Powell Industries, Inc.

Good morning, and welcome to the Powell Industries Fiscal Fourth Quarter 2022 Results Conference Call. All participants will be in a listen-only mode today. Should you need any assistance during the call, 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 that this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries' conference call today to review fiscal year 2022 fourth quarter and full year results. With me on the call are Brad 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 December 13th. 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, December 6th, 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 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 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 Brad.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2022 fourth quarter and full year results. We'll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a very strong fourth quarter to close out our fiscal year. Our deliberate and strategic efforts are yielding tangible results that are creating a more resilient, diversified, and less cyclical future Powell that will lead to stronger growth across the economic cycle. I am also incredibly proud of how our team has performed since the onset of the pandemic and its adverse effects on our business. After a challenging period of lower industrial activity throughout fiscal 2021 and into early fiscal 2022, we now enter our fiscal 2023 with the highest backlog in Powell's history. And across all of the business, we are on an extremely strong financial footing. While macroeconomic factors such as elevated costs and the global supply chain certainly remain headwinds, we are in a very solid position to continue to execute our strategic initiatives and deliver improved profitability. Total revenue in the fourth quarter was $163 million, which was 26% above the prior year and higher by 20% sequentially. By market sector, revenue from our oil and gas markets totaled $60 million and grew 24% compared to the prior year, while our utility revenue grew 42% to over $40 million. Traction saw a modest decline of $3 million to just under $14 million, and petrochemical revenue fell 37% to $15 million. Revenue for the full year increased 13% to $533 million, led by 15% growth in oil and gas, 13% growth in petrochemical, 10% in utility, partially offset by a 24% decline in traction revenue for the year. I'd like to take a moment to note that beginning this quarter, we are breaking out a new market sector, which we are calling commercial and other industrial. This sector consists mainly of markets where Powell has not historically had a strong focus. It includes applications for our products in data centers, automation, and cryptocurrency mining, among others. For the full year, our revenue in this market sector more than doubled to over $56 million, which notably was higher than our revenue from our traction market. Order activity in the quarter was strong as we secured $259 million in new bookings. That figure is the highest quarterly total since our second quarter of fiscal 2020 and is the sixth consecutive quarter of rising new gross order activity. Our book-to-bill ratio in the quarter of 1.6 times was equally strong and was the fourth straight quarter with a book-to-bill over one. As we highlighted on prior calls, activity in our coal, oil, and gas markets has lagged the overall recovery of the broader market activity. I am pleased to share that Powell was awarded a large industrial order to support the production of liquefied natural gas, which will be located on the U.S. Gulf Coast. This significant award in our fourth quarter was complemented by continued robust activity of small to mid-sized project orders that spanned across all of our end markets. For the full year, new orders totaled $719 million, an increase of 78% compared to fiscal 2021. Our teams delivered a gross margin in the quarter of 20.6%. This was a sequential improvement of 650 basis points and 320 basis points higher than the prior year. We did benefit from a non-recurring event driven by a positive recovery of project-related costs on a municipal project from a prior year, which contributed 130 basis points to the fiscal fourth quarter. After adjusting for that one-time benefit, strong project execution, favorable services mix, and positive closeouts helped to deliver the underlying margin growth. Mike will explain these effects in greater detail shortly. Moving to the bottom line, we reported net income of $8.7 million in the quarter, or 73 cents per share, compared to $3.3 million, or 28 cents per share, in the prior year. The net income line benefited from the aforementioned cost recovery, which contributed $2 million, or 17 cents per diluted share. The whole year net income was $13.7 million, or $1.15 per diluted share. During fiscal 2022, The company had three non-recurring events that, when combined, contributed 80 cents per diluted share. Lastly, we ended the year with a total backlog of $592 million. This is the highest backlog in Powell's history and represents sequential growth of 18% and is 43% higher than the end of fiscal 2021. Our project backlog is well-balanced across the markets we serve, with the utility and commercial and other industrial sectors comprising a growing share of the backlog. Overall, from a commercial standpoint, the fourth quarter was another step in the right direction and marked the continued return of our key end markets. Turning to our operational performance, we continue working diligently to mitigate the effects of a higher-cost environment. While the prices for key commodities, such as copper and steel, have improved compared to previous levels, the price and availability of key engineered components remain material headwinds. Our teams are working hard to identify and address these price increases early enough to factor them into our bidding process and ensure they do not create significant cost overruns on current and future project activity. We continue to have an extremely strong focus on productivity and strong project closeouts to protect our margins. We are also implementing pricing initiatives to align projects to the current cost environment where and when possible. We continue to closely monitor the cost of labor and our level of staffing across the business as we work to support the growth and timing of execution of our improved backlog. While not a major headwind currently, we certainly appreciate the difficult nature of finding and retaining qualified employees, as well as the rising cost of labor across the economy. Our human resources team has been working extremely hard over the last several quarters. We have an incredibly talented and resourceful group across the company that I am very proud of. Their tenacity, dedication, and creativity have helped Powell effectively navigate the difficult labor environment thus far. I'd like to conclude with a quick recap of our strategic initiatives and where our attention has been focused throughout fiscal 2022. It was on this call one year ago that we formally introduced our three areas of focus for Powell. One year later, I am very pleased with the progress we have made around each of these areas. Powell continues to develop and expand our established and reputable line of electrical automation solutions. This past year, we released several digital products that will help our customers safely and reliably control the operation of the breaker. Additionally, we recently released a new and innovative product to measure and control the operation of switchgear with Powell's first digital current measurement sensor. And we have taken our first steps to offer secure subscription-based service contracts, helping our customers protect monitor and control their high value assets and ensure peak performance. Our global services team is delivering strong results in line with our strategy. I'd like to take a moment to congratulate and thank all of our team and our service business. Their performance in the fourth quarter and for the entire year has been very strong. While there remains more work to be done, we have taken significant steps to expand Powell's value proposition beyond installation and commissioning of our electrical products and solutions. This past year, we have demonstrated our ability to offer increased value to our customers, providing value-add engineering earlier in the project during the development phase of the power network solution. And we have demonstrated our ability to take an expanded scope of site services to help our clients more efficiently and cost-effectively meet their schedule and project requirements around the modification or repair of their electrical distribution systems. I am confident that our service strategy will continue to build on these initial successes and be a true differentiator for Powell and for our customers going forward as we expand our portfolio of value-added services. And finally, in addition to our digital products, our research and development teams have made good progress in our low and medium voltage product offerings. This past year, we have further expanded our low voltage flex gear product with additional low voltage breaker offerings. Powell's FlexGear is the only ANSI offering that provides a common platform allowing our customers to use any commercially available low-voltage air circuit breaker. Also notable this past year, our medium and high-voltage bus team in Chicago led the adoption of our bus solutions to commercial markets. This is one of the contributing factors that led to Powell introducing the new commercial and other industrial sector noted earlier in my comments. And last, we welcome a new Vice President of Research and Development, Marshall Monet Jr. joined Powell this past fall. Marshall brings a proven track record of over 30 years successfully mapping and developing products and solutions that help customers improve their operations. Dennis Donsgaard, who has contributed an impressive 50 years of service with Powell, is transitioning from the R&D leadership role, a position he led for over 12 years, to helping me further develop our organic and inorganic roadmaps in support of our growth strategies. Dennis is an invaluable part of Powell's success. He has held roles in operations and he led the development of what today is Powell's global service organization. Overall, I am very excited about the path we are on and where Powell is positioned within the broader electrical distribution and management ecosystem. Our status as a leader in engineer to order, value added solutions for complex electrical distribution applications is ideally suited for a growing number of electrification requirements across the globe that is driving increased demand for power, often with new applications. 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. I'll begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2022 results. Revenues for the fourth fiscal quarter of 2022 increased by 26%, to $163 million compared to last year's fourth quarter of $130 million, and were higher sequentially by $27 million as revenues increased across all of our market sectors on a sequential basis. Notably, we successfully executed a number of projects in the commercial and other industrial market sector this quarter, making accretive gains in markets where Powell has not historically focused. As Brett mentioned, as a result of the increasing activity across commercial and other industrial applications, we determined that it is appropriate to add an additional sector to our reporting. As such, a commercial and other industrial sector has been added to our traditionally reported sectors, which will encompass applications such as data centers, pulp and paper, and mining applications, among others. Growth in these markets is a core component of our strategic initiative. Net orders for the fourth fiscal quarter were $259 million, $138 million higher than the same period one year ago, and strong demand spanning across most of our core end markets. Our industrial end markets remain very active, specifically within the gas market, evidenced by securing a large LNG project in the quarter. Complementing the positive recovery of our core industrial end markets, We also continue to see positive commercial activity across all of our end markets. As a result of the strong orders in the quarter, our fourth quarter book-to-bill ratio was 1.6 times. Reported backlog at the end of our fiscal fourth quarter was a record high $592 million, $177 million higher versus the end of fiscal 2021. The substantial increase in the order book was driven primarily by the strength across our oil and gas, utility, and commercial and other industrial end markets. Overall, we are very pleased with the order's performance across all sectors in the quarter and the resulting backlog position as we enter our fiscal of 2023. Compared to the fourth quarter of fiscal 2021, Domestic revenues of $133 million increased by 38 million or 41%, while international revenues decreased by 15% to 30 million on the winding down of large customer projects in the Middle East and Asia. From a sector perspective, revenues from our core industrial sector increased by 4%. The utility sector was higher by 42%. while the commercial and other industrial sector was higher by nearly three times versus the same period one year ago. These sector increases were offset somewhat by traction, which was lowered by 18% versus the same period a year ago as we successfully wind down a large municipal project in Canada. With respect to the year-over-year volume increase across our core industrial sector, this was driven by a 24% increase in oil and gas revenues, while petrochemical sector was lower by 37% versus the same period a year ago. We reported $33 million of gross profit in the fiscal fourth quarter of 2022, which was higher by $11 million or 49% versus the same period in the prior year. Gross profit as a percentage of revenues increased by 320 basis points to 20.6% of revenues in the fourth fiscal quarter compared to one year ago. The higher margin rate was driven by an increase in services volume across the business, coupled with a favorable mix of fast-turned service work in the quarter, as well as broad-based project productivity and associated project closeouts. Notably, the margin rate also benefited from the favorable closure of a long-standing prior-year claim related to costs associated with a U.S.-based municipal project which generated $2.5 million of gross profit or an incremental 130 basis points to the margin rate in the quarter. Selling, general, and administrative expenses increased by 4.5 million or 27% in the quarter versus the prior year, attributable mainly to variable performance-based compensation. SG&A expenses were $21 million in the fiscal fourth quarter or 13.2% of revenue, compared to 13.1% of revenues a year ago on the higher volume in fiscal 2022. Overall, the team remains diligent in managing overhead costs while continuing to focus on addressing the critical resource requirements necessary to fulfill the order book. On a net reported basis, fiscal fourth quarter net income was $8.7 million or 73 cents per diluted share which included $2 million of non-operational income attributable to the previously mentioned prior year municipal project cost recovery, generating 17 cents per diluted share. We generated $24 million of free cash flow in the fiscal fourth quarter, driven by favorable project collections and strong working capital performance in the period. CapEx spending during the quarter was $686,000. Now recapping our total year fiscal 22. Revenues of $533 million increased by $62 million or 13% compared to the prior year. Orders were 719 million, 78% higher versus fiscal 2021 led by the sustained recovery of our oil and gas on market coupled with the continued market penetration in the utility sector and the incremental growth in the commercial and other industrial end markets. Gross profit as a percentage of revenues was flat year over year at 16%, successfully offsetting the inflationary headwinds and supply chain challenges that we encountered throughout most of fiscal 2022. Selling, general, and administrative expenses were higher by $3.6 million versus the prior year. Overall, net SG&A expenses as a percentage of revenues were lower versus the prior year by 100 basis points at 13.3% of revenues in fiscal 2022 versus 14.3% in the prior year. We reported net income of $13.7 million or $1.15 per diluted share. During fiscal 2022, we had three non-recurring events, two previously noted in the third fiscal quarter earnings call, and the municipal cost claim recovery impacting the fourth fiscal quarter that, when combined, contributed to 80 cents per diluted share in fiscal 2022. Total fiscal year 2022 free cash flow was a usage of $6 million versus a cash usage of $33 million in the prior year. At the end of fiscal 2022, we had cash and short-term investments of $117 million, $17 million lower than our fiscal 2021 year-end position. The company holds zero long-term debt. As we look forward to fiscal 2023, we are encouraged with the current commercial momentum across our core end markets and are optimistic that this will continue throughout fiscal 2023. Based upon our fiscal year-end order book at $592 million, coupled with the strong commercial activity that we're presently experiencing, we anticipate solid revenue growth into fiscal 2023 versus the prior fiscal year. Additionally, as a result of the pricing actions and cost discipline initiated throughout the past 12 to 18 months, as well as the anticipated productivity that the operational teams are focused on, we expect continued improvement in project quality, resulting in increased profitability across the business in fiscal 2023. Based upon these dynamics and accounting for the typical seasonality that we will experience during the first fiscal quarter of 2023, we expect a significantly improved total year outlook in terms of revenue and earnings versus fiscal 2022, excluding the non-recurring items that I mentioned previously. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then 2.

At this time, we will pause just momentarily to assemble the roster. And our first question here will come from John Frensrep with Sidoti and Company.

Please go ahead.

Good morning, Brett and Mike, and thanks for taking the questions, and congratulations on a great quarter.

Thanks, John. Thanks, John.

I guess I want to start with some of the prepared remarks, Brett. You kind of talk about the 80 cents of one-time items. Kind of suggests that we should use as a starting point of a 35 cents for one fiscal 2022 as the number going into 2023. Is that how we should look at it? And if so, you've mentioned the seasonality in the business and the press release. How does the seasonality play in Q1 versus Q4?

Thanks, John. Yeah, absolutely. That's how I would look at it. Underlying gross margins are still where our operational focus has been, always is, and will continue to be even more so heading into next year with the backlog to ensure we can continue to make incremental growth on those margins and improve the overall profitability of the base business. The seasonality, it always hits us first quarter. We fight the two holiday periods just from a spin down, spin up time and managing through. So there'll be some of that as we kind of plow into the fiscal year. But then at this point, we expect to recover in the Q2 and on throughout the rest of the fiscal year.

Okay. And it seems like the services business was a sizable contributor to the profitability in the quarter. Can you talk a little bit about why that was the case? What percentage of revenue it was in the quarter, maybe relative to the third? Any kind of context there would be helpful.

It was a very significant contributor to the year. I think two general themes. One, as we come out of the pandemic, just sort of the pent-up demand in the in aftermarket brownfield work that was not being done in 2021. There was certainly some of that. That's the short cycle comments that both Mike and I alluded to. And then there is the element of the strategic side, where the team did a nice job taking a risk approach to other projects out there to expand our services, both on the front end of the project as well as the back end of site services to prudently look at the jobs and make commercial tenders. into these markets to test our strategies and to build capability into the team. And we're successful throughout the year. These jobs tend to be a little quicker on the cycle than a long-earned capital project. Not always. Some of the service jobs, if they're larger, they're a little longer, but definitely contributed to the success of the financial year.

Okay. And I hate to put you on the spot, but it looks like the adjusted gross margin this quarter is was about 19.3%. You know, you have record backlog. You know, I remember a time when 19, 20% gross margin was eminently achievable. Is this a run rate that you can maintain for the full year or there? I could think of the headwinds, but there are enough headwinds that kind of prevents that from materializing.

Yeah, no, I wouldn't sit here today and say it's a full year. I'll call it a goal. But today, Powell that sits versus those years past, it's that theme of we got a lot more miles to feed on our footprint than what we had 10 and 15 years ago. We do have a sizable backlog, and it is across all divisions, which is nice powder to have heading into the year. But our goal would be to increment from the underlying operational gross margin coming out of the year without the one times.

Mike, you had anything?

Okay.

Yeah, I think you hit it right on the head. The mix that we're experiencing, you know, over the last year and looking into fiscal 23 is substantially different than, you know, you referred to prior periods back in, you know, when oil and gas was really going. It's a little different mix heading into 23. Yeah.

Okay, I'll get back into queue, guys. Thanks for taking my questions. Our next question will come from John Bratz with Kansas City Capital.

Please go ahead.

Good morning, Brett. Good morning, Mike.

Good morning, John.

I was wondering if you could add a little color to the LNG award, you know, how big it might be, bigger than a breadbasket, and then maybe also maybe the sequencing of revenue and cash flows that might be associated with that project, and also maybe the margin profile of the LNG award.

So first comment I'd make is, as we kind of mentioned all of last year, into the fall and the spring, the activity continued to pick up. This is a Greenfield award. It is in line with what we classically would call a mega project. So back in the days when the offshore market was screaming, we used to call that kind of the $30 to $50 million range. This is on the north side of that. And so it's a very complex project with a lot of challenges to it, which is where we're well built. The burn rate on this will go two-plus years. There's a lot of... When they get difficult, there's usually a lot of uncertainty in the back end of the project. This has a little bit starting off, but it's a job we know very well, high complexity, and we're pretty excited to have it. On the margin side, just general pricing comment I'd make is it is still competitive, but I think we've made some progress on price in the market throughout the entire fiscal year, but still cognizant that it's a competitive world. Generally, the larger the job is, it draws more attention competitively. So there's a little bit of that woven into this one as well.

Okay, okay. You know, you've done LNG work before. Is this, the aspect of this project different than what you've done before?

No, I call them meat and potatoes, but that's a general statement. It's just the complexity of how the electrical distribution, you know, not just the electrical design, but the mechanical design, these These LNG facilities, they're being squeezed into small footprints. They're on the coast area, which have a lot of challenges mechanically on the building side. So when you combine the two together, John, it's just the engineering side of it, it is constant throughout the entire project. And given that we carry 10% of our employees are engineers and designers, there's a lot of changes that happen. And we just do it really well, really fast and efficiently. And I don't think you're going to beat Paul on that model.

Okay. Okay, good. And then lastly... Can you talk a little bit about maybe the, if you're seeing, or the prospects, I should say, for improvement on the international front? Obviously, that's been geographically a weaker area. Might we see some improvement in 2023?

Yeah, Mike noted in his comments about sort of the winding down of a couple projects in Asia. Yeah. I think we, you know, at the end of 2021, there was sort of a pause in market activity in terms of where we participate. There are some projects. I just did some touring this fall, traveling around mostly in Asia. And then I've got a trip planned for the Middle East in the next year. So we see some things starting to spin back up. And I do think that will come back mid to late next year.

Okay.

Thank you very much.

Our next question will come from John Dasher with Pinnacle. Please go ahead.

Good morning. Thanks for taking my question. Following up on the LNG question, have you worked with that customer before?

Yes, we have.

Okay, so you've done projects with them and you understand how each side works. That's good. I don't know if you can answer this, but Looking out to fiscal 23, what percentage of capacity do you think you might be operating at? Your sales were close to a record, and I know you reduced some capacity. You sold some operations. But what percentage of capacity do you think you might be operating at in fiscal 23?

John, the first way I'd respond to your question is the growth – The growth and the record backlog that we shared on the call today as a result of Q4, you're right to look at it, but it is much more broad-based than maybe what we've seen in the past brought up when we saw these sort of levels. So if you think about 12 and 13 as we were building Canada, Canada's participating, and then the UK business. So everybody, it is spread more evenly and not just a US Gulf Coast oil and gas. Remember, that market just started coming back really last couple quarters, even though the bidding activity was strong. It's nice to see it come back because we were sharing on previous calls that it was getting close and it's good to see it get over the edge. Overall capacity, a little bit timing-dependent because these large projects tend to move around on the schedule. On average, I'd say we're somewhere in the 60% to 75% range, but we're watching the curves. We're thoughtfully thinking about where we could you know, push that up if we needed to. So I'm pretty confident that with what we have today and with what we're looking at in the funnel, we're, we're well positioned to, uh, uh, take the top side of that in the next couple of years.

Okay. So you've got enough manpower and infrastructure and material sourcing to handle all of this business.

Uh, we do. I mean, if, if it continues to grow on the pace it's at, I wouldn't say that we're, uh, you know, we'll, we'll continue to have manpower challenges and, and, uh, But I think some of the changes in the macro side, the consumer side has slowed down this past summer. I've seen some indications from our operations. We've done a little bit better. You know, when we go out into the market and bring in different skill sets, whether it's in the factory leadership or even on the engineering side, you know, we're doing, I think, a little better overall there. So as I look out, you know, if we're successful at the same pace into the next two years, Wouldn't be without its challenges, but I think we're well positioned to overcome it and really capitalize.

That's helpful. And I guess finally, the new segment, commercial and other industrial, does that replace the all other segment that you segment out in the financials?

Yeah. Hi, John. This is Mike. It actually carves out from that bucket and segregates these new markets that we're seeing all this, you know, creative growth in. So, yes, it is a subset of that traditionally reported other bucket.

Okay, good. And the new segment will be basically everything that you talked about a year ago in terms of electric automation, service expansion, all of that kind of thing?

It would be in there. This would be the other segment, a specific sort of the end market segment. You know, we've always done work in pulp and paper. We've done work in data centers, although sporadically, it's just become more consistent over the last 18 months and started rising on the revenue side. So we felt it was prudent to carve it out in this segment.

Okay. Good. Congratulations and best of luck.

Thanks, Jeff. Thank you. And our next question will come from Tom Spiro with Spiro Capital. Please go ahead.

Tom Spiro, Spiro Capital. morning hey tom how are you fine fine congratulations on a strong fourth quarter and on getting that lng business good for you yeah thank you uh just one uh little housekeeping your utility business what what segment will that show up in utility is that going to be in the new business a new segment or in an old segment where will that be reported

That has been reported in its own sector, and it will continue to be reported in the utility sector. No changes there.

Okay, great. Thanks. R&D spending for the new year, do you think it's going to change much?

So I think heading into the year, you know, flattish, up to up a little bit, but in line with what we've talked on our strategic plans and with, you know, adding to the team with Marshall and others, there's a There's some work we've done this year to allocate that capital into longer-term look at the market. You know, five, ten years out, we've made some moves this year on investment, and I think as Marshall comes on and the team spins up, I think in future years we would anticipate increasing that, but not quite yet into next year.

What is the background of the new VP of R&D? Where did he come from?

Most recently, S&C Electric. I also had started his career with Eaton and Schneider in his background, so really well-rounded on the primary and as well as the secondary side of switchgear, which fits us perfectly.

That's great. That's great. You're, I guess, coming to the end of that large LNG project you won a couple of years ago. I wondered, number one, when you'll finish it up, and number two, how has it gone?

Number two, it's gone very well I think from all aspects. It hasn't been without its challenges. We knew heading into the project, I really give credit to the project team and the commercial team that secured the bid. They've done a great job from the outset of securing the job, identifying the risks, managing those risks through the project. Certainly staying very close with our client, both the engineering partner and the end client. And I think I'm – all I can say is I'm very pleased with how it's executed. It still is somewhat ongoing, although it'll be tailing off as we get through the bulk of 23 here.

I see. And earlier in this call, you had a little discussion of the impacts on gross margin of a changing mix of business, and I didn't really understand the point you were trying to make. Maybe you could take another go at it. As your mix changes, some of these – new lines of business grow services and the technologies and stuff. How will that affect your margins?

Yeah, Tom, this is Mike. When you look at our mix, as you know, the question that John brought up, you know, back five, seven years ago when gross profits were in the high teens, that mix contained a lot of oil and gas work. As Brett alluded to, the oil and gas sectors now are just beginning to recover and But what we're seeing that's supplementing a lot of this volume is utility type of work, commercial, you know, commercial and other industrial work, which typically doesn't carry the margins that the oil and gas work did back in, you know, back five, seven years ago. So that was my comment on the mix when you look versus, you know, prior years. Right.

Yeah. The complexity of those jobs from what Powell's built for in our 75-year history It's not to say they're easy, but they're just not as in-depth or complex with a lot of changes on loads because you don't have all of the process changes that happen on an industrial facility. So it's been a great build in our diversification last year, and we look to continue that both in the market side as well as development side. And then the other part is the service business. It did pick up this year. That also has a tendency to have a different phasing on the cycle. And a mix of complexities, but it's been a really nice add to the story this past year.

Do the margins on services tend to run higher or lower than your traditional oil and gas business?

Higher. It's when you're putting, especially on the labor side, when you're bringing a lot of the talented labor to bear on a project, both on the design side or site services, it tends to bring in a higher margin than some of the products.

And our next question will be a follow-up from John Frenzreb with Sidoti & Company.

Please go ahead.

Just a couple points here. I'm curious about the project that contributed $2.5 million to revenue. Was that a recent project? How old was the project? Was it older?

Yeah, John, this is a project that we executed. We actually won it, I think, in 2013 or 14. It was executed over a number of years. And Paolo incurred costs via change orders, you know, several years ago. And due to the uncertainty of recovering, the timing and the recovery of those costs, the costs flowed through the P&L, but revenue was not recorded. Now, in this last fiscal fourth quarter, that project was – finalized by the ultimate end user and the general contractor, and the amounts were defined and settled. And as a result, Powell recovered the majority of the costs that we had incurred several years ago, and that's the $2.5 million uplift in margins this quarter.

All right. And, Brett, you kind of referenced You travel to Asia. You have a coming trip to the Middle East. I'm curious about the opportunity pipeline today versus, say, three months ago. Is it still as robust? I mean, are we looking at an exit backlog in fiscal 2023 that's similar to the exit backlog in fiscal 2022? Just your thoughts about what's out there relative to what you were seeing and already captured.

It's still pretty strong, John. You know, hard to say what the exit backlog will be. I think the potential to have a strong backlog at the end of 23 is definitely there. The oil and gas side, that has been building for the better part of 12 to 18 months. And as we shared, you know, certainly very appreciative to have received the award in Q4. But the oil and gas part continues. There isn't just one project. There's a number of things that are percolating in that core market. that are ongoing and we'll definitely continue to pursue them throughout 23 and probably into 24 at this point. So I think that will be an increasing return to that core market. You know, on the broader, I don't expect any change in the utility cadence. You know, we've talked about that for a number of years, five, six years. We continue to have a very strong strategic focus, especially in our home countries of the U.S., Canada, and the U.K., so I expect to continue there. incrementally gaining share where we can, continue to execute and demonstrate to the utility customers that Powell is the best solution. And then on the broader markets that have kind of come up in the last 12 to 18 months, maybe a little bit more uncertainty in the latter part of the year, but as I sit here today, pretty robust activity. So I think at least in the first half, it'll continue at a good clip.

Okay, great. Thanks for taking my questions.

Congratulations again. Appreciate it. This concludes our question and answer session.

I would like to turn the conference back over to Brett Cope for any closing remarks.

Thank you, Joe. Overall, we are pleased with our financial performance in the quarter and for the full year as our core end markets continue to improve. We are seeing the early successes of our growth initiatives in our entering fiscal 2023 with very encouraging momentum. I would like to thank our nearly 2,000 talented employees for their enthusiasm and exceptional service to our customers. Their strong focus on operational excellence, safety, and a commitment to improve combined with a can-do spirit gives me great confidence that Powell's future is very bright. 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.