Welcome to Powell Industries Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Mr. Zach Vaughan with Dennard Lascar Investor Relations. Thank you, sir. 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 second 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 May 13. 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 6, 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?.

protecting the health and well-being of our employees and their families, collaborating closely with our customers to support of their projects and service needs, and working with our suppliers to discuss improvements in safe work practices, and early mitigation of any identified supply chain challenges.

Across our seven manufacturing facilities, we have implemented social distancing practices; we've adjusted shift hours, increased the frequency and cleaning of factory and office facilities, and instituted remote work options for those roles that support our manufacturing operations.

We have improved and updated our screen procedures for visitors and the incoming supply of raw materials and equipment. We've adjusted procedures around business travel, and we will continue to review any updated guidance from our local and government officials along with industrial best practices in the coming months.

I'll share more about the specific impacts of the Coronavirus later in my remarks, but let's turn to our second quarter results.

Powell experienced strong activity for new orders of $301 million in new bookings in the second quarter, an increase of 119% from $137 million in the first quarter, and up 53% from $197 million in the second quarter of fiscal 2019. $301 million in new awards sets a new company record for bookings performance in a single quarter.

At the end of the second quarter, backlog was $566 million, also a new company record.

Our second quarter ending backlog includes the sizable contract mentioned on our last call, a substantial award to support the design, manufacture, integration and testing of Powell custom-integrated electrical distribution solutions for a large industrial complex being constructed in the United States.

Powell designed, build and deliver multiple power controllers in support of the project. This contract will convert to revenue over a three-year period. Second quarter revenues increased to $152 million which was up $28 million or 22% higher than the second quarter of fiscal 2019. We had solid margin performance across most of the business.

Gross profit as a percentage of revenues for the second quarter was 19.6% an increase of 340 basis points from the same period last year, and 330 basis points sequentially. Additionally, net income improved to $7.4 million in the quarter from $958,000 in the prior-year.

We attribute this financial improvement to our continued focus on operational initiatives that have been ongoing across the business for some time. This includes a continued focus on operating efficiencies and productivity, and a disciplined approach to the mix and quality of our backlog as we pursue new orders.

Now, I'll share some of what we're experiencing as a result of the global pandemic. First, Powell has designated an essential manufacturer providing critical electrical distribution solutions across many industries and geographies. And we remain committed to providing our products and services to the best of our ability during this time.

And as supplier to industrial manufacturing plants, utilities and light rail transportation infrastructure, our products and solutions provide our customers with a safe and reliability distribution of electrical power. Second, as we have experienced the past cycles, we have received multiple requests to adjust project schedules.

While we have not experienced projects being canceled outright, a number of our customers have pushed out schedules for roughly a dozen or so projects most in the $1 million to $3 million range in size.

Most of these requests are affecting backlog originally planned for our fiscal fourth quarter resulting in schedules being moved to the right and pushing planned revenue for fiscal 2020 into 2021. And finally, on the supply side, we have been very successful planning mitigation strategies across our supply chain.

But for the large part, we have not experienced any disruption around supply of raw materials and third-party equipment. We have experienced a supply chain challenge from a partner in Mexico, where we performed some sub-assembly work.

We've had to temporarily move these operations back into each of our facilities in the U.S., Canada and the United Kingdom. We believe this is a short-term efficiency headwind for the business.

And we're working closely with our supplier as local labor leaders in Mexico, along with the Mexican government and other business leaders continue to work constructively to ensure safe conditions for all employees.

Specific to the North American electrical market, Powell is the only company headquartered in the United States that builds AC medium voltage breakers in North America. Two of our brands have over 80 combined years of successful reliable performance in the medium voltage market, and both are made in the United States right here in Texas.

We will continue to support our customers' infrastructure with creative solutions to extend and protect their existing capital investments and provide superior service to help them manage through the cycle.

While it is too early to forecast the ultimate impact of these events, we do expect to experience reduced activity for new orders for the balance of the fiscal year from our core oil, gas and petrochemical markets. As we have started the second half of our fiscal 2020, we have acted quickly to adjust our fixed costs.

And as we navigate through the second half, and into 2021, we will continue to monitor and adjust variable costs throughout each of our operations. If necessary, we will prudently take additional steps to preserve liquidity as we continue to manage our SG&A and cost structure efficiently and effectively.

Our last down cycle for our business started in mid-2015. However, we did not experience the full effect until our fiscal 2017. Since then, we've executed our playbook to systematically strengthen and build our business.

We have steadily increased profitability in the past two-and-a-half years and our second quarter results demonstrate the sustainability and strength of our brands. The Powell team has successfully navigated all downturns for the past seven years. And we're confident we will navigate this challenge as well.

With that, I'll turn the call over to Mike to provide more detail around our financial results before take your questions..

Thank you, Brett, and good morning, everyone. First, I will address the current quarter results and then move to year-to-date. Revenues for the second fiscal quarter of 2020 increased 22% to $152 million, compared to last year's second quarter of $124 million.

Orders for the second fiscal quarter were $301 million, a 53% increase versus prior-year and higher by $163 million sequential. Second quarter orders results were favorably impacted by the January award for the large industrial project that Brett had mentioned. This puts our total year-to-date book-to-bill ratio of 1.5.

With this award, our reported backlog at the end of the second fiscal quarter was $566 million, $140 million higher versus the same period in the prior-year. Second quarter of fiscal 2020 represents the highest backlog level in Powell's history.

Powell's fiscal 2020 second quarter revenues across all of our geographies strengthened when compared to the same period last year. Domestic revenues increased by $24 million, or 24% to $121 million.

While, international revenues generated from both our foreign operations as well as export shipments from our domestic locations increased by $4 million or 16% versus the prior-year to $31 million in the second quarter of fiscal 2020. Revenues from our industrial sector had the most significant impact on the business versus prior-year.

Revenues generated from our oil, gas and petrochemical sectors in the second fiscal quarter were $99 million compared to $79 million in the same period a year-ago. Revenues from utility customers were $24 million, a 19% increase versus the prior-year. And traction and other revenues combined to total $28 million, a 13% year-over-year improvement.

Gross profit in the second fiscal quarter of 2020 improved by $10 million, versus the first quarter to $30 million on a 13% sequential volume increase as well as strong execution across the Powell manufacturing footprint.

Gross profit as a percent of revenues continues to improve increasing by 340 basis points compared to one year-ago to 19.6% of revenues in the second fiscal quarter, driven by both strong variable cost productivity and operating leverage across the production facilities.

Selling, general and administrative expenses were $19 million in the current quarter, or 12.3% of revenue. This was higher by $1 million versus the same period a year-ago. Overall SG&A, as a percent of revenues decreased by 160 basis points versus the same period last year on higher value.

In the second quarter of fiscal 2020, we reported net income of $7.4 million or $0.64 per share, compared to net income of $958,000, or $0.08 per share in the second quarter of fiscal 2019. Now, looking at our year-to-date results. Revenues increased 23% to $286 million versus the same period a year-ago.

Domestic revenues increased by 21% while international revenues grew 28% versus the prior-year. Gross profit as a percent of revenues increased by 310 basis points to 18% of revenues favorably impacted by increased volume and productivity initiatives across manufacturing facilities.

Selling, general and administrative expenses were $36 million, 12.6% of revenue, which was 170 basis point improvement on a prior-year comparison. For the six months ending March 31, 2020, net income was $10.2 million or $0.87 per diluted share compared to a net loss of $1.7 million or $0.15 loss per diluted share a year-ago.

Year-to-date, free cash flow totaled $4 million. This was driven by $7 million through operational cash flow, while investments in property, plant and equipment was $3 million.

At the end of our fiscal second quarter, we had cash and short-term investments of $121 million, $36 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 forward, while the current environment is exceptionally challenging, we have entered into this cycle with a strong balance sheet and ample liquidity, a healthy backlog as well as a disciplined approach to cost management.

Based upon anticipated market conditions in the near-term in addition to the timing of our existing backlog in order outlook, we expect that revenues will soften in the second half of fiscal 2020 as new customer orders slow across our core industrial end markets.

We do however reaffirm our expectation that fiscal 2020 will be a profitable year for Powell. 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 & Company. Please proceed with your question..

Good morning guys, surprisingly good quarter..

Thanks, John..

Can you talk a little bit about the order intake in April for your smaller equipment kind of compare it to how it was versus March, give some kind of context maybe on what maybe the trough, maybe of the small order from those cycle?.

John, good morning, it's Brett. So coming out of second quarter as a global pandemic effects started sort of scattering folks and we were focused on our people around the world as a lot of our customers and suppliers were, things softened at the end of March and sort of trailed in April.

Little early to tell exactly how this is going to continue on to the second part of the year but definitely softer as we came out of the second quarter..

So you still had incoming small orders in April?.

We did..

I'm kind of curious about that..

Yes, we did. Yes there are a number of orders that had momentum being a long-cycle business. A lot of our projects started, even the smaller-based business awards, as I talked about, $1 million to $3 million in size. Those start a number of months out, six months out.

And so some of what you find at the end of the second quarter just finding signatures, people are displaced, people are working from home, geographically dispersed, dispersed, and so some of that trailed-off, that was some of the reason, just a whole host of different things that are hitting a lot of us in the space and just trying to find people as part of the issue..

Makes sense.

And the total order intake for the quarter the $300 million, excluding the one large industrial order, what was the balance of the order intake?.

John, as we've alluded to on prior calls, the large order that we booked in we're awarded in January, we booked it in this quarter, it's reflected in the backlog was greater than $100 million as we've communicated, we're under a strict confidentiality covenant with our customers. So we're not at liberty to discuss the specifics of this contract.

But as Brett alluded to, and we spoke about last call, our industrial end markets are softening and we we've been seeing that over the last four to six months. So it is a dynamic environment out there as we work through it..

Yes. What I was going forward there was what's the orders ex that business, ex that one job. So I get a picture of both normalized order intake, you've been averaging roughly whatever it is $140 million a quarter for the last two years? I just wanted to --.

I would offer this, John. To your point, I mean, if you go back two, three quarters, we were doing somewhere in the $150 million, $175 million it's less than that..

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

Yes, hi, good morning. It's Pete Lucas for Jon. Just I guess on the new orders that you’re seeing, you mentioned still getting some in April, it's may be too early to comment.

But anything you could say about where you're seeing bid margins now versus what is in backlog?.

Nothing has really changed in the short-term. Again, I think it’s a little early, if I kind of go back a couple of quarters, we've shared that we've kind of held price throughout most of 2019 and into 2020. I think the backlog heading into the change, if you want to change, we really seeing a change in the cycle, all signs don't look positive.

But the backlog heading and the quality of the backlog is very solid. The trailing orders we're getting still reasonable. But looking forward, it would be hard-pressed to say there won't be more focus on that as if things start to dry up a little bit. There will be a lot more competition for what's out there..

Helpful. Thanks. And also in terms of the existing backlog, you mentioned a few things getting pushed out to the right there and probably impacting I think you said fourth, fourth quarter pushing things from this year to next.

How long do you think that the current backlog should keep you profitable? And where do you see holes that you may need to fill in for that schedule? And then also, in addition to that, you talked about the delays that you mentioned, but have you seen any cancellations in the existing backlog?.

Let me take, this is Brett. Pete let me take the first part and ask Mike to jump in for what I miss here. Yes, we've got a number of customers that called over the last six to eight weeks and said hey, we need to make some adjustments.

Again, I think a lot of the comments I heard were dispersion of people, changes and trying to get folks to site and just planning. So that has created somewhat we have laid in for the fourth quarter is getting pushed out into -- stretched out into 2021 over various, it's not all just one year, you move it two months or one month.

It's kind of a variable piece. So it's created a whole in the fourth quarter, so we have made some adjustments in the cost structure to account for that here recently. As far as cancellations, no, not really seeing that.

Right now, it's been just mostly delays on the existing backlog and then just trying to kind of per my -- John Franzreb's question working on more early but we're trying to get a feel for what the rhythm will be here as folks are spinning back up and the projects that we had in the funnel heading into this as U.S started lockdown and the globe really started lockdown as it starts to loosen up a little bit.

We're looking to see where all that stands and it's a little early here early in the third quarter..

And Pete, this is Mike. Just additional color on that with respect to some of the couple of specific questions you had. With respect to the exit rates, the margin exit rate on our current backlog.

Currently, we feel really good about where we are and the order book is healthy, the quality of the customer base in that order book is healthy, the terms are decent. What we talked about last call was filling out with some book and bill filling out the second half of the year.

Clearly with the dynamics that Brett just explained stuff pushing to the right, and the macroeconomic environment, we do anticipate a softer second half going into closing out the year..

Very helpful, thanks. Last one for me, just trying to put it in context.

You mentioned prior downturns, is it fair to say that given the backlog you have in hand and the reduced exposure to upstream compared to the last downturn, that you're better insulated now and maybe won't see the same magnitude of impact on revenue as earnings compared to last time, oil would come in?.

Pete this is Brett. I think going into that -- into this change, I would agree that the unknown here is the length. So if you look at the mix and overall quality of the backlog as opposed to say compared to 2016. As we're rolling into 2017, 2017 being our down year on the last cycle, definitely a better backlog mix and quality.

The uncertainty here is well what we're seeing across the globe on the demand curve, and the supply side and what's playing out there. How long will this take? So that's a deep -- that's -- we're all going to watch that closely as we progress next couple of quarters, but the sooner, the sooner things get back on track then that would be good for us..

Thank you. Ladies and gentlemen this concludes our question -- I'm sorry, it appears we do have a follow-up from John Franzreb with Sidoti. Please proceed with your question..

Yes, just on the last topic on the book and bill side of the business, can you give us some context, what's the lowest annualized revenue you generate from short-term book and bill businesses to kind of put it in context?.

Yes, I'll take that one, John. If you look back, say five years through different cycles, the last oil and gas downturn in 2015, 2016, 2017. And you look at where we ended our backlog and our exit rate coming into the end of the next year and then subsequently what the book and bill volume of that is.

The first part of that I would range it anywhere from as you sit there with our backlog, and there's a lot of variables, things pushing out to the right, et cetera. A lot of different project dynamics. But in general, the math would tell you probably 70% to 80% of your backlog is and years convertible in the next year.

And on top of that, you'd add anywhere from probably $40 million -- $40 million a quarter type a number from a book and bill standpoint on top of that. That's what historical book and bill..

And averages -- what would be the, go ahead..

Go ahead..

So what's the trough number on that $40 million, is $40 million kind of an average per quarter.

What's the worst, do you have any sense of what the worst was?.

It has been a close, so $40 million is essentially about what we did around 2015, 2016 the downturn -- last downturn, and during the peaks, it'll be north of that..

Okay, that's helpful. And you said that, if conditions get worse, you may consider some sort of restructuring actions or cost savings initiatives that are, I guess more fixed than variable. Can you -- I'm kind of actually surprised that it gets coming out of the downturn recently that you have that much room, wiggle room to actually cut costs.

Where would that be, that kind of caught me by surprise..

Yes, so John, we did in early, early May take action both on the fixed indirect structural side of the house. So kind of your indirect pieces and your SG&A as well as taking cost out of the variables. So it really spans across all elements of the business. When you think about the different product lines, we have different locations.

It really was a wide initiative but yes, we did just recently announce an action early May..

And how much of annual cost savings would that generate?.

Roughly it will generate on an annualized basis, probably $5 million to $6 million on the indirect or fixed cost side and about the same on the variable cost side and that's an annualized number..

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

On the large project $100 million plus project is there -- you've done projects like this before often, is there anything unusual or different about this project that would maybe heighten the risk profile at all compared to other large projects you've done in the past?.

Hey Jon, it's Brett. No, it's a big project for us.

But in terms of the makeup is what we would affectionately around Powell call meat and potatoes, it fits us just perfectly and the relative profile, sometimes we see the $50 million or $60 million offshore jobs, we always talk about a year, year-and-a-half, this has sort of a three-year laying right now. So it is something that is right up our ally..

Okay.

Is the revenue flow more of a back half of three-year time horizon or front half or is it equally just across all periods?.

No, not a back half, but a lot of our projects start-off with a lot of engineering. This one has a lot of engineerings. We'll take some of that here in the second half. But it's more; we'll see a fair amount next year and a fair amount into the following year.

So I call it kind of 50:50 at this point now, that could change, but that's kind of what we're seeing initially as we lay out schedule..

Okay.

Will there be any substantial working capital build to support this project that might impinge on the sort of the free cash?.

Yes, I mean, this is Mike. From a cash flow perspective, since we booked the order in January, Jon, we anticipate upfront, upfront milestones kicking in here in 2020. And we will build working capital next year. But we've modeled the project such that we're trying to stick cash neutral on this one..

Thank you. Ladies and gentlemen, this concludes our question-and-answer segment. I would like to turn the floor back to management for closing comments..

Thank you, Operator. I would like to thank all of our talented employees for their enthusiasm and exceptional service to our customers. Our second quarter results demonstrate that our teams at Powell are driving to deliver superior execution and also continue to improve our efficiencies throughout our operations.

While we continue to work challenges around factory loading, project timing and project mix. In the fourth quarter of this fiscal year, we believe we're 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, flexibility and confidence to support the second half of fiscal 2020 and into 2021. With that, thank you all for your participation on today's call and we appreciate your continued interest in Powell and look forward to speaking with you next quarter..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..