Powell Industries, Inc.

Good day and welcome to the PAL Industries 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 a touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now 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 third quarter results. With me on the call are Brett Koch, Powell's chairman and CEO, and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until August 10th. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, August 3, 2022, 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 future 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 risk, 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. Good morning, everyone. Thank you for joining us today to review Powell's fiscal 2022 third quarter results. We'll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Our third quarter was in many ways a continuation of the market trends and operational momentum we have built and operated in over the last few quarters. Order activity across our end markets remains robust, and our industrial markets continue to recover and strengthen. Meanwhile, our efforts over the past several quarters to diversify the business, to compete in new markets, and to build a stronger services offering are yielding encouraging results. While macroeconomic factors such as material prices, labor availability, and the global supply chain remain challenging, I have been very pleased with our team's ability to navigate those headwinds and keep Powell on a sound path towards higher project activity and improved profitability. Total revenue was $135 million in the quarter, representing growth of 17% compared to the prior year, consequential growth of 6%. Revenue from our oil and gas markets grew 19% compared to the prior year to $59 million, while our utility revenue grew 15% to over $30 million. Interaction saw a decline of $4 million, mainly as a result of project timing, while our petrochemical revenue was relatively unchanged. On a year-to-date basis, revenue from our industrial end markets was higher by 19% compared to fiscal 2021, as we continue to experience improved customer order activity and encouraging positive momentum. We experienced strong demand as we secured $202 million of new orders in the third quarter. That figure is the highest quarterly new order total in over two years and marks five consecutive quarters of rising gross new order activity. Book-to-bill ratio in the quarter of 1.5 times was equally strong was the third straight quarter with a book to bill over one. Quarter activity was very broad across all of our markets and geographies where we compete. And I would note that within the quarter, the largest project of size was a traction project in the 10 to $15 million range. We recorded a gross margin of 14.1%, which is a slight step back from 14.8% in the prior year and 14.9% in the second quarter as we encountered scope and cost challenges for select projects being executed within one of our U.S. divisions. Including the impact of these projects, we did experience continued margin expansion to just over 15% in the quarter. Overall, we remain pleased with the focus and level of execution throughout all of our operations. Moving to the bottom line, we reported net income of $9.1 million in the quarter or 76 cents per share, compared to a net loss of $2 million, or 17 cents per share, in the prior year. The net income line benefited from two non-operational events in the third quarter, which combined to contribute $7.5 million, or 63 cents per share of net profit. Excluding these non-operational items, that income was $1.6 million, or 13 cents per diluted share in the third quarter. Mike will elaborate on these items to provide more context shortly. Lastly, we ended the quarter with a total backlog of $503 million, which marks sequential growth of 14% compared to last quarter and is 21% higher than where we ended fiscal 2021. Overall, from a commercial standpoint, the third quarter was another encouraging step in our recovery and the return of our key end markets. Across the company, we continue working diligently to mitigate the effects of the higher-cost environment. During the quarter, our operational teams continue to make positive progress towards navigating the headwinds of the macro environment in an effort to protect our margins through both pricing and productivity initiatives. While we have recently experienced a slight pullback in the prices of key commodities, such as copper and steel, we remain focused and disciplined on a longer-term view of supply and input cost volatility. We are also closely monitoring select engineered components. As these continue to present a challenge both in supply availability and price, we seek to identify these engineered component risks early in the bid process, provide options that will help ensure success of the project for both our customers and for Powell. Our strategic sourcing and purchasing teams have been working diligently and putting in many long hours over the last several quarters. We are actively engaged with our suppliers, working collaboratively to ensure our future backlog needs are secure and to understand early where inflationary cost pressures exist so that we can assess and take the appropriate actions to mitigate future downside risks to the business. I would like to specifically recognize and thank this team for their efforts through these extraordinary times. Looking out across our end markets, inquiry levels across the company remain robust, with broad participation from both traditional market segments as well as new market opportunities that are aligned with our strategic goals. While the trend is positive for our core oil, gas, and petrochemical customers, capital spending remains modestly below pre-pandemic levels. However, projects related to LNG, gas pipeline, and gas to chemicals continue to remain attractive, and opportunities within the more commercial and renewable sectors remains active. Our utility and commercial end markets remain strong and have been solid offsets to the decline in industrial revenue over the past two years. And within the traction sector, we continue to leverage the strength of technical solutions and proven execution capability balanced against prudent commercial risk management for light and mid-rail projects. Meanwhile, our global services team continues to deliver strong performance in line with our strategic objectives. Looking at our third quarter results and measuring against the strategic priorities that we've set forth, we remain pleased with our progress to date. As a reminder, we have focused on broadening the following attributes. Growing our 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 we look forward to sharing additional examples of our success within each initiative. 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 third quarter of fiscal 2022, we reported revenue of $135 million higher by $20 million or 17% versus the same period in the prior year and higher sequentially by 6%. New orders booked for the third fiscal quarter of 2022 were $202 million, $98 million higher versus the prior year and $51 million higher sequentially. As a result, our book to bill ratio was 1.5 times in the current period. Backlog was $503 million at the end of the third fiscal quarter and is $77 million higher as compared to the same period a year ago. Compared to one year ago, domestic revenues were higher by 16% versus the prior year to $103 million, while international revenues were 19% higher compared to the prior year driven by strong activity across our UK and Canadian operations. In total, international revenues were $32 million in the third fiscal quarter. From a market sector perspective, revenues across our oil and gas and petrochemical sectors were higher by 14% versus the prior year, while the utility sector was higher by 15% on a year-over-year basis. Additionally, we also experienced increasing volume across our other commercial end markets, which was 94% higher versus the third quarter of fiscal 2021. The volume in this sector is driven predominantly by product applications across data centers, universities, and other miscellaneous commercial infrastructure. Offsetting these year-over-year increases, the traction power sector was lower by 29% versus the third fiscal quarter of 2021 on the timing of new large traction projects. Gross profit increased by $2 million versus the same period one year ago to $19 million in the third fiscal quarter. As a percentage of revenue, gross profit decreased by 76 basis points versus the prior year to 14.1% as we encountered operational challenges on select projects being executed out of one of our US facilities. This generated a margin headwind of roughly 100 basis points on a gross profit level during the third fiscal quarter. Overall, we were pleased with our positive progress on margin accretion in this very dynamic environment. As in prior periods, we continue to experience elevated costs from raw materials, buyout components, logistics, and other overhead costs. We are beginning to recognize the offsetting pricing actions that have been incrementally incorporated into our models over the past year, as well as continuing to focus on factory efficiencies through cost initiatives and increased volume leverage. Selling, general, and administrative expenses were $16 million in the current quarter, 2% lower versus the same period a year ago. SG&A as a percentage of revenue decreased to 12% in the current quarter on higher revenues and diligent cost management. In the third quarter of fiscal 2022, we reported net income of $9.1 million or $0.76 per diluted share compared to a net loss of $2 million or a loss of $0.17 per diluted share in the third quarter of fiscal 2021. We did have two notable non-recurring items impacting the third quarter net income and earnings per share. First, during the quarter, the business recognized an after-tax gain of $1.6 million on the sale of a non-core industrial valve repair and servicing business within our Powell Canada entity. This transaction generated $4 million of cash and a gain of 14 cents per diluted share in the third fiscal quarter. We do not anticipate that this disposition will have a material impact to our future operating results. Secondly, as a result of our Canadian operations' ongoing efforts to strategically diversify their markets, coupled with strong and sustainable project execution, we have recognized positive operating results over the past three years. Based on these results, we have sufficient positive evidence to release the valuation allowance that was previously established against our Canadian deferred tax assets, generating a non-cash $5.9 million tax benefit, or 49 cents per diluted share in the current period. During the third quarter of fiscal 2022, net cash used in operating activities was $15 million as the business continues to build working capital, reflecting the increased orders cadence and higher levels of backlog. We have invested $35 million in working capital, resulting from orders and backlog growth on a fiscal year-to-date basis. including holding extra safety stock of critical components and materials in order to support execution. Investments in property, plant, and equipment totaled $649,000. At June 30, 2022, we had cash and short-term investments of $99 million, $35 million lower than our fiscal 2021 year-end positions. The company holds zero long-term debt. Looking forward, we anticipate continued strength in a sustained level of commercial activity across most of our end markets into fiscal 2023. We remain focused on the operational priorities across the business as we execute our backlog, while also targeting to deliver consistent and sustainable improvements in operational profitability. We do recognize the typical challenges of project timing and mix. However, we are well positioned to effectively execute the order book for our customers. In closing, considering the current commercial environment in the regions where Powell has a strong presence, along with the healthy backlog, strength of our balance sheet, and the focus on execution, we expect that these attributes will provide the foundation for improved financial performance as we close out fiscal 2022 and look forward to fiscal 2023. With that, we will be happy to open up the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star then 1.

As there are no questions, this concludes our question and answer session. I would like to turn the conference back over to Brett Cope, CEO, for any closing remarks.

Thank you, Matt. As we stated on today's call, our third quarter results mark another significant and positive step in the recovery, and we are optimistic as we evaluate the resiliency of our end markets in the face of global headwinds. We possess an incredibly talented team, strong backlog, and a robust balance sheet. to allow us to execute over the coming quarters. 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 next quarter.

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