Powell Industries, Inc.

And welcome to the PAL industry's second quarter fiscal 2021 results earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. As requested by management, please hold to one question and one follow-up. Brian Coleman, please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for Powell Industries' conference call to review fiscal year 2021 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 12th. 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 5th, 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 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.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2021 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. Our second quarter results were mixed relative to our expectations. Revenues for the quarter improved to $119 million, an increase of 11% sequentially over our first quarter. I would note that this growth was achieved in spite of the challenging operating environment that we continue to experience across our industrial markets. as well as the adverse impact of severe winter storm effects in Texas during the month of February that idled a majority of our Houston-based teams for nearly a week. Compared to the prior year, second quarter revenues were down 22%, mainly driven by lower revenue from the petrochemical sector, which was down 78%, compared to the second quarter of fiscal 2020. Oil and gas was down 3% year over year, while utility and municipal markets, which include traction, grew by 17% and 9% respectively compared to last year. This marks another consecutive quarter of year-over-year growth in these segments, partially offsetting the softness across the industrial sectors. Second quarter gross margin as a percentage of revenue was 14.4%, which compares to 19.6% one year ago. The year-over-year decline is mainly the result of underutilized overhead on the lower revenue, as well as raw material cost pressure resulting from higher copper prices and other industrial metals. These headwinds were partially offset by the restructuring activities taken in the third quarter of fiscal 2020. We continue to prudently manage discretionary expenses and are also closely monitoring our cost structure to ensure that we are aligned with the current environment. We are a long-cycle business, and it is imperative that we retain the domain expertise and know-how, maintaining our capabilities and readiness to serve for the eventual recovery of our major end markets. Moving to the bottom line, we were slightly below break-even as we reported a net loss of $225,000 in the quarter compared to net income of $7.4 million in the prior year. The decline was the result of lower operating earnings driven by the decrease in revenues and gross profit amidst an environment of lower new orders and adverse market conditions. We ended the quarter with $154 million of cash and short-term investments and essentially zero debt as we retained our strong liquidity position and continued to have optionality as we managed through this down cycle. New orders in the second quarter totaled $89 million compared to $91 million of new orders in the first quarter of 2021 and $301 million of new orders in the second quarter of fiscal 2020. The $301 million of new orders during this comparable period of the prior year was attributable to the large industrial award booked and reported in the second quarter of fiscal 2020. We ended the quarter with backlog totaling $437 million which represents a sequential decline of 6% and compares to $566 million as of the end of the second quarter last year. The industrial markets where we compete continue to be characterized by limited customer visibility and capital spending, as well as project delays. We are now more than one year since the pandemic hit and began impacting our end markets. And while conditions have started to improve, our industrial end market customers remain cautious as they evaluate future capital investment. Notwithstanding this, I am pleased with the level of execution across the company. We have a strong focus on driving efficiencies and project execution, while identifying the creative growth opportunities as we continue to work closely with our customers to adapt to the current environment, by both responding quickly to any requested changes to ongoing work currently in our backlog, while also providing the needed support they require for future capital spending plans. Looking forward, as the energy complex across the globe transitions to a cleaner future, we continue to believe the economics of natural gas will offer favorable opportunities in the LNG, gas pipeline, and gas to chemical process industries. We also see developing opportunities in the renewable markets of hydrogen, biofuels, biodiesel, as well as carbon capture and sequestration. These markets are more nascent but are growing. We are also closely monitoring the possibility of tightened environmental regulations that may require additional investment in existing infrastructure. We possess a leading reputation and operating history that differentiates Powell from a customer service and technological perspective. Our financial position enables us to maintain our strength while we navigate through these challenging economic cycles. We have and continue to build long and valued relationships with our customers and we believe that these core elements of our foundation remain solid and important attributes as we aspire to be the partner of choice for critical electrical infrastructure delivered on time and on budget. Before I turn the call over to Mike, I'd 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 of 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 while also broadening the markets for Powell. Our human capital, balance sheet strength, and technological expertise allow us to be proactive in the current environment. With that, I'll turn the call over to Mike to provide more detail around our financial results before we take your question.

Thank you, Brett, and good morning, everyone. The challenging macro environment that we've experienced throughout the past year, particularly across our core industrial end markets, continues to play out as the new order intake remains relatively flat across the last few quarters. New orders for the second fiscal quarter totaled $89 million. This was lower by $3 million sequentially and 71% lower versus the second fiscal quarter of 2020, as the prior year comparison includes the large industrial order that we booked in fiscal 2020. Revenues for the second fiscal quarter of 2021 were $119 million, higher sequentially by 11%, but lower versus the prior year by $33 million, as the trailing 12 months orders cadence across our oil and gas and petrochemical end markets, and the associated impact on backlog continues to adversely affect revenue. Our second quarter ending backlog was $437 million. This is lower by $28 million sequentially and $130 million lower versus the prior year on the challenging comparison that I just noted, but overall healthy from a historical perspective. The book-to-bill ratio for the second quarter was 0.7 times. Compared to one year ago, domestic revenue decreased by $33 million, or 27%, to $88 million, while international revenues were 2% higher on a year-over-year basis at $31 million. This overall decline, particularly in our domestic industrial markets, reflects the ongoing uncertainty across the oil, gas, and petrochemical end markets. From a market sector perspective, revenues across our oil and gas and petrochemical sectors were lower by 39% versus the prior year. Alternatively, versus the same period one year ago, oil and gas was down 3% while our petrochemical end markets was lower by 78%. Providing a modest offset, the utility sector was higher by 17%, while traction volume experienced a 9% increase versus the second fiscal quarter of 2020. Gross profit in the second quarter of fiscal 2021 decreased by $13 million, or 510 basis points, as a percentage of revenue versus the prior year, and down sequentially 270 basis points. The pressure on margins in the second quarter was primarily driven by lower volume and unfavorable leverage across our underutilized operating facilities, as well as increasing commodity prices. Selling, general, and administrative expenses were $17 million in the current quarter, $2 million lower versus the same period a year ago, and flat sequentially. SG&A as a percentage of revenue was 14%, which compares to 12% in the prior year and 16% sequential. In the second quarter of fiscal 2021, we reported a net loss of $225,000, or a loss of two cents per diluted share, compared to net income of $7.4 million or 64 cents per diluted share in the second quarter of fiscal 2020. During the second quarter of fiscal 2021, net cash generated from operating activities was $7 million, driven by the increased focus on working capital as we continue to execute and plan for projects currently in backlog. Investments in property, plant, and equipment for the quarter was $662,000. At the end of our second fiscal quarter, we had cash and short-term investments of $154 million, $33 million higher than a year ago, and $25 million lower than our fiscal 2020 year-end position. Long-term debt, including current maturities, was $400,000. Looking forward, we expect that our operating environment will remain challenged throughout fiscal 2021 particularly across our industrial end market. Considering this, we continue to manage our liquidity position and operating costs very diligently. Our balance sheet remains extremely strong, generating an additional $6 million of free cash flow during the second fiscal quarter. As Brett mentioned, and a key tenant of Powell, we are working closely with many of our customers to accommodate their project schedules which in turn may create some choppiness across our quarterly landscape and into fiscal 2022. Considering this, we anticipate that our second half will have a similar or slightly favorable trajectory versus the first half as we navigate through the commercial uncertainty persisting across our industrial end markets while closely managing the cost and cash equation. In closing, our backlog is healthy, our fundamentals are solid, and our strategy of maintaining ample liquidity through this downturn is sound. At this point, we'll be happy to answer your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please take up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, as requested by management, please hold to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. Our first question comes from John Frenzreb of Fidelity and Company. Please proceed.

Good morning, Brett and Mike. How are you doing? Good, good. I guess I want to start with the quarter in and of itself. You shut down for a week. Was there any lost or deferred revenue as a result of those shutdowns that were pushed either into the quarter or that you missed out on entirely? Can you kind of quantify that and what the impact was for you in the quarter?

Yeah, we estimated that to be between $2 and $3 million of revenue for those, essentially it was about four days, which carried roughly half a million dollars of margin. So it did definitely have an impact. Some of that revenue, for example, the field service revenue, Some of it may not, it wasn't necessarily a push out, may have been lost, but a lot of it was shop work that will be pushed out and recognized later.

Okay. All right. And I'm just curious about the order book and what you're seeing as far as quotation activity. Is there been a change in the tempo? Are people sniffing around a little bit more than they were a few months ago? Or is it still an environment where everybody's risk is worse?

John, it's Brad. In the most recent quarter, I think in a couple other calls, we talked about looking out the next couple quarters. I was in a conversation you and I had You know, we expect it to continue to kind of move to the right. There is this uncertainty kind of overhang. So I'd say that still is what we see looking out. The most recent quarter, I like your comment about sniffing. There was a little bit more activity kind of popped up, popped down. So it was, even with the winter storm, I think the inquiry level, there was some short-term urgency that sort of crept in. But I can't say, you know, another quarter on that I see any fundamental change to what we talked about last quarter. Horizon still looks uncertain. Out a couple of quarters, I think my comment about the potential to rise above the run rate since the pandemic hit is there. But to say it's going to sustain and start heading in a positive direction over time, I still can't say that sitting here today.

Okay. And in the interest of management's request, I'll get back into queue.

As a reminder, if you have a question, please press star. Next question is going to come from John Bratz of Kansas City Capital. John, please proceed.

Good morning, Brett, Mike. Pretty good. Brett, a question. When you look across your landscape of end markets and you talk about the weakness in the industrial markets, is there a something out there that might give you a sort of a lead, be a leading indicator of a turn in the trends? And is there a particular, you know, I guess a particular signal that something that would signal to you that we're at the bottom and we're beginning to turn up and the better days are ahead? Is there something out there that might be that signal for you?

John, I continue to read and look across the world and making sure that our teams are as engaged as we need to be. Reading the space, I think the fundamentals of the gas market, as I've talked really over the last year, year and a half, continue to be one of the economic indicators that the cost of the raw material and knowing what's out there and what's being planned, it's still driving a lot of potential problems. projects that I think will eventually materialize. I think that macro consumption of what triggers that is still unclear, and I don't see anybody being able to pinpoint that, but we are pushing on our teams to, you know, as the world is getting going again, if I can say that today's call, we are all back traveling. Customers are still a little bit hesitant to receive, you know, person-to-person, but I'd say there's more activity today than was just a quarter ago, so that's That's encouraging, but I can't say I can give you that trigger other than the fundamental, the economics look solid, and I just think it's that mass consumption of when are they going to have the confidence to pull the trigger on the large capex. You see a lot of things going on. We're watching that gas market into chemicals. That's still a very interesting space as well as just core LNG projects that are still kind of building. I don't think they're all going to go, but there are fundamentals look good for landed price that some of these should go.

Okay. Have you been able to secure any business, any contract awards with, let's say, some of those alternative energy projects, biodiesel, hydrogen, anything out there of being awarded?

We have. In fact, in the most recent quarter, we We had some awards. We were successful in some and not successful in a few others in that non-conventional conversion of diesel. And there's some more going right now. So that's been a nice win, as well as the sustained utility and traction market. Those have picked up relative to the math.

Okay. All right. Sounds good. Thank you very much, Brian.

You bet.

Our next question comes from John's friends around at Fidelity and Company. Please proceed.

Yeah, I just want to maybe talk a little bit. You said that utility was up in the quarter. That kind of contradicts what I've been hearing some other companies that a lot of crews still came out there and they were kind of bemoaning that. Why is your utility business actually up? Can you kind of delve into that a little bit?

So from a revenue standpoint and from an order intake standpoint, John, it's a It's a little bit of math with the lower revenue. It kind of rises up with the slowdown, especially in the Petrochem report on the drop on the revenue year over year. But the distribution market on the utility side has, a couple of years ago, been an overall better market for us in the States. And then you recall in Canada, they never really recovered from the 16 to 17 on the core markets like we saw in the States. And so we were forced to accelerate our strategy as we kind of went into West Canada. So we were getting Canada's, geographically speaking, last couple quarters actually been a highlight for the business. And a lot of that is supported by our diversification into other markets like utility distribution, you know, in the East Canada. Yeah.

Okay. And can you just maybe talk a little bit about the competitive landscape given the marketplace? How aggressive is the pricing environment? What are you seeing out there? Are people being more disciplined?

I'm pretty sure we talked about this last call, and I think I indicated in February we saw a little bit of increase. I don't want to say it was a step change, but I'd say – it moved up a notch in competitiveness over the last 90 days. So it definitely, you know, I made a comment here to Mr. Brotz here a minute ago about win some, lose some. We are putting the full faith of the team on every job and looking at this, and it's getting more competitive. It definitely took a step up this past quarter.

Okay. All right. That's all I had, Brett. Thanks.

This concludes our question and answer session. At this time, I would now like to turn it back to Brett Tobe for any closing remarks.

Thank you, Operator. The continued uncertainty in our core end markets, as well as the long-cycle nature of our business, continue to challenge our ability to efficiently plan our resources and, as such, impact our financial results. However, we continue to benefit from a very strong and committed team of employees across the company, a strong balance sheet, and a robust backlog that will allow us to endure the the current environment, as we have in the past cycles during our 75-year history. We remain focused on identifying new commercial opportunities for our solutions 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. You may now disconnect.