Powell Industries, Inc.

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 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that 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, operator, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2025 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 website, powellind.com, or a telephonic replay will be available until May 14. 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 7, 2025, 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 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 2025 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 marked another solid performance. The team across Powell delivered gross profit dollar growth of 33% on revenue growth of 9%, which translated into record earnings per diluted share of $3.81 in the quarter. The electric utility and commercial and industrial sectors remain growing bright spots for Powell as compared to the prior year, they grew by 48% and 16% respectively. These two sectors have and will continue to become more meaningful contributors to our total results. New orders in the quarter totaled $249 million, an increase of 6% compared to the prior year. New project activity was driven by our commercial and other industrial markets as well as the oil and gas sector. We booked two large projects in the quarter, one for a new Greenfield LNG facility to be located along the US Gulf Coast. As we have shared on previous updates, the fundamentals and market outlook for this sector remain very encouraging. The other significant award this past quarter is for a large mining project in Canada for the production of potash. This award underscores how our people and facilities are demonstrating the strength of Powell. Our investment in Canada has always been focused on building a diverse portfolio of customers across the sectors that we serve. Each of these projects were approximately $50 million. Our gross margin in the quarter was 29.9%, which reflects disciplined project execution, the benefit of closeouts, as well as continued operating efficiency across the business. Mike will discuss our margin outlook for the second half of the year, but more broadly we remain encouraged by our second quarter margin results. On the bottom line, we recorded net income of $46 million in the second quarter, or $3.81 per diluted share, which was 38% higher than the prior year and a record quarterly earnings per diluted share for Powell. Our backlog remains strong at $1.3 billion. The overall composition, margin profile, and project schedules of our backlog remain very encouraging. We have revenue visibility well into fiscal 2027, and our order book is well balanced across the sectors we serve. In addition to our strong financial results in the quarter, we continue to make important strategic progress to expand and diversify our product portfolio. During the quarter, we commercially launched several new and innovative products. The first is the grounding switch. Widely used in international IEC switchgear designs, our new product will be the first to meet a new developing standard for the North American ANSI market. This product is mainly focused on industrial markets, such as oil and gas, but is an enhancement that we will ultimately seek to commercialize into all three of our major sectors. We have also received orders for a new compact substation that our team have engineered and recently introduced to the market. The Powell Control Isle substation provides optimized workspace along with environmental protection for utility and unit substations. This -to-order medium voltage substation reduces the installed cost of the substation while providing our customers with a safe, environmentally protected aisle to service the switchgear. Our initial awards for this are in support of battery energy storage projects being developed and installed to support the utility grid. We also showcased our first design of a low-voltage switchgear product specifically designed for the data center and associated commercial market. This product increases our ability to compete within the four walls of the data center where there are significant incremental content opportunities. We are also working towards adding the commercial infrastructure and the required sales channels necessary to better compete in this important vertical for Powell. The launch of these latest products serves as continued validation of the increased R&D spend that we have undertaken over the past several quarters and it monetizes intellectual property that has been on our balance sheet for nearly two years. Most importantly, it furthers our aim of advancing our product-centric strategy to improve the overall future mix of product versus project-based revenues. We have just completed and received our occupancy permits on the capacity expansion at our electrical products facility here in Houston. I am pleased to share that this investment is on time and was finished on budget. This incremental capacity will play a critical role in advancing our key strategic priority to commercialize new products through organic investment and our R&D function, positioning us to better compete and capture greater share in all three of our key market sectors. Manufacturing of both the station breaker that we launched last summer and our new power control aisle substation will start in the third fiscal quarter. We will begin to recognize revenue through the balance of this year with more modest accretive additions in fiscal 2026. Looking ahead, the outlook for each of our end markets remains positive. The fundamentals for our oil, gas, and petrochemical markets support our expectation for continued strength in these sectors. Specific to the fundamentals of the U.S. natural gas market, price spreads across global markets remain favorable and conducive to U.S. export activity. The funnel of L&G projects that we are tracking continues to support our expectation for a strong cycle of greenfield and brownfield activity with generally a higher volume of projects that are either in process or currently being evaluated compared to the prior cycle. Activity within our commercial and other industrial market also remains healthy and includes activity within the data center market. Over the past few months, we have not seen any change or slowdown in activity within the data center market and our efforts to further penetrate the data center market and expand the total content opportunity for Powell within this market sector are progressing well. Lastly, the outlook for our electric utility market remains positive. We continue our sustained and decade-long effort to drive success for Powell in each of our three home geographies, the U.S., Canada, and the United Kingdom. Overall, we are very pleased with our financial results in the first half of this fiscal year and confident in how we position Powell to grow in each of our three major sectors. Our volume expectation in each of these sectors remain a tailwind and we expect continued strong performance for the remainder of fiscal 2025. With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail.

Thank you, Brett, and good morning, everyone. In the second quarter of fiscal 2025, we reported total revenue of $279 million compared to $255 million, or 9% higher versus the same period in fiscal 2024. New orders booked in the second fiscal quarter of 2025 were $249 million, which was 6% higher than the same period one year ago. As we continue to focus on diversifying the business across sectors outside of our core industrial, oil, and gas, and petrochemical sectors, we continue to experience positive momentum across the utility and commercial and other industrial sectors with backlog in these sectors at 29% and 13%, respectively, of the total business backlog. With these end markets continuing to contribute to the solid order activity, in addition to the sustained commercial activity across most of our other core end markets, this combined to result in a 0.9 times -to-bill ratio in the current quarter. As a result, we reported $1.3 billion of backlog at the end of the second fiscal quarter, $42 million higher versus one year ago, and $29 million lower sequentially. Compared to the second quarter of fiscal 2024, domestic revenues improved by 5% to $228 million, while international revenues were 33% higher, driven by increased project volume across our Canadian operations, as well as an increase in activity in the Middle East and Africa. In total, international revenues were up by $13 million to $51 million in the second fiscal quarter. From a market sector perspective versus the second quarter of fiscal 2024, revenues increased by 48% and 16% in the electric utility sector and the commercial and other industrial sector, respectively, reflecting our ongoing strategic focus to expand our presence across these two end markets. Additionally, the light rail traction power sector experienced a substantial increase versus the second fiscal quarter of 2024, growing by 122%, or $5 million, albeit on a small revenue base as we continue to be very selective in this market sector. Across our core industrial end markets, the petrochemical sector and the oil and gas sector were lower by 13% and 3%, respectively, versus the same period one year ago as we grow closer to completion of the large petrochemical and LNG megaprojects that were booked in fiscal 2023. Gross profit increased by $21 million to $83 million in the second fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue increased by 530 basis points to .9% of revenues versus the same period a year ago and was 520 basis points higher sequentially. The margin rates exiting the backlog continue to benefit from the large projects nearing completion, which have continued to generate strong project closeouts during the quarter, contributing roughly 275 basis points to gross profit as a percentage of revenue during the second fiscal quarter and approximately 125 basis points on a fiscal -to-date basis. Additionally, margins have also benefited from the strong volume leverage and exceptional operational execution across all of the manufacturing divisions globally. Given these solid fundamentals and based upon margin levels in the order book, we anticipate that margin rates through the remainder of fiscal 2025 should align with the reported margin levels through the first six months of fiscal 2025, excluding the impact of the aforementioned project closeouts. Selling, general, and administrative expenses were $22 million in the current period, higher by $1 million on a higher level of compensation expenses across the business versus the same period a year ago. SG&A as a percentage of revenue decreased 40 basis points to .8% in the current fiscal quarter on the higher revenue base and overhead management. In the second quarter of fiscal 2025, we reported net income of $46.3 million, generating $3.81 per diluted share compared to a net income of $33.5 million or $2.75 per diluted share in the second quarter of fiscal 2024. During the second quarter of fiscal 2025, we generated $22 million of operating cash flow driven by higher earnings generated in the second quarter, partially offset by negative working capital impact as we allocate capital to fund projects in the order book. Investments in property, plant, and equipment in the fiscal second quarter totaled $4.1 million, driven in large part by the facility expansion at our electrical products facility in Houston. At March 31, 2025, we had cash and short-term investments of $389 million compared to $358 million at September 30, 2024, and $373 million at December 31, 2024. The company does not hold any debt. As we move into the second half of fiscal 2025, we anticipate continued strength operationally based upon current factory utilization levels, project execution, and backlog quality. Notwithstanding the typical challenges of project timing and mix, coupled with the current macroeconomic uncertainties, Powell is well positioned to continue delivering strong results, both financially and operationally, for our customers and shareholders alike. At this point, we'll be happy to answer your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. 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. Our first question comes from John Bratz from Kansas City Capital. Please go ahead.

Good morning, Bratz and Mike. How are you doing, John? A couple questions on the LNG outlook. First of all, the LNG award in this quarter, did that have anything to do with Trump unpausing the pause, so to speak?

I honestly don't know for certain, but I would say overall, if you look year over year, John, it absolutely is impacting the industry. The activity is up.

Okay. Continuing on that theme, and I'm not all that close to the LNG industry, but some of the things that I read, they talk about maybe some lower energy prices, tariffs adding to cost, and so on, and that before it was sort of a regulatory risk with the Biden administration. Now, there seems to be some commercial risk on the returns or on the economics of LNG projects. Is that really an issue at this point, or do you see any commercial pause as the industry reacts to the tariffs and additional costs that may be facing the industry?

Yeah, that's a really good question, and like you, I read and am consuming as much information on the world trading economics, right? There was one in the press here not too long ago about China and what they're doing on cargoes, but they really, if you look historically, haven't bought a lot of cargoes, but when we meet with our clients about jobs that last quarter or even the future work, where are they at in their FID status and selling out future capacity to hit their FID dates, I would say generally it's very robust drive-forward sort of discussions. So, whatever really is happening behind the scenes and their interaction with their customers would give me certainly an element of confidence that Mike and I and the management team are wanting to understand as much as you are in your question, and I would say today generally is very positive as we look forward. Okay.

Any reason, given all the insight that you're getting with your clients and so on, that some of the projects, let's say they still make sense, but they're going to be pushed a little bit to the right in terms of FID?

Not sitting here today. It is a risk that's in the back of my mind because of tariffs, and you think about, okay, what's going to happen on steel? When I think about the things we don't build that they need to build

on

these facilities, that is part of the chat we have with the board and management team, but really I'm sure I'll get a question today on capital. We're actually thinking about another phase of investment at offshore to prepare, frankly.

Okay. All right. Thank you very much.

Yep.

Thank you. Your next question comes from John Frenzrep from Cydotia & Company. Please go ahead.

Good morning, guys, and thanks for taking the questions. I want to go back to Mike's statement about the gross margins benefiting from the 275 basis points of closeouts. I'm curious about two things. One, given the demand environment, why can't you be more aggressive in pricing for gross margins? And two, what should we be thinking about as a normal closeout contribution on a quarterly basis or an annual basis for that matter if you want to push it back farther, just so that we can get a bit of feel for it?

Morning, John. It's Fred. Let me try to address the first one, and I'll turn it over to Mike on the closeout one. So on the market demand side and pricing, you know, we talk about this together. We certainly look for opportunities, but the market, as we've kind of shared the last couple of quarters, kind of hit a point where it's not getting any worse. It's not going backwards. It's kind of hit this area a year and a half, two years ago, and sort of maintaining, and that seems to be still the case today. You know, some of the capacities of our competitors have improved from where they were at the worst point, if you will, through the pandemic, and they sort of leveled out last couple of quarters. It has the, I think, the potential to go back the other way. It could become more constrained. A lot of uncertainty in the macro environment for some of the markets that are smaller for Powell, maybe bigger for them. If those start to go, I could see a scenario where that would go the other way, and we're watching that for opportunity. But right now it is

more or less holding quarter over quarter. Yeah, and John, I'll add in there, you know, as we've experienced over the last year or so, one queue was a seasonal low, as you know, and we didn't see much in the way of project closeouts in one queue, but the second half of fiscal 24 and this last quarter that we reported, very strong project closeouts that benefited the margin rate. This is also coupled with strong project execution and operational leverage that I mentioned in my prepared comments. So as we look forward for the remainder of fiscal 25, we anticipate a similar exit rate from a margin perspective from backlog, but X the elevated level of project closeout gains. So in the absence of any anomalies, as we look forward to the remainder of the year, I think a reasonable barometer for the margin rates exiting backlog would approximate a normalized rate in the range of 26 to 27 percent on a year to date basis.

Yeah, I guess, Mike, that's what I'm kind of getting at that that project should we ignore project closeout benefits is what I'm getting at, because it seems to come up often enough that we shouldn't we should kind of be thinking about at least in the aggregate.

Yeah, I guess, you know, just to calibrate on that, we are in a project business. There are inherent risks in these long lead projects, and the project team has done just a phenomenal job retiring the risks on the risk register. So, you know, we have we have read the rewards of their hard work over the last year. If something goes the other way, you know, and it is a project business, it could. But we haven't seen that over the last year.

OK, just a little bit on the capacity expansion. Can you kind of update us on how much of incremental revenue you would expect in 2025 and maybe an annualized basis as we think about 2026?

But, yep, so super, super excited and pleased with the with the team's performance on getting that expansion done on time. We have orders hitting the floor here this quarter. It'll be pretty small through the balance of the year, John, if you think about the sense of completion and compounding. It's it's sort of double, you know, low double digit type of business total orders hitting the floor. But from a percentage completion, that will ramp up engine, you know, some engineering and an early build on the on the projects. And then longer term, we think I think I've shared this with the market before we anticipate next year, sort of 20 to 40 million dollar range creative as we launch projects and are successful in the market. And then, as I noted with John brought to the earlier question, you know, we know the cycle of improvement with the land that we hold in reserve here in the Houston area. We've got three different facilities with acreage and we are looking hard at having chats with the board next few months on some points and capital there to make some further improvements.

Yeah, very interesting. I think you said offshore. That's surprising and good news. Yeah, yeah, they are out there.

Couple of improvements in this next one could be could be sizable. So.

Well, which I guess we'll just walk into the question and I asked you last quarter and maybe the quarter before that I recall. But you can't deny that the cash continues to swell, you know, three hundred twenty five million dollars and even if half of it is is deployed, it still leaves you with a sizable number relative to historic standards. What are the updated thoughts?

Well, go back to your earlier question. As we launch the new products, if a couple of these, I mean, hopefully we do really well in our design basis and understanding the market and start to catch fire. You know, we would be out looking at the footprint opportunities because we'll outgrow the space we just built. And so we we understand what's out in the market done a little done a little work out there for existing buildings and crane usage. These are the product crane capacities are lower than some of the heavier things that we built traditionally here over the decades. But notwithstanding, we continue to look at the existing footprint. And should we need to build longer, longer cycle to do that heavier, heavier capital requirements. And so we we hope the former will be the opportunity. But in the meantime, for the things we do build on the substation side, especially, you know, we all we have the land here. We've had it for we picked up the additional 10 acres over at the products factory when we when we bought all that land. It's pretty clean and that's an option. But then the offshore yard, we picked up also that 10 acres sitting out there. We did a small improvement a couple of years ago there. One hundred fifty thousand square foot of lay down. But there's a lot more to go out there. And that's the land that we're kind of circling our heads around right now for fiscal Q3 to look at.

Got it. And just one question of a question. Has the board considered stocks, but at all? I'm just curious what the discussions are on that.

I think it's come up. I think we talked more about, you know, should we should we launch a buyback or, you know, on the final side, is there opportunity to use the equity side of the strength of the stock to do some things in the market for things that are in the funnel? So, you know, having having more shares out there, I understand, you know, what what that means and the conversations that are going on, especially with some of the shareholders. But we want to thoughtfully do it right to get to get the right return long term.

So, OK, thanks for my questions. I'll get back into you.

Thank you. The next question comes from Chip Moore from Rott Capital. Please go ahead.

Morning. Hey, thanks for taking the question. Maybe maybe I go back to another one on cash, guys. The, you know, I guess position you're in. I get a lot of questions around, you know, why not consider a buyback just given where the stock is, where where it's at. Are you signaling, you know, some of those organic things you see that you just talked about are just so compelling? And then any any updates on M&A potential as well?

Yeah. Hey, Chip. Morning. It's Brett. I'll start. Mike wants to jump in here. That is that is more or less the signal. I mean, it's a healthy conversation with the board every quarter. Certainly understand the map of the potential buyback, but the float is pretty low. But when you compare that for me against the work we've been hard at doing the last two to three years out in the market on the on the I'll note the inorganic. But of course, we're ramping up the organic side and just the time it takes to bring these things to market. So again, per the conversation and comment that Franza have just asked, if if these products go, you know, we've got a range of expectation for return to the market. We're going to need some capital to go to work. And we know we've done some base work to go pick up, say, a light light commercial space that would support rapid expansion over and rapid for us would be a couple of years, but wouldn't be a three year build on a new factory. We'll need to put the powder to work. So that was sort of the basis all along, along with some other things that are going on on the M&A front. And so and to that point, as I noted last two quarters, we we sort of took the longer term off off the board on the December report out. It came up last quarter, and I would just tell you that the activity there continues to be very active. Mike and I and the team within the company are are pretty heavily engaged now on a routine basis. And I feel like it's moving along methodically very well.

Great. No, that makes perfect sense. If I could ask just one or two more, I guess one electric utility growth really stood out. So maybe any more color on what you're seeing there moving forward. And then the you talked about data center and showcasing that low voltage product. You know, any more insight you can give us on potential there to get inside the four walls and and how to think about timeframes there. Thanks.

So on the utility side, I love this business. I love talking to our investors about it. I love pointing out the fact that today it is 25 to 30 percent of our revenue and that we intentionally set out the strategy to to get credit for our team at Powell that have been working hard at this. Especially, you know, in our home countries here, as I noted in my prepared comments. And so we we are out grabbing this. We have part of our organic development path on product development is targeted at increasing the share of wallet and that zero to 38 KB space. And we are amping up our efforts to build out our team members in select geographies. And when you look at how the utilities say, just take the US market between the IOUs and large, you know, combat con is and what we're doing there and how we go to market. And so the conversations even with the clients are much more strategic today than I think fair to say ever in policy history. And that's that's been a refreshing change for both sides and given us line of sight into backing this desire to to be a better supplier to them and develop solutions that are very specific to their needs in the future. So that has been a very positive momentum in the US and Canada and and also the UK on the data center market. You know, again, I mean, we're still it's a smaller part of our of our growth part, but it's been high growth in terms of its percentage when you do the math calculation. Last quarter, we had some really nice wins for good traditional power gear with some some nice name brand companies. So the engagement for us is exciting and the this fixed this fixed pattern breaker design that that we don't have that we now have been through all the testing last quarter, we released it at a show. Quietly, if you will, just to get as you start the process of introducing the product to the market. You know, it's exciting for us as an enabler to the inside the four walls, but it doesn't I don't want to take away from the efforts of things that are still going on. We are we are building and winning in in in the market with with what we already had to go to go to war with in this market. And so I think as we add people capability and keep rounding out the products, I think, you know, our anticipation is to make this sticky. And I think we're going to

succeed. Great. That's very helpful, Brandon. Maybe I can sneak one last one in just on tariffs, maybe a finer point. You know, I guess one, any risk to margins just on passing on some things and then your sort of domestic positioning overall is that is that a strategic advantage?

I think it is, you know, when you look at Powell, when you compare to our competition, at least based on my experience in the industry and knowing how we supply at Powell from a first line supplier perspective, we should be de minimis compared to our competitors. So, you know, cost opportunities, price opportunities, they should be there for Powell. Now, as you dig into, you know, when we build substations and we do major buyout, I'll point out like batteries. We don't a lot very few people of any. I think most batteries will come out of, you know, head east, kind of India and beyond. They're all going to come over overseas. You know, your typical large lead acid battery for 500 pounds, and there'll be multiple those in the substation. You know, they're going to be subject to some risk. And so we're working with our clients and they're in the end clients to ensure that, you know, that those costs are well understood and that really shouldn't be borne by Powell. And so that's the approach we're taking. And while we're trying to do everything we can to minimize the impact of the project and the ultimate viability of a project go forward, it isn't something that at this point, I think there'll be some effect, but I think we'll be pretty successful at mitigating that. It could be a little bit of, you know, as it kind of comes into cost materials maybe or things we can't see, it'll leak in the inflationary. But I think over time we'll roll that out. It's the big hitters that might come in short term when we look to pass those through.

Got it. Got it. Okay. Appreciate the call. Thank you.

Thank you. Our next follow up question comes from John Franz Rep from Sedotian Company. Please go ahead.

Yeah, just on the data center discussion, can you just tell us what kind of annualized run rate you're at? And Brett, you said you expect to grow in a double digit pace on a go forward basis. Did I hear that correctly?

Well, when I look at the growth of that, of the commercial and other industrial sector, it's growing. But it's, I don't know, we announced it years ago.

Yeah, John, when we broke out the commercial and other industrial sector back in 23, if you looked prior to this data center wave that we're currently navigating through, it was roughly 6% of the total revenue. And that's grown now to mid teens. And that growth is really attributable to the data center volumes. There are other things

in that sector, John, but just like I noted last quarter, they're not $50 million LNG jobs, but they are for gear. When we sell gear only into a job, they're nice chunky orders that are improving as we better understand the market, better position power, demonstrate to those clients and their engineering partners how we do things. So that process is that, you know, that that effort that we have to undertake for any client in any sector as we engage, it's paying, it's starting to pay dividends.

So, so, so, so I got this right. So data centers is mid teens of total company revenue. And the trajectory is still expected to be at a double digit clip or or am I overstating something?

No, it's it's it's it's sub double digits. The what I was alluding to is the increase from data centers went from six to, you know, mid teens, 15 or so. So we're still we're still sub we're still in the single digits from data centers. But to Brett's point, the market is quite large and quite robust.

Okay, I just wanted to get in context. Thank you, Mike. Thank you, Brett. Appreciate it.

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Brett Cope for CEO for any closing remarks.

Thank you, Sagar. Mike and I are fortunate to work with the most talented group of people that you'll find in the industry. Thank you to our employees for their incredible contributions to our stellar results this past quarter. I would like to also thank our customers for their continued trust and support of Powell. We have and will continue to recognize the importance of transparent, agile execution and working to support critical critical project delivery milestones. Powell is committed to your success. Thank you to everyone for joining us this morning. We appreciate your continued interest and support and look forward to updating everyone next quarter.

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