochemical end markets.

Considering this, we continue to work the fiscal 2020 book and bill opportunities in order to utilize our plant capacity throughout the second half of fiscal 2020.

With respect to the larger orders that Brett mentioned previously, our Powell will manufacture multiple power control rooms for this order that will be designed, integrated, and tested across a period of approximately 36 months with the majority of the project revenue generated in fiscal 2021 and 2022.

We do not anticipate this specific project will have a material impact on our fiscal 2020 revenue and margin.

Overall, considering our current backlog, the present level of market activity as well as the planned ramp-up in research and development investment, we reaffirm our expectations that fiscal 2020 will be a successful and profitable year for the Company. At this point, we’ll be happy to answer your questions..

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

Good morning, Mike and Brett. I’d like to start with the gross margin on a sequential basis. I know, it’s a seasonally weak quarter.

Could you just kind of talk about the drop in the gross margin? How much was it seasonality, how much was it the pricing in jobs that you executed on, and how much was it the referenced higher labor costs that becoming an issue?.

Yes. John, this is Mike. I’ll take that one. Project pricing and margins that we have in our backlog are flat. We don’t see any impact from a pricing perspective.

But, as you look sequentially at our 1Q ‘20 versus our 4Q ‘19, 3Q ‘19, you need to bear in mind that through the second half of last year -- the second half of ‘19, we have been ramping up variable resources to execute our backlog in the projected pipeline. And given this, we carried those resources through 1Q.

And given the seasonality of Thanksgiving holidays and Christmas holidays, the under-absorption was slightly more pronounced. That said, I would remind you that this 1Q was our best 1Q in over five years. 2014 was the last time we actually generated a more favorable 1Q..

And I was a little surprised, the R&D spend was actually lower than I was projecting, to put it that way.

Could you talk a little bit about your ramp in R&D spend this year? What you expect the full year tally to be? And I guess add-on to that, your total CapEx budget for 2020, how that looks now?.

John, it’s Brett. We’re still committed to some of the plans we put in place throughout last year and started executing on those. We’ve had a little slow start for various reasons on kind of one of the major projects got a pause right now. We think it’s temporary.

And we look to clear that in second quarter and get back to our plans, but still committed to the ramp-up in developing our strategic plan around the product side. On the CapEx side, no major change in terms of our run rate year-over-year, roughly about 1% of revenues, give or take.

A couple of projects we’re considering in the back half of this year, but we’re still looking at them and evaluating them and trying to understand what is the best opportunity for them..

So, Brett, would a good number for R&D be $8 million this year, or is that going to be in the high side at this point?.

Might be a little bit on the high side, but I’ll be giving you a better color next quarter once we get through this decision to understand how quick we get the products that we want to get into the pipeline developed and more importantly the testing, which is really where a lot of our costs come on the R&D side.

The labs cost a lot of money to get the electrical switch gear tested and approved to the standards. So, the timing of that is a little suspect, but I mean all spent in this fiscal..

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

Good morning, gentlemen. Thank you for taking my questions. First of all, congrats on the large order being booked.

I was just wondering what the size of that is, and the current margin profile of that, if you’re willing to disclose it, or at least the ballpark?.

Hey, Josh. It’s Brett. So, as you know, a lot of our contracts, most of them, have pretty strong confidentialities, this does as well. I can tell you, the job is in excess of $100 million. It’s in line with my quarterly comments in terms of the U.S. market being gas-driven, and it’s competitive.

But, I don’t think out of the ordinary in terms of what we’ve been running last couple of quarters in terms of pricing..

Great.

And then, just in terms of how many more projects like this you’re tracking and have the capability to handle as it starts to fill in your factories?.

There are a number of projects that we continue to support with the estimated resources and track. And like a lot of folks, we’re watching the fundamentals out there and the macro environment. Again, not just the cost side of gas, but where the final product and the facility it’s headed.

But, there are more than a couple that we’re working through for the next 12 to 24 months from a capacity standpoint. John’s earlier question on CapEx would be one of those questions. We’ve still got some opportunity in some of our facilities to do some investments to handle additional capacity.

But, right now, for the ones we’re tracking, we feel good that we can handle anything that comes our way..

Got it. Thank you.

And then, just on the midsized projects that you were mentioning that pushed out, is there any fundamental reason for that to be happening? When you talk to your clients, are they citing anything specific? And also, can you describe the number of projects that actually were pushed down to the right and kind of where they fell into the calendar?.

Well, we’re still watching the number. But, in terms of the reason, no. I’ve been talking a lot of people, as well as other companies in our space. Consensus seems to be a sort of a pause. There is no real fundamental driver. The macro things that are going on last few months are already having an effect. Oil’s down a little bit, macro demand is changing.

It seems to be for the short term. So, there doesn’t seem to be a long-term reason for it, but there is clearly something in the market that us and some others that operate in this space, are experiencing right now..

Okay. Got it. And then, in terms of the way that U.S. is going to shape up, given this uncertainty, last year, you had kind of a pretty straight shot from $110 million to call it $150 million in revenue.

Are you going to see much more lumpiness this year compared to what you saw last year in terms of getting to the year-end number?.

Yes. I think, the answer to that is yes, Jon. I mean, second half, as Brett alluded to, it’s still taking shape with the softness that we’re seeing in the inquiry levels. And I think, as we try to utilize the pipeline and get the book and bill in for -- really what we’re talking about now is probably late 3Q, 4Q volume to fill that plant capacity.

It will be a little choppier..

Okay. Got it. And just, one final one on the backlog exiting Q1.

How much of that was scheduled to liquidate this year?.

Probably about two-thirds of it..

Okay, great. Sorry, one more question. You mentioned the large project taking place over 36 months in ‘21 and ‘22.

Is it biased to any specific year, more in ‘21 or ‘22?.

Yes. That’s still to be defined, Jon. But, it will -- I mean, as we get further into the project, that will be a little clear. But, right now, it’s definitely between ‘21, ‘22..

Okay. Thank you..

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

Brett, in your press release, you talk about, you want to begin leveraging the commercial pipeline to help offset the cyclical nature of the core end markets.

Can you talk a little bit about those commercial markets, the commercial pipeline, what you’re working on, how you think it can evolve over sort of a two to three-year period, and how much sort of cyclicality can you drive out of the corporate -- at the corporate level?.

Well, I think for the time frame you asked about, Jon, the next two to three years, we’re going to be predominantly still driven by the core….

Okay..

Oil, gas, petrochemical market.

If you look back a couple of years ago, during the last downturn and some of the things we did on the R&D side, as well as geographic expansion, I’m going to pick on East Canada, an area where we historically didn’t have a sustained organic footprint, we, over the last couple of years, have methodically continued that process.

Some of our product development has underscored what I’ll call more the commercial utility, transmission generation as well as general access to those commercial markets. Now, just two things here. One is the product side.

I do think, there is room to go here to start to continue that what we’ve learned, continue building on those cycles that we’ve done in East Canada, our parts of the world, but there is also a part of access to some of these channels.

So, I can’t -- I am not going to tell you I can come in and chase every building that’s being built all over the world as medium voltage or even low voltage in the bottom of the building.

But, there are markets on the industrial space -- within the industrial space that I think we can do better than we’re doing today with -- underscored by some of the products that we have today and that we want to develop in the pipeline..

Is that going to require a different marketing or sales for us? Will it require a different -- an additional level of new investment to reach those markets?.

Yes. Definitely, channel management is something that we’ve been working on the last couple of years here at Powell. We do have a growing group to handle that channel that suffered from our historical direct sales group.

And then, as far as adding into the model, something we’re talking about the Board, and is that an opportunity to accelerate it? It is definitely a conversation we’re actively having..

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

Yes. Mike, I just wanted to talk a little bit about M&A.

What are your thoughts about maybe buying some smaller assets that may extend your product reach into something tangential to what you’re doing? I know you’re putting money into R&D to expand your opportunity pipeline, but maybe another business that is close to the core, but not exactly the core of what you do.

I kind of imagine that some of the assets are pricing a lot better today than they were a year ago..

Yes. I guess, the way I’d answer that, John is, from a capital allocation perspective, a few points. Us maintaining a very strong balance sheet with minimal leverage is very important and it’s a tribute that we value. Secondly, as we assess our capital allocation framework. R&D is a big part of that as Brett spoke of previously.

And then, third to your point, if an opportunity arises that enables the business to grow inorganically, through an accretive tuck-in investment, we’re certainly all ears. But, it really being maintenance of the strength of balance sheet is utmost important to us..

Thank you. We have reached the end of the question-and-answer session. Mr. Cope, I would now like to turn the floor back over to you for closing comments..

Thank you, Christine. Overall, despite the effects of seasonality, we are pleased with our first quarter performance. Over the last several quarters, our operation teams are executing well, successfully and prudently, meeting the challenge of our growing backlog.

While near-term visibility of midsized projects has become slightly more challenging for the remainder of our fiscal 2020 planning, the value and strength of Powell’s people, products and world-class facilities have again demonstrated our sustained value proposition, as evidenced by our recent large project awards.

I would like to thank our valued customers and our supplier partners for their continued trust and support of Powell. We appreciate your continued interest in Powell and look forward to speaking with you next quarter..

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