Good morning and welcome to the Powell Industries Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Thank you. You may begin..

Thank you and good morning everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2021 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 website powellind.com or a telephonic replay will be available until February 10. The information on how to access the replay was provided in yesterday’s earnings release.

Please note that the information reported on this call speaks only as of today, February 3, 2021 and therefore you are 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 maybe 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. With that, I will now turn the call over to Brett..

Thank you, Ryan and good morning everyone. Thank you for joining us today to review Powell’s fiscal 2021 first quarter results. I will make a few comments and then 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 2020 full year results. However, Powell’s order activity showed a modest improvement with a sequential increase in net new orders, which totaled $91 million for the quarter.

The onset of the COVID-19 pandemic, which began a little less than a year ago, had an immediate impact on the short-term business outlook, proportions of our customer base, and this continues to affect confidence levels and our customer’s capital investment plan.

Our core industrial markets in the oil and gas petrochemical sectors remain under pressure. Many projects have had their schedules pushed to the right. However, we continue to see state demand in other sectors we serve compared to last year.

While the mix shift remains a headwind, the higher utility and traction activity, coupled with a steady flow of engineering only work we are seeing, enables us to leverage our overhead while working our existing backlog until the broader markets recover.

First quarter revenues totaled $107 million, down 20% when compared to the prior year and lower by roughly 7% sequentially. The decline was driven by lower revenue from both our oil and gas petrochemical customers, which are down 33% and 70% respectively compared to the first quarter of fiscal 2020.

Those declines were partially offset by the sustained demand we are seeing in our utility and traction markets, which grew by 22% and 60% compared to the first quarter of last year. As a reminder, our first quarter results typically experienced seasonality from a revenue and new earnings perspective.

First quarter gross margin as a percentage of revenue was 17.1%, which is an increase of 80 basis points compared to 1 year ago. The year-over-year increase resulted from restructuring activities that we took in May of fiscal 2020 as well as continued strong productivity in our domestic operations.

We continue to prudently manage travel and other discretionary expenses in this environment. We are also closely monitoring dynamic regulatory changes in geographies that we serve, regularly evaluating our cost structure to ensure we are aligned with the current environment.

That said, we are in a long cycle of business and it is essential that we retain the know-how to remain properly staffed for the eventual recovery of our major end-markets.

At the bottom line, we were slightly below breakeven as we reported a net loss of $364,000 in the quarter compared to net income of $2.8 million in the prior year, primarily due to lower operating earnings resulting from a decline in revenues and gross profit amidst lower new orders and adverse market conditions.

We ended the first quarter with backlog totaling $465 million, slightly lower than the $477 million at the end of the fourth quarter, but solidly above $426 million in backlog at the end of the first quarter in the prior year.

The year-over-year increase includes the previously announced large industrial order that was booked in the second quarter of fiscal 2020 to support the design, manufacturer, integration and testing of a Powell custom integrated electrical distribution solution.

As previously reported, this project will convert to revenue over the total of a 3-year horizon. We also ended the first quarter with $150 million of cash and short-term investments and essentially zero debt, which speaks to our strong liquidity position as well as the optionality afforded to the company.

Visibility remains challenged for many of our customers as they grapple with the currently weakened state of both cyclical and secular growth drivers for their businesses and we continue to work in close concert with them to respond accordingly.

Powell’s platform as a full electrical solutions provider, with extensive technological expertise and exemplary track record of execution makes us a trusted partner during these periods of the cycle and I believe we are benefiting from that earned reputation.

Looking forward, we believe the economics of low cost abundant natural gas will continue to provide favorable opportunities in the LNG gas pipeline and gas chemical process industries. We are also seeing developing opportunities in the renewable markets of hydrogen, bio-fuels, bio-diesel as well as carbon capture and sequestration.

We are also closely monitoring the possibility of tightened environmental regulations that may require a lower level of software attributable to the emissions of transportation fuels.

Our strategic focus on improving operational excellence over the last few years positions Powell to quickly help our refining customers respond quickly and safely to upgrade facilities in order to meet improved emissions requirements. Before I turn the call over to Mike, I would like to reiterate our key focus areas for fiscal 2021.

First and foremost is the health and safety of our employees, customers and suppliers. We are also focused on maintaining our solid execution performance to ensure that we continue to meet the high expectations stakeholders have with Powell.

Next is the continuous evaluation of our current cost structure, supply chain and resource planning to optimize operations across the geographies and markets that we serve. And last, it is also critical that we continue to lay the foundation for future growth opportunities are also broadening the markets of Powell.

Our human capital, balance sheet strength and technological expertise allow us to be proactive in the current environment. With that, I will 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 2021, we reported net revenue of $107 million, a 20% reduction versus the same period in the prior year. Bookings for the first fiscal quarter were $91 million $46 million lower versus the prior year.

As a result, our book-to-bill ratio was 0.9 with $465 million of backlog at the end of the first fiscal quarter, which was $39 million higher as compared to same period a year ago. Compared to 1 year ago, domestic revenue decreased by $26 million or 25% to $80 million and international revenue fell 4% year-over-year to £27 million.

These declines reflect the continued softness across our core industrial annual earnings.

From a market sector perspective, revenues across our oil and gas and petrochemical sectors were lower by 46% versus the prior year, while the utility sector was higher by 22% and traction volume experienced a 60% increase versus the first fiscal quarter of 2020.

Compared to the first quarter of fiscal 2020, gross profit decreased by $4 million to $18 million on the lower revenue. However, as a percentage of revenue, gross profit increased by 80 basis points to 17.1% versus same period 1 year ago on favorable project closeout settlements as well as overall continued focus on productivity cost management.

Selling, general and administrative expenses were $17 million in the current quarter flat versus the same period a year ago. SG&A, as a percent of revenue, increased to 16% in the current quarter on the lower revenue.

In the first quarter of fiscal 2021, we reported a net loss of $364,000 or a loss of $0.03 per diluted share compared to net income of $2.8 million or $0.24 per diluted share in the first quarter of fiscal 2020.

During the first quarter of fiscal 2021, net cash used in operating activities was $25 million driven by annual variable incentive compensation as well as a buildup of working capital for the projects that are currently in the manufacturing stages of production. Investments in property, plant and equipment totaled $1 million.

At December 31, 2020, we had cash and short-term investments of $150 million compared to $179 million at September 30, 2020. Long-term debt, including current maturities, was $400,000.

As we look forward to the remainder of fiscal 2021, we anticipate continued commercial headwinds driven by the ongoing uncertainty across our industrial end-market and the overall pace of recovery.

Considering the long cycle nature of our business as well as the associated softness across our industrial end-markets, we do foresee a more challenging fiscal 2021 versus the prior year.

We are however anticipating that based upon our solid backlog and increasing orders gains that we are well positioned to improve our financial performance as we progress through the balance of fiscal 2021. With that in mind, our fundamentals are solid. We are maintaining our cash and cost vigilance while ensuring that we execute on our backlog.

Our strategy of maintaining minimal debt and ample liquidity is essential during this down-cycle and it also provides an element of optionality as we continue to focus on opportunities to grow the business and diversify our revenue and mix going forward. At this point, we will be happy to answer your questions..

[Operator Instructions] The first question today comes from Jon Braatz of Kansas City Capital. Please go ahead..

Good morning, Brett, Mike..

Hey, Jon..

Good morning, Jon..

Oil and gas prices have been moving up a little bit? Do you think where they are in a position, they are at a level I should say that we might begin to see some pickup in your core business and what are you hearing from your customers as these core oil and gas prices moved up?.

Jon, I guess I’d say that the answer not yet, I think it’s a positive sign for sure for the longer term, but I haven’t seen it move the needle yet on larger activity..

Okay, okay.

And then can you talk a little bit more you mentioned little bit of a pivot towards some of the alternative energies like hydrogen and carbon sequestration and so on bio-fuels? What kind of activity levels are you seeing in there and might we see that become a more meaningful piece of the business as we go forward?.

I do absolutely. It’s pretty broad.

We have some projects that are actually in the bidding and working through the commercial stage right now as well as a very broad geographically speaking set of opportunities not just in the states we are seeing some things in the UK as well as some things in the Middle East that are pretty exciting in the hydrogen arena.

So, lots of activity coming in on some of it is early stages, some of the larger projects, but it is very broad across different segments. And I think there is a huge opportunity for Powell. It fits us well..

Can they – how sizable can those projects be? Should you be awarded a contract? I mean, are they $30 million, $40 million and $50 million in size or much smaller than that?.

Yes, it depends. So like a carbon capture sequestration, we have participated in a few in the past kind of more smaller facility localized projects that have driven some projects. Those are kind of more $5 million to $10 million in the past..

Okay..

Some of the special projects we are seeing now. There is a couple out there, that are pretty decent that can get up to the $50 million, $60 million that truly will fund right now. So there are some big ones out there, but they are still the bigger they are the further out they are..

Sure. Okay, okay. Mike, we talked a little bit in the last conference call about your cash flow expectations for the year end and cash flows, cash balances were down. And as you noted, it probably would be after the – in the first quarter.

How do you see cash flow expectations from this point forward in 2021?.

Yes, I think the large projects that Brett alluded to will continue to build working capital probably through three quarters of the way through the year and then at that point we will probably plateau out and fourth quarter is probably going to be neutral.

But overall, as I communicated last quarter, I think when you look at year-over-year 2020 versus 2021 we will be in a cash usage position just really due to that working capital build up to that large project..

Okay, Mike. Thank you..

Thanks, Jon..

[Operator Instructions] The next question comes from John Franzreb of Sidoti & Company. Please go ahead..

Good morning, guys.

I am going to talk a bit about the gross margin on a sequential basis December versus September was down rather meaningfully? And I am wondering if you talk to us about how much of that is under the course and how much of that is pricing of jobs and how much of that maybe is under absorption?.

Yes. Really, we aren’t seeing a lot of price impact at this point, John, because our backlog that we came into 2021 with as we have communicated previously is really we didn’t have much adverse price impact.

When you look at the gross profit margins sequentially, it’s a little bit unfair, because you have got that seasonality impact in first quarter versus our fiscal fourth quarter very, very strong typically.

So we do see a considerable amount of under liquidation, under recovery across the landscape for Powell in the first quarter and that’s really what’s driving most of it. Price is not a significant factor at this point..

And commodity costs?.

Yes.

Once you have commodity, I want to add one comment on pricing, John, in terms of quality of backlog, I agree with Mike, going forward, I think we talked about this in December, couple of questions that came up in December on this, I think coming back in the new year, the looking forward, I do believe price continues throughout this year to be more of a challenge on various jobs.

It’s not – it’s still not consistent across the board of all markets, but coming back from the holiday seasonality piece here, I do see some sort of – I do see renewed competition sort of starting to I think ramp up a little bit..

Okay.

And Mike, you want to add about commodities before I call upon that?.

It’s fairly commodities again when you are talking sequential comparisons and what we have booked in the prior year, again, we are – our commodity pricing is not yet leaking through I do think with particularly copper in the 350 range at this point. We do have – we will see some inflation in the commodities as we go forward.

We put these jobs that we are booking today that will ultimately execute later this year and into next year..

So, Brett is it fair to assume then based on seasonality of the March quarter and the pricing of the jobs that you have – the March quarter gross margin will be better than the December quarter gross margin?.

Due to recovery we will get more liquidation, more efficiencies through the facilities..

Yes, absolutely..

But it is something to watch going forward on the mix, you might hear, I wouldn’t be surprised as we go forward, I get a lot of near-term uncertainties under that umbrella in the market, which looks like it’s going to continue for a little while longer this year.

There is just more it feels like John and what I am seeing in the first couple of weeks of the new year there seems to be more ramp up in competition. More people are reporting you can kind of see it from other folks that are public, especially have a market tied to oil and gas petrochemical which is a big segment for us..

Certainly, okay, which brings to my next question, can you give us some update towards about expanding business into new product lines in adjacent markets either through internal R&D development or the M&A into something adjacent that’s kind of outside your core competency?.

So organically you recall little over a year ago we on some of the calls, we have talked about ramping up some efforts. We had some trouble last year getting some technical things where we needed them. We are still on that plan.

We have retooled and are executing – still executing that plan and putting some things in place to look at really longer term trends, things that will happen.

What will sustain on the grid, how will things change, how will things on the distribution side really evolve to handle all the new supply and demand that’s happening on the grid can help us position so we are doing some organic development there in R&D.

And we have added some people to help us there as well as retool some of our core investment programs around product development. So that’s one.

In terms of inorganic, as we have talked about, they are kind of three areas that we are looking at, I’d say, definitely in the product area anything and the electrical distribution still within the space of low voltage and medium voltage. We do play a little bit higher than 38 kV level on an integration basis.

But in terms of adding portfolio, we are having a lot of chats around the LV and the MV level and then also talk in the past we have rolled out some R&D on the sensor side. So, we are running right to the big data and AI and internet of things.

I mean, we are not in the sense of running to big massive server-based solutions at crunch data where we are focused is on the end of getting the data out of the system and moving up to scale from that standpoint. So we have got lot of sensors that we have rolled out last couple of years.

They continue to roll into the market across multiple sectors, very broad acceptance not just oil and gas, we are seeing it in commercial as well as utility sort of very broad acceptance into the market on the sensor side and the feedback is driving our thought process around that next evolution of what do you do with the data? How do you best crunch it? What’s that role that Powell could play to monetize the next level of business opportunity whether we can do that inside the company or outside the company that’s an area and then strategic thoughts around service, again, not at all things for all people type of model, but select markets, select geographies where it makes sense..

And just on the R&D side, what would you anticipate the full R&D expense to be for 2021?.

I think we are loaded about 1.3% to 1.4% of revenues for ‘21..

Got it. Thanks, guys. I will get back into queue. Thanks for taking my questions..

You bet..

This concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks..

Thank you, Alyssa. While our markets remain challenged by near-term uncertainties driven in large part by the global pandemic, Powell is uniquely positioned to weather this storm. We had an incredibly talented team, a healthy backlog and a strong balance sheet.

Our strategic focus on operational excellence over the last 3 years has further strengthened Powell as a trusted partner with our customers and we remain focused on advancing our efforts in new and encouraging growth opportunities to support the continued success of the company well into the future.

With that, thank you for your participation on today’s call. We appreciate your continued interest in Powell and look forward to speaking to you all next quarter..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..