Welcome to the Powell Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would like to turn the conference over to Ryan Coleman of Investor Relations. Thank you, and 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 third 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 August 11. 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, August 4, 2021 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 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'll 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 third 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. Our financial results for the third quarter were largely in line with the prior period.

Revenue was relatively unchanged sequentially, while our gross margins were slightly higher.

We continue to work through and manage pressures across our cost base, including industrial metals such as copper and steel as well as within our labor cost, both variable and fixed, as we are always working to balance the current volume of project work against the timing of our backlog to fully utilize our overhead.

There were a number of positive signs in the quarter, which we regard as important steps in the right direction toward recovery. For example, we saw an encouraging sequential uptick in the orders. I'll touch on this and more in a few moments.

First, revenues for the third quarter totaled $116 million, slightly below the $119 million in the prior quarter and $118 million in the prior year. Compared to the prior year, revenue from our petrochemical sector was down 48%.

Oil and gas revenue was higher by 7% year-over-year, while our municipal markets, which include traction grew 52%, marking seven consecutive quarters of year-over-year growth. And our utility revenue grew by 57% in the quarter, which marks four consecutive quarters of year-over-year growth in this segment.

Our gradual and continued success in both the municipal and utility markets is a direct result of our efforts to focus and compete more effectively, helping to partially offset the softness in the industrial sectors.

Third quarter gross margin as a percentage of revenue was 14.8%, which is 40 basis points better than last quarter, but remains below the 18.1% in the comparable period one year ago. The year-over-year decline is mainly the result of unutilized overhead on the lower revenue, as well as raw material cost pressure that I noted earlier.

While commodity prices have recently started to stabilize, we continue to increase our awareness throughout the organization to both passing through the inflationary costs where possible, along with being diligent with our suppliers.

On a similar note, we are monitoring the labor availability situation, which is causing upward pressure on wage costs across wide sectors of the economy. While labor inflation is not currently a significant problem for us, it may cause some margin pressure in the future as our end markets continue to recover and we increase our staff accordingly.

As always, we continue to closely monitor our cost structure to protect our margin profile in these periods of lower volumes. As a predominantly long-cycle business, it is critical that we retain the domain expertise and technical know-how to ensure that we capitalize on project opportunities as they become increasingly available.

Moving to the bottom line. We reported a net loss of $2 million in the quarter compared to net income of $3.5 million in the prior year. The decline was the result of lower earnings driven by the decrease in revenues and gross profit amidst the current environment of adverse market conditions.

We ended the quarter with $129 million of cash and short-term investments and essentially zero debt, as we retain our strong liquidity position, which offers us continued flexibility to manage through this down cycle. As I mentioned earlier, new orders in the third quarter were an encouraging bright spot, totaling $103 million.

That compares to the second quarter total of $89 million and $91 million of new orders in the first quarter of 2021. While new orders remain lower than what we ultimately aim to achieve, we view the $103 million this quarter as an important step in the right direction.

We ended the quarter with backlog totaling $426 million, which is roughly 3% lower than the second quarter. It is also lower when compared to the $532 million backlog at the end of the comparable period last year, though that number was benefited by the largest-ever award in Powell's history during the second quarter of fiscal 2020.

The increase in our third quarter orders was accompanied by robust quoting activity, supporting both new projects along with request to update pricing for several projects, mostly within our core oil, gas and petrochemical markets that were previously delayed at the start of the COVID pandemic.

We view this as an additional positive step for the longer-term recovery process of our end markets. Overall, our financial results remain challenged by industry conditions. However, I remain pleased with the level of execution across our operations.

We have a strong focus on driving efficiencies and project execution at Powell as well as working closely with our customers. Looking forward, we continue to believe the economics of natural gas will offer favorable opportunities in the LNG, gas pipeline and gas-to-chemical process industries for the foreseeable future.

As the world transitions to cleaner energy sources, we are actively participating in the development and planning of projects in the renewable markets of biofuels and biodiesel, carbon capture and sequestration as well as the early stages of hydrogen and related projects.

Obviously, these renewable markets and technologies are still developing at a bit distant, but are exciting and offer an opportunity to leverage Powell's products and solutions. Additionally, we also continue to monitor the possibility of tightened environmental regulations that may require additional investment in existing infrastructure.

Effectively competing in these new and growing markets requires a history of operational excellence as well as an ability to continuously develop new and innovative technologies. We remain committed to our research and development activities, and throughout our fiscal 2021, we have continued to innovate.

Recent accomplishments include a new unique design for an underground distribution switch specific to the need of one of our utility customers. This new underground switch will meet or exceed operational specifications, while providing an upgrade path to replace aging infrastructure in the distribution network.

We are always working to ensure Powell's products are the safest in the industry. And this year, we added new remote racking technology to our Power/Vac line of breakers and switchgear. This enhancement further increases operator safety and will benefit all of the markets that we compete, including our OEM customer base.

And last, we continue to build out our suite of digital asset management sensors. In fiscal 2021, we released the latest in a suite of sensors to help our customers move to an event-based maintenance strategy.

We believe that digital technologies will continue to play a larger role in the future of electrical distribution, helping all of our customers achieve higher operating performance from their invested capital while also serving as an enabling technology to help achieve carbon reduction goals.

Overall, we are encouraged by some of the trends that we saw in the third quarter. However, we are remaining somewhat cautious as it will certainly take more time to understand the direction of our customers' capital spending plans. In the meantime, our financial position and deep expertise enables us to weather periods of lower volume.

Additionally, the core elements of our history and foundation remain important attributes as we continue to be a partner of choice for critical electrical infrastructure delivered on time and on budget. Reiterating our key focus areas as we enter the final quarter of our fiscal year.

First and foremost is the health and safety of our employees, customers and suppliers. Second, we remain focused on maintaining our solid execution performance to meet the high expectations that our customers have come to expect from 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 finally, identifying more nascent applications for our electrical systems and technology, where we can be competitive as we look to broaden and diversify our pipeline and future opportunities.

And last, before I turn the call over to Mike, I would like to draw your attention to Powell's 2020 Corporate Responsibility Report that we recently published and that you will find posted on our website.

The report provides an expanded view of our environmental, social and governance performance, including support for the Sustainability Accounting Standards Board framework. Across all of our teams, our employees have and continue to be excellent stewards of the resources that we use to produce our products and solutions.

We have always embraced a diverse team, and we value all of our employees. And we track the critical metrics important to all of our stakeholders such as a constant focus on safety, which is an area that we are proud to share in our Corporate Responsibility Report.

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. As Brett mentioned, new orders for the third fiscal quarter showed an encouraging upward trend, both sequentially and on a year-over-year basis, totaling $103 million. This is higher by $15 million sequentially and $22 million higher versus the third fiscal quarter of 2020.

Our fiscal third quarter total orders represent the first period of year-over-year growth in the last five quarters. Our revenues for the third fiscal quarter of 2021 were $116 million, lower both sequentially and versus the prior year by 2%.

The challenging macro environment that we've been navigating throughout the past 12 to 18 months that has resulted in a significantly lower orders cadence, particularly across our oil and gas and petrochemical end markets, has had an adverse impact on the fiscal 2021 revenues. The third quarter ending backlog was $426 million.

This is lower by $11 million sequentially and $107 million lower versus the prior year as we have continued to convert the backlog, particularly the large industrial order that was booked in the second fiscal quarter of 2020. Overall, we feel that our backlog position remains healthy, particularly when comparing to historical levels.

The book-to-bill ratio for the third quarter was 0.9 times, which is an improvement from the prior quarter book-to-bill ratio of 0.7 times. Compared to the prior year, domestic revenues decreased by $3 million or 3% to $88 million, and international revenues were 2% higher on a year-over-year basis at $27 million.

The overall revenue decline versus the prior year is a reflection of the softness across our oil, gas and petrochemical end markets that we've experienced throughout the past one and a half years. From a market sector perspective, revenue across our oil and gas and petrochemical sector was lower by 14% versus the prior year.

Breaking the sector down further, oil and gas increased by 7%, while petrochemical end markets were lower by 48%. Helping to offset this reduction, the utility sector was higher by 57%, while traction volume generated a 52% increase versus the third fiscal quarter of 2020.

Gross profit in the third quarter of fiscal 2021 decreased by $4 million or 330 basis points as a percentage of revenue versus the prior year, but was higher sequentially by 40 basis points.

The margin pressure versus the prior year was driven primarily by the lower volume, generating unfavorable utilization and leverage across our operating facility. In addition to volume, increasing commodity prices, specifically in copper and steel, were a headwind as well.

As Brett mentioned earlier, we're moving quickly to pass this inflationary pressure through its price. However, there is a timing lag relative to the increase in cost. Selling, general and administrative expenses were $17 million in the current quarter, a $1.2 million increase versus the same period a year ago and flat sequentially.

From a year-over-year perspective, we're experiencing modestly higher employee benefit costs, in large part driven by the lower expenses incurred during the COVID-19 lockdown. SG&A as a percentage of revenue was 14.5%, which compares to 13.2% in the prior year and 14.1% sequentially.

In the third quarter of fiscal 2021, we reported a net loss of $2 million or a loss of $0.17 per diluted share compared to net income of $3.5 million or $0.30 per diluted share in the third quarter of fiscal 2020.

During the third quarter of fiscal 2021, net cash used in operating activities was $22 million driven primarily by the ramp-up of working capital as we execute the large industrial project that was booked in the second quarter of fiscal 2020. Investments in property, plant and equipment for the quarter was $857,000.

At the end of our third fiscal quarter, we had cash and short-term investments of $129 million, $35 million lower than one year ago and $50 million lower than our fiscal 2020 year-end position. Long-term debt, including current maturities was $400,000.

As we exit our third fiscal quarter and look forward to the fourth fiscal quarter and beyond, we are cautiously optimistic that our industrial end markets are beginning to show signs of a slow recovery based upon the current quarter's orders uptick.

That said, we continue to expect a challenging operating environment with anticipated inflationary headwind as well as a competitive commercial landscape globally. As we navigate through this environment, we are continuing to closely manage our liquidity and operating costs.

As noted previously, our backlog position is solid, and our balance sheet remains strong. Looking forward, we anticipate some choppiness across the quarterly landscape driven in large part by the ongoing uncertainty across many of our industrial customers as they align their capital projects to the current market environment.

At this point, we'll be happy to answer your questions..

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Jon Braatz of Kansas City Capital. Please go ahead..

Good morning Brett, good morning Mike. .

Morning Jon. .

Brett and Mike, obviously the petrochemical sector has been very soft.

Are you seeing in your incoming orders any improvement, any new activity that would suggest that maybe that you're seeing the light at the end of the tunnel in that particular sector?.

Jon, it's Brett. The answer to your question in short is yes. We are seeing, it has been a very soft subsector for us over the past 12 to 16 months. So, absolutely spot on. And we've seen, that part of the subsector, we saw pick up in the Q3 and kind of continuing a little into Q4.

I wouldn't go so far to say the light at the end of the tunnel, but definitely encouraging and nice to have activity pick back up.

Some of that is new activity as I noted in the prepared comments, and some is a mix of some jobs that were delayed and some of those engineering-only opportunities that we see at the start of every downturn kind of being brought forward in funding. So, it has been a lot more fun in that subsector in the last few months..

Okay. Obviously, the Delta variant is in the news these days.

Anything you're seeing and hearing most recently impacting projects started activity levels and so on? Or is it too early?.

Not yet. Yeah, a little early, but the radar's up. I'd say nothing as of today and today's call has been momentum-wise changed, but obviously, we're very anxious for any data that comes in, but nothing as of today..

Okay. And then secondly, in terms of your gross margins, you're feeling pressure because of the lower volumes and also the raw material cost.

But when you think about your price increases that you're putting into effect that are impacting the new orders and so on, everything else being equal, what kind of recovery do you think you could see in gross margins sort of assuming flat revenues just from getting the price increases through, how much of a drag is that this year? And sort of what kind of recovery might we expect to just recovering those cost increases?.

That's a good question, Jon. There are a lot of dynamics on this inflationary front on the materials side, which has stabilized a little bit in the last couple of months. The inflationary piece on the cost for labor is a constantly changing equation right now.

And of course, don't forget the cost structure side, we're constantly watching it, trying to balance the resources looking forward over the six to 12-month period of a project cycle. So, I'll let Mike comment here. We are having some success, I'll say, on pushing that through on price, I think, across the market.

It's always a competitive concern, but I think it's so broad that it is kind of floating back into the market.

But it's not, I don't think it's unexpected at the customer level, but there's the normal back and forth of what we can legitimately pass-through what's real cost? And so, we are having some success on alleviating those short-term issues while getting the pricing updated for the longer-term projects that are yet to be awarded.

So, I wouldn't get overly excited, but I would expect to look at my point to recovery if we're successful..

What I'd offer, Jon is as we close out third quarter year-to-date, and we understand the inflationary pressures and the efficiencies due to the lower volume, we actually got dinged about 70 basis points just on the leverage and productivity front, just on the lower volume. And the commodity inflation was about 100 basis points.

Now, as I mentioned in my prepared comments that, commodity inflation a lot of that, specifically the metals, we've acted judiciously to get that into our estimating models. But there will be a timing estimate, just a timing lag on when that will be realized.

So, this will be, it will be a slow claw back from a pricing perspective, just to answer your question. To quantify how much that will be, there's a lot of moving parts at this point. If volume comes back, that will help. That will help tremendously. .

Leverage a lot better..

Yeah, okay. All right Brett and Mike. Thank you very much..

Thanks Jon, thanks..

The next question comes from John Deysher of Pinnacle. Please go ahead..

Good morning everyone. .

Good morning..

Two questions. One, you mentioned increased environmental regulations that might prompt an increase in investment in your infrastructure.

Can you tell us more about that in terms of regulations and what the cost of complying with that might be?.

Well, the one that we always watch very closely is anything on the fuel side. The current administration just came out last week, I think, with guidance on not only some targets for some of the new EV vehicle aspirations that they have by the end of the decade.

They also came out and renewed and changed what the last administration did on fuel economy. So that will be a mix of what the automakers do as well as what they can do on the fuel side. So, any time there's desulfurization- or dehydrogenation-type projects on the refining side, we always see an investment cycle. So, it's not firmed up yet, John.

But that would definitely be an upside to that sector of the business for us over the near to midterm..

Okay.

So, there's no budget or anything for increasing the increased investment in your infrastructure at this point?.

No, not yet. This would be an increase in activity around quoting and budgeting and planning, and then it'll come down to timing when the administration lays down here and their final rule..

Okay. Fair enough. The other question is, back in December -- December 9, 2020 which was your fourth quarter earnings call, there was some discussion of the Board and management working on a strategic plan to lay out the direction of the company. And I think you are going to disclose the results fairly soon.

I haven't heard anything about this, although I may have missed it.

And I was just wondering, did anything ever come of that strategic plan you highlighted back in December of 2020?.

Well, we continue on. We've not published an updated IR deck that clearly lays out some of the words that we've used in the past earnings call. But there are generally three areas, John, that we're very focused on that I had mentioned in the prior calls. And we will have the deck updated here.

I can't give you a firm date, but it's, again, sooner as opposed to later. But first area is around the core electrical products part of Powell, what we believe makes us partially relevant to the industry and our customers is the products and solutions that we produce that make up that solution, the breakers, the switchgear.

Along with that would be this drive into the digital automation. We spent considerable R&D, time and money and to learn and to develop new sensors around the asset management side. Those are now making their way into the market, has been for the last few years.

And we're learning as we go about what we are doing well and where we need to adjust and plan strategically for the future. And then the last area is a couple of years ago, big three here off the top of my head.

We combined all of our service teams across Powell's footprint, to really drive a more synergistic strategy across the company as opposed to segmented the visions that we had to drive a more cohesive service strategy for where we're installed and really to be a partner.

And this the COVID pandemic, that changed -- every downturn sees a change in demographics. How can Powell be more relevant in our clients' operations on the maintenance of their assets and extend the life of their capital tomorrow? And so, that's an area that we believe we could do better in, and that's an area that we're driving pretty hard..

Okay, that's helpful. But you mentioned updating the deck.

Is that going to happen anytime soon?.

Yes. Can't give you a date as of today, but it is something that we're working on collaboratively with the Board as well with our management team..

Okay. It sounds like it's a work in process..

It is a work in process, and we are wanting to get that out there as soon as we can..

Okay. Great. Thank you very much..

Okay, John thank you..

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

Thank you, Andrea. While our financial results remain challenged by the underutilization of our overhead driven by lower volume levels, the core operational capability across Powell is extremely strong.

Our world-class employees are leading through these challenging times, and we are committed to being a supplier of choice when it comes to meeting the needs of our customers for their electrical distribution products and solutions.

We are encouraged by improved activity in our industrial markets and the continued strength in our utility and municipal sectors. Our balance sheet remains a core strength. And we are actively pursuing new and exciting projects and emerging market opportunities that will better diversify our backlog and project mix going forward.

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

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect..