Powell Industries Inc (POWL) Q4 2020 Earnings Call Transcript

Thank you and good morning everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2020 fourth quarter and full year 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 where a telephonic replay will be available until December 16. 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 9, 2020 and therefore you're advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures; sensitivity to general economic and industry conditions; international, political, and economic risks; availability and price of raw materials; and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission.

Thank you, Ryan and good morning everyone. Thank you for joining us today to review Powell's fiscal 2020 fourth quarter and full year results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Since our last update, our enhanced safety measures have remained in place and we have continued to prioritize the health of our employees, customers, and suppliers above all else. As an essential business, we remain fully operational. We continue to follow all recommended safe work practices, such as ensuring that our team has access to the personal protective equipment they need on a daily basis, safe distancing at workstation, staggered work schedules, and where and when possible work-from-home options for roles that support manufacturing operation. I continue to be impressed by our team's response during this crisis and their commitment to Powell and our customers. Throughout the fourth quarter, industrial end markets remained clouded and under pressure as a result of the pandemic, which impacted our revenue and new orders for the quarter accordingly. However, across all of Powell, our operations executed well on current projects and we were able to contain costs effectively. Fourth quarter revenues were $115 million, down 23% when compared to the prior year and lower by roughly 3% sequentially. The decline was driven by lower revenue from both our oil and gas and petrochemical customers, which were down 50% and 35% respectively compared to fiscal 2019. Those declines were partially offset by sustained activity in our utility and traction market, which each grew over 30% compared to last year. Fourth quarter gross margin as a percentage of revenue was 18.9%, which is a decline of just 30 basis points compared to one year ago and an increase of 80 basis points compared to last quarter. The sequential increase resulted from restructuring activities that we took in May as well as strong productivity in our domestic operation. We continue to restrict travel and other discretionary expenses in this environment, partially due to local, state, and federal stipulation. Going forward, we will continue to evaluate our cost structure to ensure we are aligned with the current environment, while ensuring we remain properly staffed for the eventual return on customer project activity. We reported net income of $3 million in the quarter, down from $6.5 million in the prior year, primarily due to a decline in revenues and gross profit, resulting from a decrease in new orders and adverse market conditions. We continue to effectively manage our working capital position. Combined with our focus on our cost structure, we generated $18 million of free cash flow in the quarter. New bookings on a gross basis for the fourth quarter were $75 million. Net orders for the fourth quarter were $57 million as the quarter was offset by $18 million of adjustments to previously booked orders. Within that $18 million, $13 million was related to a previously awarded project in our backlog that was re-scoped to an engineering-only project at the request of our customer and their engineering partner. We ended the quarter with backlog totaling $477 million, which includes the previously announced large industrial order that was booked in the second quarter to support the design, manufacture, integration, and testing of a Powell custom integrated electrical distribution solution. Powell designed, built, and delivered multiple power control rooms in support of the project. This contract will convert to revenue over a three-year period. During the quarter, we continued to experience lower bookings rate consistent with the third quarter as the impact of the pandemic hit our core market. However, we did experience improved quoting activity at the start of the fourth quarter across most of our operations. One of the key value differentiations of Powell's model is our extensive engineering capability. Consistent with prior economic cycles, we are starting to see an increase in engineering-only awards. These awards keep our engineering teams utilized in the near-term, while enabling our clients to continue to progress their projects until such time when full funding is approved. Visibility remains a challenge for many of our customers as they grapple with a significant deterioration in the near-term outlook relative to the beginning of 2020. As we've discussed, we have seen several mid to large projects shift their schedules into 2021 at the earliest while a handful of customers continue to evaluate their timetable. As I briefly mentioned, the bright spot in the quarter was the activity within our utility and traction market. Additionally, short cycle service, parts, and OEM work have continued to show steady improvement. These projects are typically smaller, but they are important work that utilize our assets and our cost structure. Powell has gone through numerous downturns in customer activity that we have successfully navigated in the past, most recently during our fiscal 2015 through 2017. Of course, the drivers this time are different; steps we are taking in response are similar. More than ever, it is critical during times like this that we continue to deliver the premier service our customers have come to expect from Powell during our 73-year history as a leader in electrical distribution solutions. We are also taking the necessary steps to manage our cost structure and preserve the strength of our balance sheet. We ended the fiscal year with $179 million of cash and short-term investments and essentially zero debt. This offers us incredible optionality as we navigate this environment. Looking forward, we believe the economics of low-cost abundant natural gas will continue to provide favorable opportunities in the LNG, gas pipeline, and gas to chemical process industries. We also see opportunities in the renewable markets of hydrogen, biofuels, and biodiesel. Several projects are in the planning stages that would drive future demand for both the process plants and the supporting pipeline infrastructure. Additionally, we anticipate that oil-to-chemical projects will become more economically viable as oil prices support a return for these projects. Lastly, any future tightening of regulations that require a lower level of sulfur will drive higher demand for electrical distribution as refiners are required to upgrade facilities to meet improved emission standards. Like all cycles, our industrial market and customer activity will improve, and we are ensuring that we make progress against the initiatives that will drive Powell's future growth. One of these initiatives is Powell's ongoing commitment to research and development and technological innovation.

Thank you, Brett, and good morning, everyone. Revenues for the fourth fiscal quarter of 2020 decreased 23% to $115 million compared to last year's fourth quarter of $149 million and were down $3 million sequentially as we encountered continued softness across our core industrial markets. Net orders for the fourth fiscal quarter were $57 million with $75 million of new orders booked in the period offset by $18 million of order cancellations and scope adjustments to the backlog. The $18 million consisted of $13 million of a converted or re-scoped project and roughly $5 million of cancellation. These net reported results reflect a 65% decrease versus the prior year, resulting in a book-to-bill ratio of 0.5 times for the quarter. Reported backlog at the end of our fourth quarter was $477 million, $58 million higher versus the same period in the prior year. Compared to the fourth quarter of fiscal 2019, domestic revenues of $81 million decreased by $34 million or 29% versus the same period one year ago, while international revenues were flat versus the prior year. From an end market perspective versus the prior fiscal year, revenues from our industrial sector decreased by 45%, while the utility sector was higher by 31% and traction revenue increased by 32%. The year-over-year volume reduction across the industrial sector was led by a 50% decline in oil and gas volume, while petrochemical revenue was down 35% versus the same period a year ago. We reported $22 million of gross profit in the fiscal fourth quarter of 2020, which was lower by $7 million or 24% versus the prior year at 23% less value. Gross profit as a percentage of revenues decreased by 30 basis points to 18.9% of revenues in the fourth fiscal quarter compared to one year ago. This was driven in large part by unfavorable year-over-year project mix in our international location, partially offset by favorable productivity across most of our domestic locations. Selling, general, and administrative expenses decreased by $3.4 million or 17% versus the prior year attributable to restructuring benefits and overall cost management. SG&A expenses were $16.3 million in the fiscal fourth quarter or 14.2% of revenue compared to 13.3% of revenues a year ago on the lower revenue comparison. On a net reported basis, fiscal fourth quarter net income was $3 million or $0.25 per diluted share. We generated $18 million of free cash flow in the fiscal fourth quarter. This was driven by our strong working capital performance in the period as we see the benefits of projects closeout as well as favorable milestone billings and collections. CapEx spending during the quarter was $852,000. Now, recapping our total year fiscal 2020. Revenues of $519 million increased $1 million compared to the prior year. Orders were $577 million, 15% lower versus fiscal 2019. Gross profit as a percentage of revenues increased by 140 basis points to 18.2% of revenue and favorable volume leverage and productivity across most of our North American operation. Selling, general, and administrative expenses were lower by $2.3 million versus the prior year. This was partially offset by $1.4 million of restructuring costs in fiscal 2020 in addition to a non-repeatable insurance settlement benefiting fiscal 2019 by $950,000. Overall, net SG&A expenses as a percentage of revenues were flat year-over-year at 13.4%. We reported net income of $16.7 million or $1.42 per diluted share compared to $9.9 million or $0.85 per diluted share in fiscal 2019. Total fiscal year 2020 free cash flow totaled $67 million versus $65 million in the prior year. At the end of fiscal 2020, we had cash and short-term investment of $179 million, $54 million higher than our fiscal 2019 yearend position. Long-term debt including current maturities was $800,000. Looking forward to fiscal 2021, we continue to be adversely affected by the uncertainty across our industrial end markets and anticipate that these cyclical conditions may persist throughout fiscal 2020. That said, as we navigate these near-term economic variables, we are well-positioned to manage through the industrial end market dynamics as we continue to focus on executing the backlog, while also maintaining our strong liquidity. We are also seeing stronger activity in our utility and traction markets, which were higher by 31% and 32%, respectively in the fourth quarter. While project orders in these markets are smaller in scope, they're important projects that helped to keep our asset base utilized and leveraged until our industrial end markets recover. As we've demonstrated in the past, we're committed to maximizing margins across the portfolio, and we'll continue these efforts into fiscal 2021 and beyond. Additionally, our balance sheet is strong, which provides the business with the element of optionality as we assess opportunities to diversify and grow into the future. As a reminder, we typically encounter a seasonality impact at the start of our fiscal year and as such, we do anticipate that the first quarter will be softer sequentially from an earnings perspective due to fewer days worked resulting from holidays and paid time off compared to the prior quarter.

Good morning Brett and Mike. How are you doing?

The market John on that one is a gas to chemical project, and it's a repeat customer, longtime customer of Powell. It is a little unique in the re-scoping of it. Of the $13 million, I assume that’s the core question because there were just some straight cancellations on that Mike mentioned in the detail. But yes, gas to chemical and from what I can see balance sheet, it is called a charter balance sheet and deferred spending to a later time, so they called us up and we converted to the engineering-only. We anticipate at some point, though, that will come back; they just wanted to pull back on the committed cash.

I was actually more interested in the cancelled projects rather than the re-scope, Brett, because I consider those relatively rare. Is there any commonality among them?

Yes, $5 million or so balance on the cancels were more in the oil space, straight refining, brick-and-mortar type jobs.

Okay. Any sense that that business has bottomed or are you still concerned about the trajectory of that market?

If you look at the Q3, Q4, it was kind of the same run rate. I think we might see one or two more is bottoming, but I don't know if we've seen the end of that yet.

Recently, a competing company put some assets up for sale. I wonder if you have considered those assets and whether you find them appealing. You mentioned that you are looking into inorganic growth opportunities, which is somewhat unusual. Can you elaborate on that?

So, I know the question has been asked in previous calls, and what we're doing with cash. And I share very openly that with the Board and the management team, our conversations have been very focused on this subject and how we're going to direct the company and work the strategies right for the future, but working on that now for the better part of the year. Those conversations continue, as I mentioned before, to become more focused around a couple of key strategies. We are watching the marketplace with our competitors in many senses, and so we're aware of that and evaluating how that might be best for Powell's shareholders in the future.

So that means you're considering inorganic growth opportunities or not?

We are. We are starting to try to build the framework and guidelines by which we're going to stay disciplined to add to our strategy here to push the company forward into where we see the market heading for Powell.

Got it. One last question and I'll get back in the queue. We’re nearly done with the first quarter besides the seasonality, which you are reminding us all about, how is it kind of shaping up relative to the fourth quarter on any kind of comparable basis that you can help us with?

Coming off of the fourth quarter, I mentioned the increase in quoting activity. This was a significant change compared to the third quarter when everything was quite uncertain. We are still experiencing some effects of remote work and the lack of people in their offices, which continues to slow things down in areas like utility traction or core oil and gas petrochem. However, we have definitely seen an uptick in activity. The run rate remains stable, but in terms of the mix, engineering-only awards have increased. While these may not involve large sums, they represent potential future business. I remain optimistic about the possibility of these getting funded, though there are no guarantees. We are making solid progress toward future business opportunities, but the actual run rate has not changed as we enter the beginning of the quarter. The mix is looking more positive, indicating a desire to fund, and when that happens, I believe we will be well-positioned to add those projects to our backlog.

Great. Great. Thanks for taking my questions. I'll hop back in the queue.

Good morning guys.

Good morning Jon.

Mike, can you clarify the working capital needs as we approach 2021? Business is expected to be soft, but do you anticipate a need to increase working capital? Additionally, were your cash balances positively impacted by payroll tax deferrals related to the COVID legislation?

Yes, so I'll take the second one first, the answer to that is no, we didn't have any impacts due to the COVID legislation that went through. From a working capital impact looking forward into fiscal 2021 and first I digress to 2020, great year for working capital cash overall for the company, really driven by a couple of things. The working capital was benefited by the unwinding of a lot of these projects that had finished up in the second half of 2020 as well as some of the milestone billings for that large project. Looking forward into 2021, we will use some of that cash for working capital for this sizable project that we're executing in 2021 and 2022. So, I would expect cash to come down a little bit as we work our way through mid-2021.

Okay. And regarding the new business opportunities coming in, how do they appear in terms of margins? Are you experiencing any margin pressure in this challenging environment?

Coming into Q1, we are starting to see some price pressure. We didn't notice it much in Q4, but now it’s becoming evident, particularly in the traditional markets where we usually face pressure. This is more noticeable on the generation side of utilities, and in some markets where distribution is less challenging and more open to competition, we expect to see that pressure.

Okay, one last question. And this is probably a long shot, but I was reading the other day about offshore drilling activity and offshore oil production. And there were some comments in there about how maybe with these higher oil prices and new technology, that offshore oil and gas production may begin a little bit more in earnest than we've seen recently. And talking about maybe Gulf of Mexico and Brazil and so on, Brett are you seeing any activity in sort of your legacy business, the oil and gas platform business or production business?

We do have one job that we took last year, where the offshore market traditional for Powell really changed several years ago. We did see a little bit from a legacy job, legacy customer last year do one of these smaller CapEx expansions and sort of field extensions. I do watch the FPSO market, Jon, it's not a market we have competed in. We struggle a little bit to really effectively compete. Well, that market is actually doing a little better for the offshore side right now in those markets you mentioned. So, yes, we're watching it. We are watching even those legacy customers or what how they're thinking about these extensions. And what would they do either topsides or new technologies to extend these fields or take an existing platform to rework it? And even though power structure, the new strategy, a lot of new thought and power from short type applications won't work for that due to on-deck distribution design. So definitely, sticking our brush with that.

Okay. All right. Thank you very much.

Good morning, everyone. Thanks for taking my question.

Hey John.

I was just curious you mentioned margin pressure going into the current quarter. Are you walking away from any business because of price?

No, not yet. In my prepared comments, I mentioned the 15/17 parallel. There was a point in that cycle caused by the drop in oil prices, which contributed to a downturn where we hit a limit. We're not at that stage yet. We didn't observe significant price pressure in the fourth quarter, and we only started to notice it towards the end. At the beginning of the first quarter, we began to see a bit of it, specifically in certain markets, but not universally.

Okay, because I would guess some of your competitors don't have the rock solid balance sheet that you do. And I'm just a little concerned that those guys gain market share when you reach the price at which you won't compete.

No, we're not there yet and we have a lot of checks about the risk profile of the project in terms and the whole scope of the job, what we're building, how we're getting at the site, what are the onsite services, which is an area we're looking to expand upon? And how can we manage the risk with the engineering partner or the end customer to have a more open discussion before the jobs are worried about where Powell can help meet their needs on the job, which we know there's price pressure on first purchase price, but how can we mix around the scope to put Powell in the best light to do what we do best? So, those conversations are substantive and are happening now and we're cognizant of the risk profile by engaging the customer on that conversation. So, we can help them meet their need on the budget side, but yet, do what's best for Powell and not lose the job, while lower margin make sure the risk is managed as well.

All right, okay. Good. That's good to hear. And on the strategic plan that you indicated, you've been working on for the better part of a year, is there a timeline there in terms of wrapping that up and figuring out exactly which direction you want to move?

Not yet. We're working on with the Board and the management team and we will get to the point of updating our Investor Relations deck, can't quite yet today give a timeframe when that will be published and to give the direction where we aspire to go, but I think we're coalescing around a couple of strategic options and so we're near there and hopefully very soon we'll be able to sort of lay that out in the share with all the shareholders where we see the best future for Powell, we're putting the money to work.

Okay, good. And finally for me, has the mix of the backlog shifted at all over the last year or so? I mean is it more non-petrochemical, non-oil and gas as a percentage or is it the same or how has the mix of the backlog shifted?

Yes John, this is Mike. Over the past year and moving forward, I've observed a noticeable decrease in our industrial backlog, particularly in the oil and gas and petrochemical sectors. However, we are seeing increased activity in utility work, as mentioned in our prepared comments. This indicates a shift in our mix, both in terms of product applications and geographically. Our Canadian and U.K. facilities have strong backlogs, but they have different margin profiles, which does influence our overall mix.

And industrial oil and gas, that's still the lion's share of the backlog at this point?

At this point, yes, correct.

Okay, good. And you mentioned traction. I'm not familiar with that, what is traction?

John, that's mostly in North America light rail and markets. You think about Washington Metro, Bay Area Rapid Transit, Chicago Transit, Toronto Transit. So, we think the published that we do the rectifiers and the DC switchgear or powering a rail.

Okay, great. Thanks and good luck.

Can you provide some insights into the cost structure? Have you rehired anyone who was furloughed? What are your expectations for the workforce moving forward? Additionally, are the restructuring actions announced over the summer completed, or are there more planned? Are you satisfied with the current organization of the firm?

John, it's Brett. I'll start and Mike can provide additional insights. Since the adjustment in May, there haven’t been any significant changes. Regarding bringing back staff, we're considering some engineering-only tasks, but it's proving to be a bit challenging. In Q1, we’re evaluating our resources to determine if we can bring some employees back to manage this workload and how long that situation might last. This is currently our focus. The rest of our operations are stable. Looking ahead, we’ll be assessing things on a quarterly basis until we have more clarity. There seems to be a strong interest in securing funding for these engineering-only projects; if that funding doesn't materialize, we may have to consider alternative actions, which could delay progress. Therefore, our strategy is to manage things on a quarter-to-quarter basis until we gain more insight, and we are being careful about our cost structure to ensure we’re not compromising our long-term capabilities. As you know, the model takes time to develop expertise, and it's important for us to retain our talent.

I mean I think what we did in May and June, really benefited the second half of the year and to Brett's point, it's quarter-to-quarter, causing the worst cadence, the commercial activity out there, understanding just looking around the corner and we're doing that every three weeks. So, staying very close to it.

Okay, and Brett the incoming order book, it may be the lowest I've seen in decades. How does that bounce around in the next coming quarters? Should we expect maybe a sharp recovery or is it just down to visibility for you to tell?

The visibility is quite unclear. As I mentioned earlier, John, the pace in Q1 has not changed significantly. The mix has shifted slightly, as we are seeing some contracts that don't encompass the entire project. Powell's insights are helping us navigate these early phases and understand the market dynamics, the pandemic's impact, and overall economic conditions. There is a marginally more optimistic sentiment towards initiating projects because there is an expectation of full funding to be realized by the end user. However, the overall figures remain largely unchanged. So, I can't say for certain, but looking ahead, there is potential for a few quarters to show considerable improvement. Nevertheless, at this moment, the quarterly run rate remains cautious, and I don't anticipate any significant changes in the near term, specifically over the next quarter or two. However, there is potential for a notable increase in the future.

Okay. Thanks for taking my follow-ups Brett.

There being no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Brett Cope, CEO for any closing remarks.

Thank you, Grant. The pandemic is certainly challenging our customers and how we operate each day. However, Powell is uniquely positioned to weather the storm. We have an incredibly talented team, a healthy backlog, a strong balance sheet, and great relationships with our customers and suppliers. We are firing on all cylinders across our operation and we are not standing at length by while we wait for our industrial markets to recover. We are focused on advancing our efforts in new and encouraging growth avenues that will better diversify our backlog and project mix going forward. With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you all next quarter.

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