Good day and welcome to the Powell Industries Fiscal Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2023 third quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website powellind.com or a telephonic replay will be available until August 9th. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, August 2nd, 2023, 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 turn the call over to Brett.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2023 third 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 third quarter marked another solid performance by the Powell team as we delivered financial results that were once again among the best in our history. Market dynamics in our core industrial end markets remain very favorable, particularly within LNG, while we also saw encouraging results in our utility and commercial and other industrial sectors. Total revenue in the third quarter was $192 million, which is 42% higher than the prior year and marked sequential growth of about 12%. By market sector versus the same period a year ago, revenue from our oil and gas sector increased 25%. Petrochemical and utility revenue each grew by 45%, while revenue from our commercial and other industrial sector more than doubled. Traction saw a slight revenue decline compared to the prior year largely a function of the conclusion of a large project in Canada as well as our more selective bidding approach towards the sector. Because the strength of our results in recent quarters has been led by the sharp recovery of our core oil and gas and petrochemical markets, it is easy to lose track of the encouraging performance of both the utility and commercial and other industrial sectors. On a year-to-date basis, our utility revenue of $115 million is 40% higher than the comparable period last year, while our commercial and other industrial sector revenue more than doubled over the same time period. These results speak both to the success of our strategic actions as well as the mix of our current backlog. Order activity in the third quarter was again very strong as new bookings exceeded $500 million for the second consecutive quarter. The $505 million of new orders compares to $202 million last year and $508 million last quarter. Our book-to-bill ratio in the quarter of 2.6 times also marked the seventh straight quarter with a book-to-bill over one and consecutive quarters above two times. I'm pleased to note that Powell was awarded two large greenfield LNG projects both to be located along the US Gulf Coast that combined for roughly $200 million in awards in the quarter. This marks four straight quarters of significant project activity in this market sector as the near and long-term setup remains favorable. Our bookings in the third quarter also speak to the breadth of new order activity as we recorded roughly $300 million of new orders, excluding these large LNG projects. Notable highlights include a sizable carbon capture and sequestration facility that will be located within North America, strong regional performance from our Canadian team and an uptick this quarter for new bookings from the Traction sector. Gross margin in the third quarter was 22.2%, an increase of 810 basis points compared to the prior year. Strong project execution, volume leverage and positive closeouts are all helping to drive our margin growth. On a year-to-date basis, our gross margin of 19.5% is firmly within our unchanged target of the high teens. Moving to the bottom line. Net income in the third quarter more than doubled to $18.5 million or $1.52 per diluted share compared to $9.1 million or $0.76 per diluted share in the prior year. And lastly we ended the quarter with an order backlog of over $1.3 billion, an increase of 31% compared to the end of the prior quarter and more than doubled versus the prior year. As we've stated, we are very comfortable with the size, mix and quality of our order book. Our project backlog is well balanced across our eight manufacturing facilities and project schedules are extending into fiscal 2025 providing us with a steady balanced cadence of future activity. We previously shared that our teams have identified capital improvement projects that will facilitate both incremental capacity as well as improved production efficiency in several of our facilities. During the third quarter, we initiated an expansion of our Houston facility located along the Gulf Coast. The capital investment in our offshore yard will provide for additional capacity of electrical substations supporting the recent rise of our backlog while also helping us remain competitive on our schedules for future business. The recovery of our end markets led predominantly by our oil and gas sector has been sharper and more pronounced than we had initially expected roughly one year ago. The complexity of LNG projects, combined with construction and start-up schedules that have a little room for error, speak to the strength and trust that our customers have placed in Powell. We are very grateful for that confidence as we aspire to be the supplier of choice for critical electrical infrastructure. Although our end markets remain strong, we expect the pace at which our backlog has grown over the last nine months to stabilize at levels that are higher than average historically, but will be more measured relative to the growth of recent quarters. That said quoting activity across all of our markets remains active. And we are in a very strong position and expect that our focused efforts on our strategic initiatives and the health of our end markets will support the positive momentum into fiscal 2024. Operationally, our teams across each of our facilities continues to perform well, driving our production volumes up over the last several quarters. We remain disciplined to ensure we are meeting project milestones while working to maintain high standards of quality for our products and solutions while also eliminating inefficiencies throughout our manufacturing process. The investments that we have made in the tools, processes and our people over the last six-plus years have prepared the business to meet this record backlog. Unfortunately, the price and availability of key engineered components continue to create challenges in the near term, including, in some cases, longer lead times. However, we continue to effectively manage through each of these headwinds and where possible factor contingencies and allowances for these components into our bidding activity and project schedules. Labor availability remains a challenge and is very much top of mind across the company. While our ability to attract and retain quality team members has not had a significant impact on the business to date, it has become an item of increased importance and urgency given the growth in our backlog. Our operational leadership, along with our human resources teams, continues to work extremely hard and remain closely aligned as we plan our future work and engage the market to attract the talent to meet our future goals. Overall, project activity and our participation across the markets we serve remains robust. The LNG, gas pipeline and gas-to-chemical sector all continue to be very active and favorable markets for Powell. We've also been pleased with the quoting activity and our ability to win projects within the renewable markets, such as hydrogen, biodiesel and related biofuels, such as sustainable aviation fuel, as well as increasing activity within carbon capture and sequestration as previously noted. Our near and medium-term priorities remain unchanged. We are focused on growing our electrical automation platform, expanding our existing services franchise and diversifying our product portfolio, be it through tangential applications that complement our existing offerings as well as expanding the scope of our product catalog into new electrical technologies. Overall, we are pleased with our financial performance in both the third quarter and first nine months of the year. We have confidence that project activity across the markets we serve will continue to support healthy levels of order activity into fiscal 2024. While we do expect new booking totals to moderate, we anticipate that they will remain healthy and well-balanced across market sectors. We have also improved the quality of the backlog, which is currently at the highest level in the company's history. Altogether, these factors should support solid financial performance that extends into fiscal 2024. With that, I'll turn the call over to Mike to provide more detail around our financial results.

Thank you, Brett, and good morning, everyone. In the third quarter of fiscal 2023, we reported net revenue of $192 million compared to $136 million or 42% higher versus the same period in the prior year. Commercial activity across most of our core markets remain strong, recording new orders booked in the third fiscal quarter of $505 million. This is the second consecutive quarter that we have recognized new orders booked in excess of $500 million, which has resulted in fiscal year-to-date new orders booked of $1.2 billion through the fiscal third quarter. During the fiscal third quarter, we booked two large projects that totaled roughly $200 million of the reported $505 million of new bookings, both of which are large greenfield LNG projects being constructed on the US Gulf Coast. The fiscal third quarter bookings results of $505 million is $304 million higher than the same period one year ago and roughly flat sequentially. It is worth mentioning that the demand that we are currently supporting carries with it longer lead times as a significant portion of these most recent large industrial orders will be executed well into our fiscal 2025. On a fiscal year-to-date basis, our book-to-bill ratio is 2.5 times, resulting in backlog growing to $1.3 billion at the close of our fiscal third quarter. Yet again, this is a record high backlog level for the company and is $836 million higher versus one year ago and $318 million higher sequentially. Reflecting on the orders cadence over the last four quarters, we do anticipate that our backlog will begin to moderate as we expect the current pipeline of large projects to be awarded on a more measured basis going forward. Moving onto revenue. Domestic revenues were higher by 49% versus the prior year to $153 million and international revenues were higher by 20% or $7 million compared to the prior year driven by a volume uptick in our European and Middle East markets versus the prior year. In total, international revenues were $39 million in the third fiscal quarter of 2023. From a market sector perspective, revenues across our petrochemical sector were higher by 45% and the oil and gas sector was 25% higher on a year-over-year basis. Additionally, revenues across both utility and the commercial and other industrial sectors were also significantly stronger versus the same period one year ago, increasing 45% and 137%, respectively. The Traction sector was lower versus the third fiscal quarter of 2022 by 27% and lighter volume in the plants driven by softer commercial activity across this sector through the first half of fiscal 2023. Gross profit reported in the period was $43 million, an increase of $24 million in the third fiscal quarter versus the same period one year ago. As a percentage of revenues, reported gross profit in the fiscal third quarter increased by 810 basis points to 22.2% versus the same period a year ago. The favorable trend in the project margins is attributable to the continued balance across input costs and pricing dynamics in addition to volume leverage and associated productivity across all of the manufacturing facilities, which contributed to favorable project closeouts during the quarter. And finally, we had a one-time project cancellation that contributed 60 basis points of margin to the quarter. Selling, general, and administrative expenses were $19.7 million in the current quarter, higher by $3 million versus the same period a year ago and an increase in variable performance-based compensation based upon the expectation for higher levels of operating performance versus the prior year. SG&A as a percentage of revenue decreased by 190 basis points to 10.2% in the current quarter on the higher revenue base. In the third quarter of fiscal 2023, we reported net income of $18.5 million, generating $1.52 per diluted share compared to net income of $9.1 million or $0.76 per diluted share in the third quarter of fiscal 2022. The prior year comparison period did include two nonrecurring items that, when combined, accounted for $7.5 million of net income or $0.63 per diluted share. During the third quarter of fiscal 2023, cash flow from operating activities was a positive $50 million as we have reached a point in the cycle where we're experiencing an uptick in cash related to the advanced payments on the large projects. This precedes the eventual outlay of cash required for the working capital attributable to the new projects that have recently been booked into the backlog. Investments in property, plant, and equipment totaled $650,000 during the fiscal third quarter as we invest in capacity and productivity projects across the business. As part of this initiative, we recently committed to a critical project that will expand our capacity in one of our Houston locations. This roughly $3 million investment will help to ensure that we can confidently fulfill our delivery commitments to our customers. At June 30th, 2023, we had cash and short-term investments of $210 million, $93 million higher than our fiscal '22 year-end position. The company holds no long-term debt. Looking forward, we anticipate continued strength across most of our core end markets into fiscal 2024. We are encouraged by the progress that has been made on margin accretion through a variety of operational and commercial levers and will remain focused on our operational priorities as we execute the backlog. We do recognize the typical project challenges of timing and mix. However, we continue to target margins in the upper teens on an annualized basis, including the normal seasonality impact that we regularly experience in our fiscal first quarter. We also recognize that we may deliver quarterly margin levels that are modestly higher than our target level as we navigate through the remainder of fiscal 2023 and into fiscal 2024. Considering this, in addition to the sustained level of commercial activity across most of our end markets as well as the strength of our balance sheet, we anticipate that these variables will provide the foundation for continued momentum relative to our financial results as we close out fiscal 2023 and look forward to fiscal 2024. At this point, we will be happy to answer your questions.

We will now begin the question-and-answer session. Our first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys, and congratulations on a really solid quarter. I'd like to kick it off, Brett, with your perspective on the overall market outlook, how much big game hunting is there still out there for large projects, make it that in the coming year? Or have you gotten past maybe the midpoint of maybe those large projects hitting the order book?

Good morning, John, and thank you for your comments. The team has done an excellent job bringing us to this point in the cycle. Looking ahead, the last four quarters have seen an extraordinary rate of mega projects booked, which is unmatched in our history, and I am grateful to our customers for their trust. There are potential projects that are eager to move forward and others that are making decisions regarding final investment. There’s some uncertainty there. Whether we’ve reached the midpoint depends on how many projects actually get funded. I believe the pace will slow down a bit moving forward. We’re still exploring various scenarios for different projects, particularly in the LNG sector, as previously mentioned. There’s a bit more uncertainty now, with not as many projects lined up as quickly as before. If the project spreads remain favorable and gas prices stay reasonable, there could be growth internationally. Many factors are at play, including the availability of construction resources, which could influence the landscape over the next one to two years.

Okay. And in your prepared remarks, you highlighted an underappreciation of, maybe, the utility market. What's changed in the utility sector today versus maybe six months ago?

I believe it remains consistent. In earlier calls, I mentioned that after the pandemic, the sector had a period of weaker activity for the company in late 2021, but it rebounded well. This is an area we have been focusing on for nearly a decade, working to enhance our portfolio and strengthen our presence, particularly in North America and our home markets, including the UK. The progress has been positive. Our marketing and project teams have effectively maintained a methodical approach in our home countries. I consider this a key strategic goal to establish a stronger presence in that market, and we are committed to executing that plan.

Great. And you've had a great gross margin in the quarter, but you said your target gross margin is still the high teens. What could weigh on the gross margin profile on a go-forward basis that wasn't evident in the June quarter results?

Hey, John, this is Mike. I'll take that one. Yes, look, we're really pleased with our third quarter results as well as our year-to-date margin results through the first three quarters of fiscal 2023. We've reported 19.5% gross profit. And if you exclude the nonrecurring item that I mentioned in my prepared statements, we're at 19.2%. So we're still squarely in our targeted range of the high teens. And looking forward, as you consider the quality of our backlog, which we're very pleased with as well, the ongoing productivity and efficiency projects in the business, we're comfortable maintaining this margin target as we close out '23 and head into '24.

Okay. Fair enough. And one last question, I'll get back into the queue. I mean cash is building. I know you're going to use it at some point in this process. But at the end of the day, you're still going to have a sizable cash position a year or so for now at least. Can you talk a little bit about priorities for the use of cash?

Yes. I mean over the last six months, with the large projects entering our backlog, we've built a considerable cash balance, about $105 million over the last six months. Over the next six months, I think we would begin to consume some of that cash as we've been getting into the procurement and manufacturing cycle for these large projects. So we'll start to use some of that cash in those cycles as we build working capital.

Okay, guys. Thanks. I'll get back into queue.

Thanks, John.

Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, guys.

Good morning, John.

Good morning, John.

Congratulations on a wonderful quarter. One question I have is, looking ahead to 2024 and considering your backlog and incoming orders, how much of that production is already committed? What is your perspective on your production schedules for 2024, and how complete do they currently appear?

As we approach the end of the fiscal year, approximately half of our backlog is already accounted for in our plans for the next year. This is how we are currently approaching our planning as we wrap up Q4. The primary constraints in our production are affecting our Houston facilities more than others, although all our locations are experiencing some impact. We are carefully evaluating each opportunity to determine how we can position resources, particularly for customer requests that require a quicker turnaround. There are still available slots, and we are expanding our offshore capacity while also implementing a third shift at several other facilities. We are employing various strategies to enhance production capacity, focusing on leveraging our workforce and talent to drive us forward. We still possess the capability to meet demand, which is why we are confident in our prepared remarks and optimistic about our competitive position as we enter the next year.

Okay. Good. When you look at the big projects that you're being awarded, how might the margin on those projects be relative to some of the other projects, the one-off projects in the industrial area and so on. And how much those margins compared with the other projects you're earning? And maybe are the margins on the bigger projects a little bit higher than maybe where they were a couple of years ago, because maybe conditions are a little bit tighter?

Coming out of the pandemic, over the last 24 months, we have improved our market presence. We've slightly increased prices while significantly enhancing efficiency and execution through our team. In general, I would say that Powell excels in more complex projects. We incur substantial fixed costs in engineering not only in product development but also in what we build and aim to create in the future. These projects are quite large and entail many changes throughout their lifecycle, encompassing both what we manufacture and what we purchase and incorporate into the overall solution. Typically, the larger the project, the longer its lifecycle. Powell deserves recognition for our ability to respond to customer needs and for our ability to meet schedules, earning the trust of our clients.

Okay. One last question. With two large LNG awards this quarter, were those greenfield facilities or expansions?

No, those are both greenfields.

Okay. All right. Thank you very much.

All right, Jon. Thanks.

Our next question is a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Hi, guys. Just on the facility expansion. Does that change your CapEx budget? Just kind of remind us what you're going to spend as far as capital expenditures this year?

Yes, John. It will bump the CapEx spend this year. It's roughly a $3 million project. A little of that will fall into fiscal '24, but the majority of it will hit fiscal '23. So it will be a little higher CapEx spend this year.

Okay. And I'm curious about the revenue mix in the June quarter. How much of revenue was derived from some of those shorter duration kind of equipment sales? Typically, I believe, it's like $25 million to $40 million a quarter. Has that fluctuated positively or negatively? And does that impact the profit profile one way or the other?

Yes. I mean typically, the book-to-bill within the quarter runs $30 million to $40 million. That's kind of consistent. It hasn't changed much to speak of, John. So that's really kind of a constant running through the business.

Okay. And Brett, you mentioned that labor is a priority, I think, is how you phrased it as far as management is concerned. Can you talk a little bit about how challenging the labor markets are in the jurisdictions you operate and what we should think about as potential margin pressure from higher labor costs?

As we begin the new calendar year, I've mentioned in previous calls that we've seen improved outcomes in managing variable costs, particularly as we add personnel to handle increased workload. We are making steady progress on this front. However, we are experiencing some pressure on the fixed cost side, particularly in bringing in supervision and management to support our expanding workforce, whether that’s in professional roles or production supervision. This has presented some challenges recently, and we need to focus more intently on preparing for the ramp-up that we expect next year. We have managed similar ramps in the past and are well aware of the associated challenges, which creates a sense of urgency as we transition from summer into fall. From a cost perspective, during the pandemic, we prioritized taking care of our employees, and we continue to plan for their well-being as we move forward. While this has been a significant issue, the situation has softened somewhat with a decline in other sectors we don’t engage with, which has positively impacted our ability to attract talent and understand the associated costs for direct labor and overhead. I believe we have adequately accounted for these factors in our model for the next two years.

Okay. That was a great call holding onto that personnel during the downturn. One other question, and I guess I haven't brought this up in quite some time, especially considering recovering the margin profile, but give us some of your thoughts on the competitive landscape. What's the pricing environment like with the competition out there? Just some thoughts in general.

Yes. Well, again, on the mega projects, certainly, very grateful. And as I noted, it is unprecedented in our history to have four straight quarters of mega awards like this and so we're humbled by the awards. It isn't without competitive notice we know in the market, whether it be a mega or a bread and butter $1 million substation for the utility. So we're cognizant of that. We are very sensitive to the pricing in the market. We certainly like to be rewarded for that, that we do best. And keeping a note that we are a long-term relationship-based company. So we're always going to approach our customer relationships with that in mind and being very fair for the outlook. But competitively, I do think I noted last quarter on the pricing side, probably a little bit more competitive, nothing like we've seen in past down cycles, but it is certainly not as urgent on short-term needs. And so we're a little bit more thoughtful around that to adjust so we can ensure that we're taking care of as many of our customers as we can as they come in with their needs.

Okay. Fair enough. Congratulations again. Thank you.

Thanks, John.

Next question is a follow-up from Jon Braatz with Kansas City Capital. Please go ahead.

One follow-up. I think you mentioned that international revenues were ticking up in the quarter. I think they were up 20% or something like that. Do you see some momentum building there or would you characterize it more as possibly sort of a one-off increase?

I believe the momentum is generally consistent. There's not just one factor influencing this over the past few quarters; it's a multi-sector participation. In the UK, the current dynamics are particularly interesting due to their transition from the EU. We are actively looking to take advantage of opportunities in the market and expand in areas where we haven't traditionally been strong, specifically in utility, which I previously mentioned. This is a sector we've been pursuing and seeing success in the UK, unlike in the past. In the Middle East, we're observing notable developments with both electrical standards, IEC and ANSI, and we have a significant presence there. Recently, there has been a slight uptick, not when compared to the overall business, but relative to the region and our historical performance. This summer has shown a bit of an upward trend. I visited the region in the first quarter and am generally optimistic about our prospects there. While nothing is exceptionally notable compared to other areas, it's a market we know well and are committed to for the long term. Overall, our efforts are steadily progressing, supported by having the right people in place at the right time, even amidst the challenges we are currently facing.

Yeah, okay. All right. Thanks so much.

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, Sarah. Our third quarter delivered solid performance with sequential improvements in our top and bottom line. The significant growth and improving quality of our backlog, combined with the strength of our balance sheet, provides solid momentum as we enter our final quarter of the fiscal year and plan for 2024 and beyond. I would like to thank our incredibly talented employees through their talent, leadership and tenacity, they have prepared Powell well for this growth cycle in our business. Thanks also to our valued customers and our supplier partners for their continued trust and support of Powell. With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you next quarter.

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