Good day, and welcome to the Powell Industries Fiscal Second Quarter 2024 Results Conference Call. [Operator Instructions] Please note this event is being recorded..

I would like now to turn the conference over to Mr. Ryan Coleman with Investor Relations. Please go ahead. .

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries' conference call today to review fiscal year 2024 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 8. The information on how to access the replay was provided in yesterday's earnings release..

Please note that this information reported on this call speaks only as of today, May 1, 2024, 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 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 turn the call over to Brett. .

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2024 second 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..

Powell's second quarter financial results showed strong year-over-year growth supported by continued strength and healthy levels of project activity from our core industrial end markets and complemented by impressive performances from both the utility and the commercial and other industrial sectors..

New orders in the quarter totaled $235 million, reflecting another strong quarter of bookings and in line with our expectations of a normalized but still elevated cadence of awards. Notably, there were no mega projects included in our second quarter bookings.

Rather, the $235 million of orders is comprised of a strong volume of small- and medium-sized awards that speak to our core competencies and well-balanced across our markets..

Our revenue in the quarter grew 49% to $255 million, driven mainly by strong performance from our largest markets, oil and gas and petrochemical, which grew 66% and 93%, respectively, compared to the same period of fiscal 2023..

As our operations have ramped to meet the demand of higher overall project volumes, we remain focused on project execution and operational efficiencies.

Many of the initiatives and process improvements put into place during the lean quarters of the pandemic continue to work well as we are benefiting today from improved and more efficient manufacturing operational processes.

These streamlined operations also helped to create additional capacity while also delivering attractive returns for our stakeholders..

Our gross profit was very strong in the quarter, growing 88% versus the same period in the prior year, leading to a gross profit of 24.6% of revenue or 510 basis points better than the prior year..

We are also benefiting from the quality of our backlog as it carries a more favorable margin profile than that of recent years.

This is mainly driven by a higher share of industrial projects where Powell's core expertise and competency lie and, conversely, a more selective share of work which tends to carry a lower margin profile due to either the nature of how this type of work is awarded or content less favorable to our strength of handling complex, heavier engineering requirements..

While we are, of course, always conscientious of how we utilize our resources to pursue and quote projects, Powell's focus on custom engineered-to-order solutions for complex projects means that we rarely aspire to win projects on price.

Rather, the value we provide is our industry-leading track record for both our product technology and our project expertise, and that we deliver for our customers on every project..

The strength of our engineering teams is equally important as it enables us to be closer to the customer throughout the project life cycle, allowing us to adapt quickly as project requirements, scope and timing change while fostering healthy long-term customer relationships. .

On the bottom line, we recorded net income of $33.5 million or $2.75 per diluted share, which was roughly 4x higher than the $8.5 million or $0.70 per diluted share in the year-ago period. Our backlog remains near the highest in Powell's history and was roughly flat sequentially at $1.3 billion. .

Regarding our capacity initiatives, the expansion of our Houston facility on the Gulf Coast is complete. And that expansion is providing us with incremental fabrication and integration support for large power control rooms, especially for projects that support delivery and transport by water access..

In addition, the expansion of our electrical products factory in Houston is progressing as planned. This $11 million expansion is expected to be completed in the middle of fiscal 2025 and coincides with our initiative to release new products in support of our future growth across the customers and markets we serve..

We remain comfortable with our current staffing levels and are confident that we have the right people in place to meet the demanding project schedules of our backlog.

However, as we look out over a multiyear period and evaluate the markets we serve, finding talented engineers to help us increase our throughput will remain a critical area of focus for us.

Our HR team continues to do a terrific job finding great people to join the Powell team as well as developing creative staffing plans to improve efficiency and help us service a backlog that has tripled in just 2 years..

Looking forward, our expectations for project activity and new orders are relatively unchanged. Overall, quoting activity remains very healthy and balanced..

Within the oil and gas LNG market, the fundamentals of the U.S. natural gas market remain favorable and support many global economic and environmental goals over a long-term horizon. Natural gas price spreads across global markets remain conducive to U.S. export activity. That said, it is our assessment that the comments earlier this year from the U.S.

Department of Energy regarding U.S. LNG export permitting have had a slight dampening effect on new projects coming to market for bid. These projects are likely being pushed out to the right and have not yet impacted Powell's long-term planning for this market..

The fundamentals for our oil and gas and petrochemical markets continue to underwrite our expectation for continued strength for these sectors, which also includes energy transition projects, such as biofuels, carbon capture and hydrogen..

Activity within our commercial and other industrial market also remains attractive. Revenue in this segment grew 57% this quarter. Over the past several quarters, the growth in this sector has been driven by our growing presence in the data center market and has mostly been driven by a limited amount of the total value that we could offer.

We believe that the strong growth that we have seen so far in this fast-growing market for Powell has a larger potential as we continue to qualify more of our products and services for the future of this important end market.

We have primarily served the outside connection of the data center to the grid and see the potential for further penetration within the 4 walls of the data center where Powell can provide increased value..

In addition, sales to data center customers have generally been smaller in scale and focused on individual products. However, as data centers grow in both physical size and computing power, the electrical energy demanded by these facilities will only grow in scale.

As a result, the power solutions required by data centers will also grow in sophistication and require companies like Powell to build customized and fully integrated solutions within a single power control room to ensure the reliability and uptime performance of the servers to store and secure the data.

We are prepared for this future and are building relationships with both hyperscalers as well as colocators to better understand the power demands of these facilities to deliver Powell's engineered-to-order solutions for these customers..

Lastly, the outlook for our utility market is among the most positive in recent years. Powell has grown to become a leading provider of utility distribution substations. These types of projects remain core to our results in this market, but recently, we have seen the return of new generation work.

Helped by the increasing electrical power demands, such as data centers, it is clear that overall power generation capacity across the U.S. must grow in the coming years. We are optimistic that we are beginning to see the initial stages of an increase in utility projects to meet this expected demand.

The quality of projects we are seeing in this market remain favorable as does our ability to secure new orders on the projects we pursue..

To wrap up, we are pleased with our financial performance in the first half of our fiscal 2024, and our outlook for each of the markets we serve remains favorable. We benefit from a strong balance sheet and a $1.3 billion backlog that we believe will sustain our profitability through fiscal 2024 and into 2025..

Meanwhile, our near- and medium-term priorities remain unchanged. We are focused on growing our electrical automation platform, expanding our services franchise, and diversifying and expanding our electrical products and solutions portfolio.

We remain committed to these initiatives and are pleased with the progress we are making in each of these areas..

With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail. .

Thank you, Brett, and good morning, everyone. .

In the second quarter of fiscal 2024, we reported total revenue of $255 million compared to $171 million or 49% higher versus the same period in fiscal 2023..

New orders booked in the second fiscal quarter of 2024 were $235 million, which was 54% lower than the same period 1 year ago on a difficult comparison as the prior period included 2 mega project bookings. .

As we focus on diversifying our project backlog, we continue to experience positive momentum in new bookings across both the electric utility sector and the commercial and other industrial sector, which are both higher sequentially by 61% and 3%, respectively.

With these end markets contributing to the solid order activity, in addition to the sustained commercial activity in our core industrial end markets, they combine to generate a 0.9x book-to-bill ratio in the current quarter, which results in the fiscal second quarter ending backlog at $1.3 billion, $255 million higher versus 1 year ago and $23 million lower sequentially..

Compared to the second quarter of fiscal 2023, domestic revenues improved by 62% to $217 million, while international revenues were 2% higher driven predominantly by increased project volume at our Canadian facility. In total, international revenues were up by $1 million to $38 million in the second fiscal quarter..

From a market sector perspective versus the second quarter of fiscal 2023, revenues across our oil and gas and petrochemical sectors continued their positive momentum. The oil and gas sector was higher by 66%, while the petrochemical sector nearly doubled, higher by 93%..

In addition to the continued year-over-year growth in these sectors, we also experienced solid growth in both the electrical utility and commercial and other industrial market sectors, increasing by 11% and 57%, respectively, reflecting our ongoing focus to grow in tangential markets outside of our core industrial end market. .

The light rail traction power sector was lower by 38% as we continue to be very selective in this market sector..

Gross profit increased by $29 million to $63 million in the second fiscal quarter versus the same period 1 year ago. Gross profit as a percentage of revenue increased by 510 basis points to 24.6% versus the same period a year ago and was 25 basis points lower sequentially.

The margin rates' exiting backlog continue to benefit from the favorable volume leverage and solid operational execution across all of our manufacturing facilities. There is no change from our last update in our gross profit percentage projections, in the low to mid-20s throughout fiscal 2024..

Selling, general and administrative expenses were $21 million in the current period, lower by $1 million on a lower level of variable performance-based compensation versus the same period 1 year ago.

SG&A as a percentage of revenue decreased 450 basis points to 8.2% in the current fiscal quarter on the higher revenue base and diligent overhead management..

In the second quarter of fiscal 2024, we reported net income of $33.5 million, generating $2.75 per diluted share, compared to net income of $8.5 million or $0.70 per diluted share in the second quarter of fiscal 2023..

During the second quarter of fiscal 2024, we generated $17 million of operating cash flow driven by higher earnings generated in the second quarter, partially offset by a negative working capital impact as we allocate capital to fund projects in the order book. .

Investments in property, plant and equipment in the fiscal second quarter totaled $900,000..

At March 31, 2024, we had cash and short-term investments of $365 million compared to $279 million at September 30, 2023, and $355 million at December 31, 2023. The company does not hold any debt..

As we look forward, we are optimistic that our strategic focus to grow in tangential end markets combined with the sustained strength across our core industrial end markets will continue throughout fiscal 2024. .

We are cognizant, however, of the recent uncertainties in the macro environment that may have a timing impact on near-term LNG market activity.

Notwithstanding this minor disruption from a commercial perspective, both the sustained level of market activity across our other end markets as well as the quality and level of our backlog positions the business favorably to sustain the momentum that we experienced in the first half of fiscal 2024 and continue our solid financial performance throughout the remainder of this fiscal year..

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

[Operator Instructions] Our first question comes from John Franzreb of Sidoti & Company. .

Brett and Mike, congratulations on another solid quarter. I'd like to start, I guess, with the top line because that surprised me the most personally. Last quarter, you kind of referenced you were running at full capacity but were still able to generate really strong revenue gains in the quarter.

I'm curious, how should we think about that? Is there anything unusual as far as the revenue recognition? Is that a sustainable level? Can you just kind of walk us through how at full capacity you can generate that kind of -- that size of revenue volume?.

John, it's Brett. I'll start and then I'll ask Mike to jump in here, too. During the quarter, about midway through the quarter, it did catch us a little surprised, too. It's a little lumpy as we looked at all the things that we're buying. So when we looked at the results on the revenue side, there was a fair amount of large buyout.

And the way the POC works for us, it sort of jumped up a little bit. So looking at the back half of the year -- I'm going to ask Mike to jump in here. But I don't think that level that we just saw -- its potential just kind of depends on timing as the schedules move around. But it was a little bit higher than we expected as we went into the quarter. .

Yes. And John, this is Mike. To follow on, on Brett's comments, the major buyout in the projects business does introduce some choppiness across the quarterly landscapes, for sure. But as we look at our backlog and we profile it out the next 12 months, typically, it is between 50% and 60% convertible over the next 12 months.

And that will vary very slightly given how the major buyout falls. But no major changes from what we communicated last quarter in our total top line expectations and the like. .

Does that suggest that normal seasonality will be limited, you won't see the big bump maybe in revenue we typically see in the fourth quarter and maybe we should think about it a little bit flatter?.

I think the delta between the 2Q, 3Q cadence and the 4Q cadence probably will be less than it normally is. But I still think, traditionally, fourth quarter is usually a seasonally heavier quarter from a fiscal standpoint -- fiscal year standpoint as we profile the year. .

Understood. And you maintained your gross margin expectations of low to mid-20s.

What are the limits to a better gross margin profile that you're seeing?.

Well, one of the biggest contributors has been the leverage. And being this ramped-up, kind of for your earlier question, I think that is one of the limiting factors, is we're kind of butting up against capacities. There's eking out that leverage. We're kind of down to cost management.

And we've kind of echoed that throughout the organization on our operational reviews this spring that the incrementals can come on the cost side. We're always cognizant on the employee side, making sure we're getting good, quality folks on the team and supporting them as best we can.

But I think at this point forward, our best avenue forward is maintaining productivity and watching our cost side. .

Okay. And I guess one last question, I'll get back in the queue. The cash build has been sizable. I mean, historically, you've had good revenues with working capital outflows. I haven't seen the cash flow statement yet, but it doesn't seem to be the case.

Can you talk about how we should think about cash usage as jobs ramp up? And also your priorities for excess cash, has the Board addressed maybe a potential special dividend or something along those lines?.

Okay. Yes, John, I'll start and then Brett can chime in here. First, as we sit here today, the $365 million of cash and marketable -- market securities we feel has, in large part, plateaued. We consumed roughly $20 million of capital to fund working capital this quarter.

The offset to that was replenishment with the balance in new orders and the orders cadence in backlog and the associated advanced payments.

So we anticipate, as we look forward, given the healthy and normalized booking cadence, providing cash inflows, this should -- this cash balance should maintain about where it is, maybe slightly recede, as we fund working capital and CapEx requirements in the second half. .

Yes. And then on the uses of capital in the future, John, in the prepared comments, I kind of made an update on the $11 million expansion. There are some other things we're looking for tweaking capacities as we go out through the rest of the fiscal and calendar year. Nothing to share today.

Nothing that would be above what we've already got on the books for plan. But there are discussions about different facilities and what can we do, what's sustainable in the markets and where we're going with our product and strategy. So there are a few things that we're looking at that I think in subsequent quarters we'll be reporting on..

And then back to just the inorganic funnel, that continues in earnest, Mike, I, the management team, the Board. Again, nothing immediate this quarter to share, but it continues to become a bigger part of the time Mike and I are spending year-over-year. And I'm pretty excited by what the next couple of years has in store for us there. .

[Operator Instructions] Our next question comes from Jon Braatz of Kansas City Capital. .

Back to the revenue side of the business, Brett or Mike, what are you seeing in terms of sort of the quarterly book-to-burn numbers? We've talked about this in the past, Mike.

But has that accelerated? Is that more than what is typically the case?.

That's been pretty static, Jon, over the past several quarters. And we typically run $30 million to $40 million a quarter of book-to-bill on top of the traditional backlog burn. So no, that's been pretty stable. .

Okay. Very good.

And pricing, when we look at pricing throughout the quarter, any benefit from pricing?.

Nothing. It's been pretty flat for a couple of quarters now. There's always some opportunity there, but schedule still dictates overall, I'd say, on competition and where we're at in the market.

But pricing has become gradually more of a factor as -- not so much for Powell but the engineered components that still throttle most of what we compete on, and we're out in the market, and it's got -- it's improved. And so with that, it settled the pricing market a little bit. It's not eroding, but I don't think it's going to be much more accretive. .

Okay. Brett, most of the strength has been, from a geographical standpoint, in the U.S.

Anything you're seeing on the international front that suggests that we might see some stronger days ahead?.

Yes. We were just in the U.K. where we have the 1 factory we compete, IEC, also doing very well, by the way. They're having one of their best years in many years. But we were talking internationally. We're seeing some resurgence potential in the Middle East. It's been a little light there for a couple of years.

So we see some potential growing for international. And also some work in Africa that's pretty interesting to us. We have a pretty good base of installed base from the north of Africa, around mostly to the west side of Africa, and we're seeing some brownfield work resurge that has gotten our interest.

So yes, we feel pretty good about that for next year. .

Okay. And then last, Brett, you spoke a little bit about the data center market and getting inside the 4 walls of a data center as opposed to outside.

And can you talk a little bit about the process of getting into the 4 walls, what this opportunity size might be and what the potential might be and where you see it going from here?.

Sure. So when you get inside the 4 walls, you're stepping down on the electrical one line into lower voltages. And we today could compete, but we're not optimized to compete in that. And it's, of course, space that started pretty strongly by some very large multinational competitors.

But as we've got a foothold now with a lot of these folks over the last 3 or 4 years, we're having very good substantive discussion about what are the designs, do they want a fixed-mount breaker or a withdrawable breaker, that dictates a little bit how we compete.

But it also is giving us a lot of ideation and discussion about the R&D side and what can we do to our products to make them more competitive, to provide optionality to our client, to go with Powell on a wider scale of products and services..

So it's a little bit of a process on the AVL, the approved vendor list, but it's bidirectional. So we definitely have to do some things to improve the product. I think the service side of Powell is ready to go.

And I'm hopeful that it's just a matter of time that we'll solve that equation with a few of the large folks out there and build some really sticky relationships for years to come. .

Is that where some of your -- a lot of your R&D spending is going, in that area?.

Some of the more recent R&D. We have some projects that have been going on for years that are very targeted at the core industrials and utility. Utility has become a really important market segment for us. But more recently, there are some things that we're learning, we think.

For the products we already have, we have some ideas that we're running in the ground right now that, if we can solve the technical problem, we think we'll have a plus one differentiator. .

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

Thank you, Alan. Overall, it was a very solid second quarter, and we are pleased with our performance across the organization. We have a great focus on productivity and efficiency across our operations, and our teams are delivering on schedule and on budget to our commitments..

I would like to thank all of our employees for their energy and commitment as we have raised the bar with the incredible growth of our backlog. Also, of course, thank you to all our valued customers. We appreciate your continued trust in Powell..

Thank you all for your participation today. We appreciate your interest in Powell, and look forward to speaking with you next quarter. .

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