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spk01: Good morning, and welcome to the Powell Industries Earnings Conference Call. At this time, all participants are in a 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 a question, please press star, then two. 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.
spk03: 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 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 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.
spk04: Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2022 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 results in the second quarter saw a strong sequential uptick in new order activity, as well as year-over-year revenue growth of 8% as our customers and end markets continue to recover from the pandemic-induced downturn. The $151 million of new orders for the second quarter marks four consecutive quarters of rising new order activity and is the highest quarter of new order intake activity since our second quarter of fiscal 2020. Our bookings performance led to a book-to-bill ratio of 1.2 times in the quarter and is the second consecutive quarter with a book-to-bill ratio of up one. Our revenue of $128 million compares to $107 million in the prior quarter and is 8% higher than last year. Then our industrial markets revenue from our oil and gas sector increased year over year by 7% for the second straight quarter, while the petrochemical sector increased by 85% after growing by 88% versus the prior year in the first quarter of fiscal 2022. Year to date, revenue from our industrial markets is 21% higher than the comparable period in fiscal 2021. Revenue from our utility sector grew by 7% compared to the prior year, while traction fell by 34% due largely to timing and our continuing efforts to exercise discipline and risk management within this market segment. We remain pleased with the focus and level of execution throughout all of our operations as we saw our gross margins improve sequentially by 230 basis points to 14.9% in the second quarter. We continue working to find ways to mitigate the effects of the higher cost environment. As we stated last quarter, we are beginning to recognize revenue on projects booked in the first half of fiscal 2021 that carry higher raw material and component costs, continuing to create a near-term headwind. However, we are cautiously optimistic that we have begun to see the stabilization in the prices of key commodities, such as copper and steel. Left engineering components continue to present a challenge both through supply availability and pricing. We are actively engaged with our suppliers and, where possible, passing through inflationary costs. We also continue to monitor and navigate the tight labor situation. While the expected upward pressure on wage costs remain an added potential headwind, we have largely been successful working through these challenges across all of our manufacturing operations. As you may recall, While we did execute a modest restructuring at the outset of the global pandemic in 2020, we deliberately retained the majority of our workforce during fiscal 2021, despite lower revenue levels. We knew it was critically important to retain the technological and commercial know-how and skilled labor for the eventual return of our order and project activity. That decision is presently benefiting us as we start to pivot and plan for the growth of our backlog. Nonetheless, we will continue to prudently manage our fixed costs as we plan for future project activity. Moving to the bottom line, we reported a net loss of $1.2 million in the quarter compared to a net loss of $225,000 in the prior year. The net loss was mainly driven by a second fiscal quarter tax provision, as Mike will explain shortly in more detail. We ended the quarter with $114 million of cash and short-term investments and no debt. Our net cash position is $12 million higher than the prior quarter, despite building working capital in the face of rising order activity to support the steady improvement of our end markets. Lastly, we ended the quarter with backlog totaling $440 million, which marks sequential growth of 6% from $416 million at the end of the first quarter and is $3 million higher than one year ago. While we see our second quarter results as another step in a positive direction, Perhaps most noteworthy is the fact that we continue to see an encouraging and broad recovery in overall order activity, despite the slower recovery dynamics of our industrial end markets. These are legacy markets for Powell that have historically constituted the majority of our order book and revenues. While we have been experiencing a steady increase in cost estimating activities across an increasing funnel for our industrial end markets, including our core oil, gas, and petrochemical customers, capital spending still remains modestly below pre-pandemic levels. Offsetting the pace of the industrial recovery during the second quarter, the business recognized a greater proportion of utility and light industrial orders, while also continuing from the first quarter of fiscal 2022, our global services team has delivered strong performance in line with our strategic objectives. These results clearly demonstrate that the commercial strategies and deliberate strategic efforts to diversify our business Enhancing the share of growth opportunities in new markets and applications for Powell's technologies is beginning to deliver for all of our stakeholders. These positive changes will aid in de-risking our business and lead to less reliance on the heavy cyclical nature of our core markets. There are also significant steps towards our stated strategy of expanding into new markets that are demanding innovative solutions and products where Powell can leverage its leading R&D capabilities and operational excellence. Overall, our view of a steady recovery and positive momentum across our markets on a month-to-month basis remains intact and unchanged. Customer attitudes around deploying capital are becoming gradually more positive. We expect the industrial markets to continue their pace of gradual but steady improvement and thoughtful capital investment for the remainder of fiscal 2022. Customer activity across projects related to LNG, gas pipeline, and gas to chemicals continues to remain attractive, and opportunities within the more nascent light commercial and renewable sector remains active, providing opportunities for us to leverage Powell's strengths and capabilities. Additionally, we expect to continue our strategy of steady, methodic growth across the utility distribution market throughout North America and the U.K., and for the traction sector, we will continue to leverage the strength of technical solutions and proven execution capability balanced against prudent commercial risk management for light and mid-rail projects. Reflecting on our second quarter results and measuring progress against the strategic priorities that we've set forth and the associated alignment of the business against these initiatives, we are pleased with the progress to date. As a reminder, we have focused on broadening the following attributes, 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. 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.
spk05: 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 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 volume 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 revenue. 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 on 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 10 cents per diluted share compared to a net loss of $225,000 or a loss of two cents 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 two cents per diluted share in the quarter. During the second quarter of fiscal 2022, net cash generated in operating activities was $15 million. This 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 market, We're optimistic that continued growth in these markets will deliver counter-cyclical, 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.
spk01: 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 pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Frensreb with Sidoti and Company. Please go ahead.
spk00: Brett and Mike, thanks for taking the questions.
spk04: Good morning, John. Good morning, John.
spk00: I guess I'm 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 was necessary to happen? What changed versus three months ago? Has an order been pulled forward? Any call there would be helpful.
spk05: Yeah, 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're near, at or near break-even, very, very difficult to predict. But considering the commercial activity that we're 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 22-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 provision essentially now aligns the business with our anticipated earnings for the entire fiscal year.
spk00: Okay. So, it was more the case of the light industrial side of the business proving to be better or firmer than I assume the longer lead type stuff you have a handle on. So it was really light industrial that was the delta there.
spk05: As well as utility. Had a strong quarter, commercial quarter in utility and light industrial.
spk00: Got it. Can you talk a little bit about the gross margin profile in the recent order book? How is that compared to, say, three months ago? Are you able to push through surcharges or escalators to offset commodity costs? Any little call would be helpful.
spk04: 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 in the next two to six months. And we see a lot of that in some of the light industrial and utility piece. But not only. On projects that have a longer time horizon, there's still a fair amount of competition, something kind of 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 and understanding where the market's at and pricing appropriately into that market.
spk00: Okay. And one last question, I'll get back into Q. Just on the 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? Just your thoughts along those lines.
spk04: Yeah, I think there's two parts to this, because we do talk a lot about it. Let me cover some of the market in terms of book and revenue, and I'll let Mike address some of the things on the cost side and the ripple. So, first of all... You know, for me it's an advantage in the way we're structured right now. We're what we would call an integrated factory structure at our locations, not a feeder factory where we compete against a lot of the multinationals that they've developed their factory systems over the last 30 years. So from an exposure standpoint, and when we go to 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 a speed side, which really did help second quarter 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're aligned. So that's been an advantage for Powell and will be for the next couple of quarters, I believe, as it 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's been very involved with the teams on that. I'll let him comment on some of that.
spk05: Yeah, Jen, 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, Russia, has an impact on those core commodities, which we are keeping very close to and, you know, 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's feeling that potentially in a mid-longer-term perspective, may have some benefits to the U.S. producers in this power.
spk00: Okay, guys, great. I'll get back to you. Thanks for taking my questions.
spk05: Thanks, John.
spk01: Our next question comes from John Bratz with Kansas City Capital. Please go ahead.
spk02: Morning, Brett, Mike. Good morning, John. 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 in progress you are making in the commercial side?
spk04: So, yeah, on the legacy side, I would first talk about utility. You know, if you remember, John, really our last five plus years, I've talked a lot about our methodic progress in the utility, starting with Canada, you know, go back to the 14 and 15 downturn, never really recovered in West Canada as quick as we did in the States. And so we had to pivot and we did do R&D development in 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 U.S. on distribution, more so the generation for our offering, our enclosed solutions, 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's 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 stated strategies, especially around developing new products for the markets that we serve, go back to when Tom acquired the GE PowerVac line 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 strong historical relationships with our core. So that, as we kind of were working through our strategy over the last couple 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 would 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. 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.
spk02: Okay, thank you. To the extent that, let's say, some of these projected LNG projects go forward and there's 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, uh, in the inflationary pressures or, or would you still be sort of, uh, at the whims of, uh, um, some escalating, escalating costs again?
spk04: Yeah, no, great, great question. The short answer is yes, we're able to put in some protections, but there isn't an element of delicacy in that because, uh, uh, um, you know, there's still competitive pressures and the longer, as I mentioned, noted, uh, with John Franzrev, as you look out further, there's still more competition for jobs that are two or three years out. It's some assumption of the 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 subsupply piece, not so much on the commodity piece. I think Mike and the team have done very well there, but on that engineering component piece, there's a lot more work going into that. And then we do project out what if, and so there's a lot more how do we plan that out, when would it hit, what could we buy up front, and really even modifying some of our engineering process to understand where can we do some things early in the project with their help, you know, maybe pivoting some milestones to lock in things earlier in the project than we might have historically. So those are the collaborative discussions we have. So there's a way through it. So everybody, you know, our, our, of course, our goal is to deliver, uh, you know, 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, um, 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, you know, what we saw in the past of fitting these large jobs. But I think we're the best, and there's a couple still percolating out there.
spk02: Okay. Speaking specifically about LNG projects, do you see some of them reaching FID and moving forward here?
spk04: I do. I think in the next nine to 12 months, there's a couple of, and not just LNG, but there are a couple of LNG gas-related jobs that are, you know, there's still some sliding to the right on schedule. There's, you know, whether it's geopolitical, you know, how they're rolling up all their costs on the structural steel side. I mean, I'm sure there's a lot of moving parts that are more than just the electrical distribution, but I definitely believe there's some jobs that are continuing to move closer to that go forward point.
spk03: Okay. Thank you.
spk04: You bet.
spk01: 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.
spk04: 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 next quarter.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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