Q4 2019 Earnings Call
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I'd like to turn the conference over to your host Zach fond of Dennard Lascar Investor Relations. Thank you you may begin thank you operator, and good morning, everyone.
We appreciate you joining us for all industries conference call today to review fiscal year 2019 fourth quarter results.
With me on the call or Brett Cope Bell's chairman and CEO and Mike makeup I'll CFO .
There will be a replay of todays call will be available via webcast by going to the company's website, how I indeed dot com.
Or a telephonic replay will be available until December 12.
Information on how to access the replay was provided.
Yesterday's earnings release.
Please note that information reported on this call speaks only as of today December fit 20 Nike.
And therefore, you're advised that any time sensitive information.
Yes.
No longer be accurate at the time of replay listening or transcript breathing.
This conference call include certain statements, including statements relating to the company's expectations that its future operating results.
The maybe considered forward looking statements within the meaning of the private Securities Litigation Reform Act that 1995.
Investors are cautioned that such forward looking statements involve risks and uncertainties and the 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 now I'll turn the call over the past CEO Branco Brett.
Thank you Sac and good morning, everyone. Thank you for joining us today to review Paals fiscal 2019 fourth quarter results.
I'll make a few comments and I will turn the call over to Mike for more financial commentary.
Hi, there before we take your questions.
We are pleased to report another quarter of solid progress with both strong revenue and net income growth.
Revenues increased $149 million.
Oh I was 19, we've experienced increased demand primarily from customers in our core oil gas and petrochemical markets.
Along with these improved market conditions, we have continued to work through lower margin projects that were booked in late fiscal 2018 and it in and into early 2019.
Combined these trends have resulted in a positive growth quality and mix of our backlog, which it helps to support improved operational contributions across most of our divisions.
I was largest operational challenge continues to be the recruitment and retention.
Quality employees in an exceptionally tight labor market.
To keep pace and to meet the needs of our customers. We're strategically balancing our use of independent contractors management of overtime hiring and training of new employees against our ability to leverage our people and project execution across our facilities.
We believe this concentrated focus will accelerate with long term decisions in the privatization of short term actions.
We also continue to actively manage and adjust resource planning to mitigate inflationary pressures.
By diligently monitoring and working with our supply chain partners are able to optimize visibility improve productivity and lower cost to confront these dynamic market conditions.
While our core markets in the U.S. have trended upward throughout 2019.
Paals International operations, particularly in Canada, and the United Kingdom have only recently begun to show signs of recovery.
Backlog and other indicators have shown a marked resilience in the face a persistent volunteer volatility and the various international markets and geographies we serve.
As we ended the first quarter fiscal 2020.
Please to report that trends from our core end markets associated inquiry activity has improved substantially when compared to a year ago.
We continue to see the majority of new project activity coming from our domestic oil gas and petrochemical markets.
The abundance of low cost natural gas and domestic markets continues to be one of the key economic economic drivers of future product project activity.
Our current pipeline remains active, particularly as we bid projects of larger and appearing size compared to last year.
We continue to actively bid and pursue smaller base business projects to optimize capacity in the second half of fiscal 2020.
And activity continues for several larger projects that pending final funding and award would execute over an 18 to 24 month window.
As it stands today the timing of client investment decisions around these larger projects is likely to result in a more lumpy and longer market cycle that could continue throughout 2020 as these projects will take longer to work their way through the production schedule.
We also continue to partner with our customers by ensuring that we can support them on engineering only activities.
By collaborating with them and their engineering partners. During the early phases of detailed engineering, we can help our customers bridge that project schedules until such times the project receives full investment funding.
In addition to the training and development of our employees Paul as experienced the benefit of sustained investments in research and development throughout industry cycles.
The market challenges of the last several years, where no exception.
We maintained our focus on R&D through these difficult years, and develop new products, allowing us to expand into new markets.
And we developed lower cost designs of our existing products to enhance productivity and our manufacturing operations, all while meeting or exceeding our customer specifications.
As we enter our fiscal 2020, we are taking strategic steps to increase our commitment to our employees as well as increased allocation of capital to advanced innovation of our products and services through our investment in research and development.
This added investment will allow us to accelerate new offerings across the portfolio of our electrical solutions.
And help extend our service capabilities.
Our emphasis on R&D is the result of close customer collaboration and strong execution for many years of multiple product and technological transitions.
We expect our increase in R&D spending to ramp up in fiscal 2020 and extend into 2021.
While we are optimistic about the traject trajectory of 2020, we continue to position Powell and its resources to identify prioritize projects that we can efficiently execute in order to deliver stronger results to match market conditions.
In closing fourth quarter revenues were up substantially.
Order activity was strong and backlog continues to grow across our business.
Healthy tailwind of our core domestic markets and our fiscal 2019, ending backlog has positioned us well for the first half of fiscal 2020.
While the commercial pipeline remains active the team continues to work through the timing and seasonality dynamics' doses Siri to optimize second half capacity for fiscal 2020.
With that I'll turn the call over to Mike to provide more detail around a financial results before we take your questions.
Thank you Brett and good morning, everyone.
Let me first start with some highlights from our fourth quarter, and then move to full fiscal year results.
Orders for the fourth quarter were $162 million up 12% sequentially and higher by $84 million year over year.
As Bret mentioned, we're benefiting from the industrial sector end market demand, specifically within the downstream oil and gas space, which led the fourth quarter bookings activity.
Our book to Bill ratio finished the fourth quarter of fiscal 2019 at 1.1 flat sequentially, while our fourth quarter ending backlog remained strong at $419 million 158 million higher than a year ago, and 12 million higher versus prior quarter.
Revenues for the quarter were $149 million up 10% on a sequential basis and higher by $14 million or 10% versus the fourth quarter for fiscal 2018.
The strong topline growth was generated primarily in the domestic industrial sector.
Specific to geographic Craig revenue segmentation domestic revenues for the quarter were higher by 4% or $5 million to 114 million versus the prior year and were up by 10% sequentially.
International revenues from both our foreign operations as well as export shipments from our domestic facilities increased by 34% or $9 million year over year to $34 million versus the fourth quarter of fiscal 2018 as the international market activity continues to improve.
From a market sectors standpoint revenue generated from the industrial sector increased by 21% sequentially to a $120 million in the fourth quarter of fiscal 2019, and was higher by $20 million, where 20% compared to the prior year.
The downstream oil and gas sector, driven by natural gas supply in related pricing continues to generate strong inquiry activity on petrochemical expansions and upgrades revenues generated from our utility sector decreased by 12% or $3 million to 19 million in the fourth quarter.
Fiscal 2018 versus the same period a year ago.
And revenues from the municipal sector were lower by 28% or $4 million down to $9 million in the fourth quarter of fiscal 2019 versus the prior year.
Our gross profit increased by $5 million and bossi, both a sequential and year over year basis to $29 million in the fourth quarter of fiscal 2018.
The gross profit rate in the fourth quarter was 19% and improvement of 170 basis points sequentially and up 140 basis points year over year unfavorable productivity driven by higher plant volume and fit fixed cost leverage across our domestic manufacturing facilities.
Selling general and administrative expenses were $20 million in the fourth quarter of fiscal 2018.
13% of revenues, which was lower by 30 basis points versus the prior year in higher by 65 basis points sequentially, primarily due to year end performance based compensation.
We reported net income of $6.5 million or 56 cents per share in the fourth quarter of fiscal 2019 compared to $1.5 million or 13 cents per share in the same period a year ago.
Free cash flow in the fourth quarter of fiscal 2019 was $34 million $37 million higher than the fourth quarter fiscal 2018.
For the full fiscal year 2019 ended September thirtyth.
Revenues increased $68 million or 15% versus the prior year to $517 million domestic revenues Gen generated a $73 million increase versus the prior.
Per year, while international revenues were slightly lower by 4 million versus fiscal 18.
Gross profit as a percentage of revenues increased to 17% compared to 15% can fiscal 18, a 230 basis point improvement and favorable pricing levels can plant utilization throughout the year.
Selling general and administrative expenses as a percentage of revenues improved by 140 basis points to 14% compared to 15% in fiscal 2018, driven by higher revenues across the business in fiscal 2019.
SGN expenses increased 5% for $3 million to 70 million hit the business volume increases requiring additional selling can support staff to deliver and execute these incremental volumes.
Our effective tax rate for the total year fiscal 2019 was 20%.
This reflected the us federal statutory rate and was also favorably impacted by our Canadian operations, which utilize a net operating loss carry forwards that is fully reserved through a valuation allowance.
Reported net income for the full year fiscal 2019 was $9.9 million or 85 cents per share.
Free cash flow was $64 million in fiscal 2019.
An increase of $97 million versus fiscal 2018, driven substantially through better working capital performance.
Investments in property plant and equipment was $4 million through fiscal 2018 flat with the prior year spend.
At the end of fiscal 2019, we had total cash and short term investments of $125 million, which was 50 million higher than our fiscal 18 year end position.
Long term debt, including current maturities was $800000.
Looking forward, we anticipate current level of end market activity will continue into 2020, helping to fill available capacity across our facilities. However, we do recognize the project timing may impact plant loading in revenue timing throughout the year.
Considering the current landscape, we remain optimistic that full year fiscal 2020 ruler will result in a solid increase in revenues over 2019 levels, enabling us to leverage this incremental volume and margin to fund a double digit increase across our research and development of new.
Issues.
In general for the total year fiscal 2020, we are optimistic that second half project timing and associated factory loading will provide another year of profitability.
Specific to the first quarter of fiscal 2020, we do anticipate that seasonality will have an impact on the sequential earnings comparison.
However, we expect a favorable year over year comparison.
At this point, we'll be happy to answer your questions.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer session.
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Please ask one question and one follow up question and then re queue for additional questions.
Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, gentlemen, thank you for taking my questions and very nice quarter.
Kitchens Gerry.
Let me just start with the orders have averaged about 170 million in the past four quarters is it reasonable to assume that you're going to generate you know around that level of revenue over the next for and kind of what are the puts and takes too.
The scheduling and the recognition liquidation of that from a quarterly perspective.
Yeah, John I think as you as you look at our trajectory on our backlog roughly roughly 80% of the current ending backlog. We think is going to be convertible into into 2020. So that's kind of how youd. How you do the math, it's clearly not going to be.
Evenly you know evenly split across the quarters, but that's that's how we're looking at that.
Okay, great and in terms of the margin that you're receiving a you did a great job. This quarter, a 19% can you sustain that as you go into 2020 and beyond or over there's some timing or other project specific benefits that you realize yeah. I mean look at it was a very strong quarter from a gross profit perspective, we were very pleased with that I wouldn't know debt.
We we experienced our first quarter in quite some time that most of our reporting segments reported positive sequential productivity and mix which was.
Which was very good this was really driven by our north American operations and spanned across most of our product lines.
Overall, the largest contributor to the gross profit exit rate at 17% on the year and 19% on the quarter was really generated by the favorable mix in the backlog of our downstream oil and gas volume predominantly in our U.S. facilities.
Okay got it so I guess the question is in your current backlog exiting.
Q3 does that does that margin looks favorable or was that more of a onetime that what I. What I would offer John is as we look forward into 2020.
And our international operations ramp up there are different dynamics in the UK in Canada with respect to price and efficiencies, which could be a headwind a little bit of a headwind as we head into a into 20 Twond secondly, as we always we work these large price.
Jackson is Brad NIAGEN communicated previously.
There are in very competitive environments, and we may has a little price pressure on some of these these larger projects.
Okay, great. Thank you I'll jump back in Q.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Your next question comes from the line of John next year with Pinnacle Capital Management. Please proceed with your question.
Good morning, and nice quarter.
Orange and thank you.
Just curious the you mentioned R&D spending a couple of times, though.
Double digits going into the new year, what is the budget for the coming here and what exactly.
Are you spending that on.
Oh that John we typically run one one of the quarter percent of revenues historically, a we're gonna look to increase that little bit next year to two years and primarily around our electrical.
Solutions Breakers switch gear, a there's a few markets that we got some success in over the last couple of years and there are some trends that we're watching that oh.
We think it's the right time to ramp ups investments for those up those markets in the future.
And you said it indicates it will be up but at least a mid double digits is that what I heard.
Yep Yep greater than 10, but but you know maybe maybe less than 50 somewhere in there okay.
No I don't think you've mentioned Capex for 2000 fiscal 2000.
20, what's that budget.
We're anticipating holding capex about flat, maybe up a little bit as we look at some of the.
Productivity initiatives, we've got in the pipeline, but nothing nothing drastic no drastic changes their channel, okay and finally.
The use of subcontractors.
Just curious what percentage of the year end labor base.
Contractors.
Good how do you overseas that I know a lot of companies have difficulty managing external contractor. So I'm just curious.
What's the percentage and then how do you manage that.
Oh, My I don't really short, although the actual percentage I'm going to say, it's probably less than.
You probably.
Somewhere between five and 8% of the of the workforce in the fourth quarter, but it varies John .
Offshore facility that we have we always had good relationships with supply partners were able to leverage that.
Right now in some of the other facilities, especially in the U.S., where we have tighter markets, we're seeing it creeping a little bit in a in the UK, which traditionally we have it. So we're working on solving that issue right now trying to figure out the right balance with long term hires and ER and contractors and get back to the model of we're comfortable with of course balancing.
That against future need as well.
And you feel the internal controls are adequate to keep that those that in line.
Oh, we do you know safety is always first and we work with our supplier partners through our supply chain grew to a to go through the qualification process and the review process and we're confident constant communication with that so.
It does always create a different dynamic when you bring in like I said offshore we're more comfortable that because that is typically the way we run the yard.
The other facilities, a little bit more diligence to watch it make sure that we have good communication to manage it.
Oh very good thank you.
Our next question as a follow up question from the line of John kind of went Tang from CJS Securities. Please proceed with your question.
Might just I'm on the that's fantastic cash flow in the quarter <unk> do you get to keep all that going forward or was it just the timing thing that's going to be reversal for any reason and two assuming you get to keep it is there any change your cap allocation priorities.
Yes so.
Yeah. It was a great cash flow free cash flow year, and specifically in the quarter.
As we look forward to 2020 and you can look at where we are sitting with receivables and payables et cetera. The way I would tend to view the year playing out is you could have an uptick early in the year and some of these larger projects payment you know if they materialize.
Were to materialize, you're going to use some some working capital to ramp up on those so probably kind of a you know probably I would estimate a wash I wouldn't estimate anything a a big ramp up.
And with respect to capital allocation you know two to two breast point on the R&D. That's one of the reasons that we you really want to leverage some of this capital growth business in a in our products and services.
Okay, Great and then just on the topic of large project in your pipeline.
What's the status of of them potentially coming later this year number one number two or did you have any medium or large projects are.
And your order book a in the past quarter.
Second question first John fourth quarter had to moderate projects in the $15 million to $25 million range from both both from the core markets.
Going forward there are a number of large projects that are.
Oh, you know talk about them last couple of quarters as you know some of them are Ah.
Still more uncertain terms, a full funding, but the work continues on those and then there are couple that are funded and activity is very intense over the over the last really last couple of quarters and but the larger the project the more uncertainty on timing so for she got to win and even once you.
Good there's there's always moving to the right. Once you get the project so kind of when you say activities and taxes that on your end or just from a in the industry pipeline.
Industry cycle kind of okay.
And the timing for you a is still expected to be more towards the end of the year in terms of planning a potential water.
Yeah it.
It's one of those things you don't want to call did you call. It was a small theres a lot of work, there's a lot of estimating and engineering support that we're providing on multiple projects and ER.
You know its timings, they're very active and ER at they pulled the trigger hopefully we're at the table there in the final negotiation.
Got it understood. Thank you guys yeah. Thanks.
This concludes todays question and answer session I'd like to hand, the call back to management for closing remarks.
Thank you, Doug our fourth quarter delivered solid performance with sequential improvements in our top and bottom line the strength of our backlog combined with the strength of our balance sheet provide solid momentum as we head into fiscal 2020.
Paals ability to meet the constant market challenges, while working to minimize the impact on both the business as well as our customers was a strength.
And a differentiator our business model.
Our employees half and continue to do a tremendous job delivering incremental efficiency gains.
In order to meet the changing needs of our customers end markets, which underscores our ability to secure a future projects and drive new strategies to improve productivity and profitability.
I would like to think are valued customers and our supplier partners for their continued trust and support of Powell and with that thank you for your participation on today's call. We appreciate your continued interest in Paul and look forward to speaking with you next work.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.