Good morning. And welcome to the Powell Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would 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 2022 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 website, powellind.com, or a telephonic replay will be available until May 11th. Information on how to access the replay is provided in yesterday's earnings release.

Please note that the information reported on this call speaks only as of today, May 4th, 2022, and therefore, your advice of 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 expectation 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. With that, I'll now turn the call over to Brett..

growing our electrical automation platform; expanding our existing services franchise; and diversifying our product portfolio through both targeting tangential applications that complement our existing product offerings, as well as expanding the scope of our product catalog into new electrical technologies.

We are beginning to see the benefits materialize as a result of these efforts and look forward to sharing additional examples of our successes within each initiative. Lastly, our priorities for the year are unchanged. First and foremost is the health and safety of our employees, customers, and suppliers.

Second, we remain focused on maintaining our solid execution performance, strong project closeouts, and factory efficiencies as we look to protect our margins in an inflationary cost environment.

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 lastly, as we look over a longer-term horizon, we are committed to thoughtfully executing on our three strategic priorities and updating investors on our progress as appropriate. With that, I'll turn the call over to Mike to provide more detail around our financial results..

Thank you, Brett, and Good morning, everyone. In the second quarter of fiscal 2022, we reported net revenue of $128 million, higher by $9 million or 8% versus the same period in the prior year. New orders booked for the second fiscal quarter of 2022 was $151 million, $62 million higher versus the prior year and $43 million higher sequentially.

As a result, our book-to-bill ratio based upon reported orders was $1.2 million in the period, with $440 million of backlog at the end of the second fiscal quarter, which was $3 million higher as compared to the same period a year ago.

Compared to one year ago, domestic revenues were slightly lower by 1% versus the prior year to $87 million, while international revenues were 33% higher compared to the prior year, driven by strong value across all of our traditional international markets based in Canada, UK, and the Middle East.

In total international revenues were $41 million in the second fiscal quarter. From a market sector perspective, revenues across our oil and gas and petrochemical sectors were higher by 20% versus the prior year and the utility sector generated a 7% year-over-year increase in revenues.

Offsetting these year-over-year revenue increases, our traction sector was lower by 34% versus the second fiscal quarter of 2021 on the timing of new large traction projects. Gross profit increased by $6 million sequentially and $2 million versus the same period one year ago to $19 million in the second fiscal quarter.

As a percentage of revenue, gross profit increased by 230 basis points sequentially and 50 basis points versus the prior year to 14.9%.

While inflationary pressures continue to be a headwind to the overall profitability, the business is beginning to recognize incremental pricing gains in the short cycle side of the business, while also offsetting the cost pressure with factory efficiencies and labor productivity.

Selling, general, and administrative expenses were $17 million in the current quarter, 2% higher versus the same period a year ago. SG&A, as a percentage of revenue, decreased to 13% in the current quarter, and higher revenues and diligent cost management.

In the second quarter of fiscal 2022, we reported a net loss of $1.2 million, or a loss of $0.10 per diluted share, compared to a net loss of $225,000, or a loss of $0.02 per diluted share in the second quarter of fiscal 2021.

Although pre-tax income in the second fiscal quarter was positive, the fiscal 2022 second quarter net loss is primarily attributable to a tax provision that was recorded in anticipation of a stronger earnings profile than was previously expected for the total year fiscal 2022.

As such, our fiscal 2022 tax provision is currently aligned on a total year basis with these profitability expectations. Additionally, during the second fiscal quarter, we sold a small parcel of non-revenue generating land adjacent to one of our operating facilities, which was accretive to EPS by $0.02 per diluted share in the quarter.

During the second quarter of fiscal 2022, net cash generated and operating activities was $15 million. This is in lieu of holding higher levels of inventory in order to help facilitate new orders and alleviate supply chain disruptions. Investments in property, plant and equipment totaled $680,000.

At March 31st, 2021, we had cash and short-term investments of $114 million, $20 million lower than our fiscal 2021 year end position. The company holds zero long-term debt.

Looking forward, and considering the progress that the team has made in the first half of fiscal 2022 towards growing a commercial presence outside of our traditional industrial end-markets, we are optimistic that continued growth in these markets will deliver countercyclical accretive revenue and earnings in future periods that will complement our historical industrial market base.

From a profitability perspective, we continue our efforts to proactively address the macro inflationary pressures through pricing actions, productivity initiatives, and commercial terms to more directly address the current supply chain cost and material availability challenges, while also thoughtfully building inventory levels in order to maintain commercial competitiveness.

In closing, we maintain our expectation that the second half of fiscal 2022 will show substantial improvement from a profitability standpoint as compared to the first half. With that, we will be happy to open the line up for questions..

Hi, Brett and Mike. Thanks for taking the questions. .

Good morning, John. .

Good morning, John..

I guess we're going to start with one of the things you left off with Mike about the tax reversal. Could you talk a little bit about why that necessarily happened? What changed versus three months ago? Has an audit been put forward? Any color there would be helpful..

Yes, sure, John. And to be clear, it wasn't necessarily a tax reversal. It was a provision that was made due to the realignment of our income.

So, first I'd say, on a total year basis, the effective tax rate when we are near at or near breakeven, very, very difficult to predict, but considering the commercial activity that we are seeing across our light industrial and utility end-markets, especially during the second quarter here, in conjunction with the gradual recovery that Brett mentioned across our core industrial end-markets, we anticipate additional revenue and margin versus our prior estimate on a total fiscal 2022 year basis.

So, considering this, as a result of this, this necessitates an adjustment to the tax provision, which was taken in the discrete 2Q period of $1.8 million. So this essentially, this provision essentially now aligns the business with our anticipated earnings for the entire fiscal year..

Okay, so it was more of a case of the light industrial side of the business proving to be better or firmer than – and some of the longer lead-type stuff you have a handle on. So, it was with light industrial, that was the delta there..

As well as utility had a strong quarter in utility and light industrial..

Got it. And you talked a little bit about the gross margin profile and the recent order book. How's that compared to, say, three months ago? Are you able to push through surcharges or escalators to offset commodity costs? Any little color there would be helpful..

Yeah. Hey, John, it's Brett. So, in the last quarter, yes, we are doing better in some of the market on price, especially that's tied to speed, shorter cycle deliveries, something that's kind of the next two to six months and we see a lot of that in some of the light industrial and utility piece, but not fully.

On projects that have a longer time horizon, there is still a fair amount of competition, something kind of a year, year and a half out for delivery.

So it's a little bit of a mixed market, but we definitely have taken a step forward this past quarter, doing better across the business, in understanding where the market is at and pricing appropriately into that market..

Okay. And one last question, I'll get back into queue.

Just on a bigger picture side here, what are your thoughts about recent geopolitical events? And has that changed the opportunity profile at all, or is it too soon to tell to shift thoughts along those lines?.

Yes, I think there is two parts of this because we do talk a lot about it. I already covered some of the market forms in terms of book and revenue and all that, Mike addressed some of the things on the cost side and the ripple. So, first of all, for me, it's an advantage in the way we are structured right now.

We are what we would call an integrated factory structure at our locations, not a feeder factory, where we compete against a lot of multinationals that they've developed their factory systems over the last 30 years.

So, from an exposure standpoint, and when we go to a market and what we convert when we buy our commodities and convert, and as we're selling into the market today, which is actually enhancing our ability to deliver on the speed side, which really did helped second quarter in top-line order performance, we're not that exposed and we have some exposure sort of into some suppliers, Europe and India, but really more the Americas, North and South, where we are aligned.

So that's an advantage for Powell and will be for the next couple of quarters, I believe, as this sort of plays out.

That said, where we do get exposure indirectly is sort of the ripple effect on logistics and not material for Powell per se, but when we have an integrated – either large integrated switchgear offering or a PCR, there might be some exposure there with things that we buy.

And so, Mike has been very involved with the teams on that and I'll let him comment on some of that..

Yes, John, just on the core raw materials that the business consumes, you know, copper, aluminum, steel, stainless steel, things of that nature.

Clearly, the upheaval in Ukraine and Russia has an impact on those core commodities, which we are keeping very close to and buying forward where we can and looking at potentially hedging some of these things.

On the flip side, you know, with the LNG pressure that Europe is feeling that potentially in a mid to longer-term perspective may have some benefits to the U.S. producers in this half..

Okay, guys. Great. I’ll get back into queue. Thanks for taking my questions..

Okay. Thanks, John. .

Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead..

Good morning, Brett, Mike. .

Good morning, Jon. .

Hi, Jon..

Brett, when you look at the incoming orders that you generated here in the second quarter, can you sort of parse that out between some of the legacy business versus the new activity in the commercial area? What kind of inroads are you making and progress you are making in the commercial side?.

So, yes, on the legacy side, I would first talk about utility. If you remember, Jon, over really our last five plus years, I've talked a lot about our methodic progress in the utility starting with Canada, go back to the 2014, 2015 downturn, never really recovered in West Canada as quick as we did in the States.

And so we had to fit it and we did do R&D development to support of that effort into a utility strong East Canada strategy. And we talked about that over the last couple of years.

And so, along with that, we've seen methodic progress in the US on distribution, more so the generation for our offering, our enclosed solution, so a more robust, a little higher initial price, but you get a longer life out of the asset for the utility.

And so I think in the second quarter, it's along those lines, and I think that there has been some – because of the way we are structured and the ability to still kind of hit some quick deliveries, sort of saw some upturn in that market specifically.

On new markets, the three straight stated strategies, especially around developing new products for the markets that we serve, go back to when Tom acquired the GE Power backline in 2006.

Subsequently, the IS grouping sold to ABB, that really threw Powell into channels and having to develop new ways into the market versus just direct sales through our stronger than historical relationships with our core.

So that, as we kind of were working through our strategy over the last couple of years, one of the ones that - one of the tactics that we had to develop was a better understanding, support, and strategy around those channels. So we are seeing in this past quarter the results of that.

So there is a fair amount of opportunity that I think historically we have not have seen if 18 months, two years ago, we wouldn't have beefed up that strategy on the channel piece.

So it's giving us exactly what we want, and it's giving us upside orders, but also a lot of intel on where we've got to continue to invest in order to sustain that well into the future. So, it's been a real positive move for the company..

Okay. Thank you.

To the extent that, let's say, some of these projected LNG projects go forward and there is an opportunity for Powell and, let's say, a large opportunity, a sizable opportunity, given what we've seen in the past, the most recent past in terms of the inflationary pressures, how do you approach a project like that? And are you able to, in pursuing a project like that, put in more protections at this point now, to protect yourself from in the inflationary pressures? Or would you still be sort of at the whims of some escalating costs again? A - Brett Cope Yes, great question.

The short answer is yes.

We are able to put in some protections, but there isn't an element of delicacy in that because there is still competitive pressures, and the longer – as I noted, with John Franzreb, as you can look out further, there is still more competition for jobs that are two or three years out, it’s some assumptions of a recovery on the cost side.

But they are real costs, and so we are - as I noted the last couple of quarters, doing a lot of work with our engineering partners and the end-client on several jobs. And we are putting protections in there. Everything from validities, and a lot more work even with the sub-supply piece, whether – not so much on the commodity piece.

I think Mike and the team have done very well there. But I'm managing their component piece. There is a lot more work going into that.

And then, we do project out what-ifs, and so there's a lot more, how do we plan that out? When would it hit? What could we buy upfront and really even modifying some of our engineering process to understand where can we do some things early in the project with their help, maybe pivoting some milestones to walk in things earlier in the project than we might have been historically.

So those are the collaborative discussions we have. So there is a way through it. So, everybody – our - of course, our goal is to deliver on-time and on-budget and certainly expand our brand. So we don't want to lose that.

And so I think being predictable with our clients and those discussions being transparent while also demonstrating that we still think we're the best to hit these complex projects more than any other model out there. So, it is a lot more than a typical just – what we saw in the past, fitting these large jobs.

But I think we're the best and there's a couple still percolating out there, so..

Okay.

Speaking specifically about LNG projects, do you see some of them reaching FID and moving forward here?.

I do. I think in the next nine to 12 months, there is a couple of – not just LNG, but there are a couple LNG gas-related jobs that are – there is still some sliding to the right on schedule, there is - whether it's geopolitical, or how they're rolling up all their costs on the structural steel side.

I mean, I am sure there is a lot of moving parts that are more than just the electrical distribution, but I definitely believe there is some jobs that are continuing to move closer to that go-forward point..

Okay. Thank you. .

You bet..

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

Thank you, Joe. As we stated on today's call, we view our second quarter results as a significant and positive step in the recovery, and we are optimistic about improved performance in the second half of the year.

Trends across our end-markets remain favorable and we possess an incredibly talented team, a healthy backlog, strong balance sheet, and great relationships with our customers and suppliers. With that, thank you for your participation on today's call.

We appreciate your continued interest in Powell and we look forward to speaking with you all the next quarter..

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