Q3 2020 Powell Industries Inc Earnings Call

Good morning, ladies and gentlemen, thank you for standing by.

Welcome to the Powell Industries' third quarter earnings Conference call at this time, all participants alright listen only mode question answer session will follow the formal presentation.

Did you require operator assistant starting the conference. Please press star zero to say, one operator, well now turn the conference over to your host Zach ball, what's in our glass true Oscar Investor Relations. Thank you you may begin.

Thank you operator and good morning.

We appreciate you joining us from all industries conference call today towards your fiscal 2023rd quarter results.

Well the color breakout.

Chairman and CEO, Mike Mccown.

Oh.

Dolby a replay of todays call when it will be available via webcast by going to the company's website.

Hi, Andy Dot com.

Sonic replay will be available until August 12.

Based on how DOCSIS three point was provided in Yesterdays earnings release.

Please note that information reported on this call speaks only as of today August 2020, and therefore, you're advised that any time sensitive information may no longer be accurate at the time, a replay listening or transcript breeding.

This conference call with certain statements, including statements related to the company's expectations of its future operating results.

Maybe considered forward looking statements within the meaning of the private Securities Litigation Reform Act at 99.

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.

What are your price raw materials and execution of business strategies.

For more information please refer to the company's filings with the Securities Exchange Commission.

I'll turn the call over call CEO Breco Brett.

Thanks sack and good morning, everyone. Thanks for joining us today to review Paul's fiscal 2023rd quarter results.

Make a few comments and then I'll turn the call over to Mike for more financial commentary, where we take your questions.

As a result, the ongoing challenges created by the pandemic enhanced safety procedures and protocols [laughter] implemented across all of our operations continue to be in place across the business.

Our top priority has been and remains the safety of our employees customers and suppliers.

I'm proud of our people and our partners, but stepped up to this global challenge.

We continue to support each other and our customers that's in the central business and all of our facilities remain open and 100% operational.

Despite the coated related operational challenges, we experienced solid margin performance and recent cost efficiencies during the quarter.

Third quarter revenues were $118 million down, 13% and compared to $136 million from the third quarter fiscal 2019.

Revenue declined slightly in the quarter largely due to a shift in our backlog profile.

For the past few months as we have completed and shipped a large amount of shorter duration work. We have started work on new projects that have a longer execution schedule and complexity profile.

Despite lower year over year quarterly revenues third quarter gross margin as a percentage of revenue was 18.1%.

Up 60 basis points from 17.5% in the third quarter last year.

In addition to increase efficiencies in place a stronger focus on cost.

We took the difficult, but necessary steps restructured the business by making adjustments to both our fixed and variable costs in order to align the business with current and expected activity levels.

We reported net income of $3.5 million in the quarter down from $5.1 billion in the prior year, primarily due to a decline in revenues and gross profit, resulting from a decrease in new orders adverse market conditions and separation costs.

This was partially offset by favorable impact from the reversal of income tax reserve, which Mike will discuss in more detail.

Our continued focus on maintaining margin and reducing cost allowed us to generate over $45 million in free cash flow during the quarter that set a new quarterly record for free cash flow generation.

New orders booked were $81 million in third quarter compared sequentially to $301 billion in the second quarter and down from $145 million in the third quarter fiscal 2019.

At the end of the third quarter, Paul backlog was $532 million, which includes the previously announced large industrial order that was booked in the second quarter to support the design manufacture integration and testing, but Paul custom integrated electrical distribution solution.

Paul will design build and deliver multiple power control rooms, and supported the project.

This contract will convert to revenue over a three year period.

Throughout the third quarter, we experienced an overall weakening of industrial demand due to the global health crisis.

Sponsor of the current current macroeconomic environment.

Core oil gas and petrochemical customers began to review capital spending plans take steps to conserve cash.

As we previously reported our domestic operations have been experiencing stronger project activity supported by low price abundant natural gas.

Inquiry activity for the sub sector began to slow early in the quarter as lockdowns and transitions to remote working were instituted across the industry.

As our markets adapted to these new work conditions and activity resumed in June our customers and their APC partners have and continue to evaluate the future return their projects.

Several mid size and large projects have now moved their schedules in 2021 at the earliest while a handful of projects continue to continue to evaluate their direction.

Activity in the utility and traction markets largely remained steady in the third quarter.

Short cycle service parts of the OEM work also slowed early in the quarter as we work to safely return our service personnel from domestic and international Worksite.

But improved steadily as we progressed through June.

Now I'll update some of our operational initiatives as a result dependent.

First as an essential manufacturing, providing critical electrical distribution solutions across many industries and geographies. We have been meeting regularly to review the state of our operation.

To assess any new issues within our manufacturing facilities and supply chain.

And to share critical learnings among the management team included including the areas of health and safety best practices workforce utilization and resource planning.

Second we are proto proactively collaborating with customers and taking the necessary steps to address project and services.

While we have been successful in fulfilling project commitments today.

We continued to see a shifting project schedules, resulting in plan fiscal 2020 revenue converting to 2021.

Finally, we continue to work with our suppliers to enhance existing sticky best practices and mitigate supply chain logistical challenges.

Over the past few months, we've been able to successfully worked through any downside effects of the current environment on our operations.

On the last fall I mentioned several challenges we are experiencing with an important supplier base in Mexico.

Our supply chain leadership work to support our local partner as they navigate their review and implementation of safe work practices.

In parallel we worked quickly to coordinate a short term adjustment in our global operations limit any potential impact on project schedules.

This included steps to temporarily moved these operations back into each of our facilities you in the United States, Canada, and the United Kingdom.

Our Mexico based partner resumed operations in June and we continue to run full operations today.

Going forward, we will continue to monitor to support all of our key suppliers.

By the ongoing uncertainty presented by this pandemic, our third quarter results demonstrate the sustainability of strength of our brand.

73 years of experience.

Similar to our last market cycle, which last from 2015 through 2017.

We are executing our playbook to take prudent steps to manage our cost structure. While also working to assist systematically strengthen and build our business for the future.

Then and now Paul remains committed to our plans and investment in research and development to create innovative products and services to capitalize on opportunities and maximize profitability in uncertain market environment.

We have and will continue to focus on protecting the business through cash conservation cost management and productivity gains.

Sure that polymer just stronger from this cycle and is well positioned to take advantage of future opportunities.

Our balance sheet remains strong and we will continue to support our customers across a diverse set of end markets to ensure a disciplined approach to the mix and quality of our backlogs, we pursue new orders.

We remain focused on the health and safety of our employees and communities and we are prepared to take additional actions as warranted.

Fox the evolving business environment.

With that I'll turn the call over to Mike provide more detail around our financial results for would take your questions.

Thank you Brett and good morning, everyone.

Revenues for the third fiscal quarter of 20, Twond decreased 13% at $118 million compared to last year's third quarter of 136 million.

Continued softness across our core industrial end markets.

Orders for the third fiscal quarter were up 81 million, a 44% decrease versus prior year.

The fiscal third quarter book to Bill ratio was 0.7 times revenue.

Reported backlog at the end of the third fiscal quarter was $532 million 125 million higher versus same period in the prior year.

Domestic revenues decreased by 12 million or 12% to $91 million versus same period, one year ago International revenues decreased by $5 million were 16% versus prior year.

From an end market perspective versus the prior fiscal year revenues from our industrial sector decreased by 10%.

The utility sector was lower by 37%, while the traction sector increased by 23%.

This volume reduction from the industrial and utility sectors is driven by the execution of the existing project backlog.

The increase in the longer lead time projects in our current backlog as well as the overall market softness across our industrial end markets.

Gross profit in the third fiscal quarter of 2020 was lower by $8 million versus the second quarter to $21 million on a 22% sequential volume decrease.

Gross profit as a percentage of revenues increased by 60 basis points compared to one year ago to 18.1% of revenues in the third fiscal quarter.

Primarily driven by the improved project execution and operational efficiencies across our us.

Selling general and administrative expenses decreased by 1.6 million or 9% versus prior year and were $15.5 million in the current quarter or 13.1% of revenue compared to 12.6% of revenue a year ago on the lower volume.

On a reported basis fiscal third quarter net income was $3.5 million or 30 cents per diluted share.

Our third quarter result included $1.4 million at pre tax base.

Or 12 cents per diluted share of separation costs as we align our operating expense.

Current market conditions.

Offsetting this restructuring cost was a benefit from the successful conclusion of an IRS audit.

We recorded a 1.7 million dollar or 14 cents per diluted share tax benefit related to R&D credits that were not previously recognized for fiscal years 2014 grew 27.

Cash flow is very strong in the fiscal third quarter recording $45 million of free cash flow.

This was driven by the completion of projects in the backlog and the unwinding of the associated working capital.

As well as achieving contract billing milestones for the large industrial project that was booked into backlog during the second fiscal quarter of 2020.

Capex spending during the quarter was $809000.

Year to date orders were 520 million, 1% higher versus prior year, while revenues increased 10% to 404 million compared to the same period a year ago.

Gross profit as a percentage of revenues for the first nine months of fiscal 2020 increased by 220 basis point.

18% of revenues and volume leverage and improved project execution.

For the nine month ended June 30, 2020, we reported net income of $13.7 million or $1.17 cents per diluted share while year to date free cash flow totaled $49 million.

At the end of our fiscal third quarter, we had cash and short term investments of $163 million 69 million higher than a year ago in 39 million higher than in our fiscal 2019 year end position.

Long term debt, including current maturities was $800000.

Looking forward, we do anticipate continued uncertainty across our core end markets with many of our industrial customers operating on lower Opex and Capex spend.

Considering this we're prudently managing liquidity and operating costs in the near term, while maintaining a focus on the overall profitability of the company.

Notwithstanding the current market challenges, we have maintained our strong and conservative financial position with very little leverage and a 163 million in cash and marketable securities on hand.

As we near the close of our fiscal 2020, we anticipate that the fiscal fourth quarter will be marginally softer than the third quarter.

However, based upon our financial position through the nine months ending June 20 to one.

We're confident that Paolo close fiscal year 2020, with strong earnings healthy backlog in a solid cash position, which situation business well as we look forward to fiscal year 2021.

At this point, we'll be happy to answer your question.

Thank you.

At this time, we will be conducting a question and answer session. She would like to ask a question. Please press star 100 telephone keypad.

Information tell will indicate your line is in the question Q.

If at any time, you wish to remove your question from the Q. Please press star to participants using speaker equipment, and maybe necessary to pick up your had said before pressing the star keys. Once again to ask a question. Please press star one.

Our first question is from John Franzreb with Sidoti.

Good morning, guys, Hey, doing.

Good morning, John.

I just want to start with some deferrals, you're talking about jobs at a moving out of.

Q4.

220, 21 are they moving into the first half a 2021 like.

What are your customers kind of what's the timing kind of looked like at this point.

So John spreads the push outs.

Q3 in Q4.

Exactly.

Total number but it's.

It's about 15 million and plan revenue pushing into what I'd say the first half 21 right now.

Probably a little I'll start on timing because things are still some of these projects that are moving out.

They're kind of hold some of them combined say, we need to hold and so we put engineering on holds all the schedule may not be from it may get revised again, but.

They sort of every plan.

Now, let's just make sure I understand this existing projects in backlog. This is not new quotation activity, a new orders that you'd hope to get.

Factor.

Okay great.

And the.

Sizable drop you saw in the utility market in the third quarter can you kind of expand upon what's what are you seeing in utility market.

I think what happened in June but are we talking sometimes surprised about but also on that you expect that seem to come in six nine months.

I know John I'm, sorry, I didn't catch the very first part of your question.

Yes.

Drop in revenue and utility Mark.

Our next crop multi market.

Yeah no.

Yes, John This is Mike that was really just a function we had some large jobs that.

We burn data out of backlog do utility market is.

As we sit here today.

It is stable.

As is the traction market, but it's really just a function of the project timing.

Sorry, I misunderstood evident report on Okay, No no no problem I'm actually going to sell so I apologize for the if it's spotty connection here.

With that might one last question regarding your restructurings are the certain units that you're winding down more so than others are you reevaluate the outlook in the marketplace and the data I'll get back into queue.

So the they restructured the business John pit.

Predominately a larger percentage of the Houston based operations, where we do see how large a larger part of our revenue from the oil gas and Petrochem market along the Gulf Coast, Yes.

It was that was heavier here in the southern part of United States, All the operations did adjust but but having this year.

Okay. Thanks, guys I'll get back. Thank you appreciate return.

Once again, if you'd like to ask your question. Please press star one of your telephone keypad.

We have a follow up question from John Franzreb with Sidoti.

Okay guys.

I'm.

I actually want to ask about pricing of new jobs and Atlanta.

Can you talk about where you're seeing out there and how new jobs pricing out for you.

Uh huh.

So.

Lot of variability.

I think for the what's available when you look at our comments around utility and.

CND generation as well as trashing jobs.

No real change, albeit those jobs typically are more competitive.

Anyway.

Tend to be.

A little smaller in size, a little less complex or.

In comparison to say, a large LNG job or a large refinery job.

Well more straightforward not as not as much low voltage common contact sometimes so there aren't as many changes throughout the job strict medium voltage so.

Typically those price lower anyway, so I haven't seen any market changes in the overall pricing environment.

But I would expect that to hold is certainly continues in.

If we look back at comparative.

16, 17, as we entered the last economic down cycle.

Price competition I would expect to increase.

For the infrastructure related projects.

No I guess, but along those lines what would your expectations would be it sounds like you're bracing for a.

At least a modest long down cycle, how long you think it's going to be are you thinking about a year 235, what do you what do you kind of.

Said in the business up for at this point.

A lot of scenarios John I think is awarded itself, yes, theres a lot of data out there. There's there's positive data that says LNG pricing recovers and.

Part of the momentum that we.

That led us into this crisis.

Good could recover quicker than than that and then there's data out there looked at the majors on their cash conservation moves.

You know there.

They are making big moves.

And you got to believe that's going to affect their capex and opex spend so.

We're trying to triangulate up probably like yourself and everybody else and.

As we've said in the comments they prepared remarks, some of the projects already in the quarter. Our sliding out there are few others that people are trying to.

Hold on to and we do have we're pretty busy on inquiry activity, but it's sort of.

Cost out redo and they're trying to figure out what their landed price some of these contracts going to be and how they're going to justify the jobs. So.

I think it's gonna be.

Pretty uncertain through the end of the calendar year.

And I can't really say into next year, how far but lot of lot of factors here, we're trying to Washington and platform.

Okay.

Okay guys. Thanks for taking my follow ups I appreciate it.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.

Thank you David.

Democrats cost a shift in how we manage our business think about workforce planning and how we execute our work across our footprint.

What has not changed is our commitment to our customers and to our highly talented and dedicated employees.

The strength of Paul, including our proven operating expertise will guide us through this extraordinary economic environment.

Beyond Tobin 19, we continue to focus on our employees customers and communities and maintaining liquidity without compromising our financial stability.

By managing our business and aligning our cost structure to support customer activities, we will be well prepared to respond to favorable industry trends that remain a critical driver to the recovery.

Thank you for your participation on today's call. We appreciate your continued interest and Paul and look forward to speaking with you all next quarter.

This concludes today's conference Powell Industries'. Thanks, you for your participation you may disconnect your lines at this time.