Q1 2021 Powell Industries Inc Earnings Call
Welcome to the Powell Industries earnings Conference call. At this time, all participants are in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please.
Please note. This event is being recorded I'd now like to turn the conference over to Ryan Coleman Investor Relations. Thank you you may begin.
Thank you and good morning, everyone. Thank you for joining us for Powell Industries Conference call today to review fiscal year 2021 first quarter results with me on the call are Brett Cope Powell's chairman and CEO and Mike Metcalf Powell CFO, there will be a replay of today's call and it will be available via webcast by going to the company's website.
Powell I N. The dot com or a telephonic replay will be available until February 10th 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 February three 2021, 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 companys expectations of its future operating results that may be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 investors are <unk>.
And 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 the execution of business strategies for more information. Please refer to the company's filings with the Securities and Exchange Commission with that I'll now turn the call over to Brett.
Thank you Ryan and good morning, everyone. Thank you for joining us today to review <unk> fiscal 2021 first quarter results.
I will make a few comments and then turn the call over to Mike for more financial commentary, where we take your questions.
In many respects not much has changed over the past 60 days or so since we shared our 2020 full year results.
However, pulse of order activity showed a modest improvement with the sequential increase of net new orders, which totaled $91 million for the quarter.
The onset of the COVID-19, pandemic, which began a little less than a year ago at in the immediate impact on the short term business outlook proportions of our customer base.
And this continues to affect confidence levels on our customers' capital investment plan.
Our core industrial markets, and the oil and gas petrochemical sectors remain under pressure.
Any projects that have their schedule is pushed to the right.
However, we continue to see steady demand in other sectors, we serve compared to last year.
While the mix shift remains a headwind the <unk>.
Higher utility and traction activity.
Coupled with the steady flow of engineering only work, we are seeing enables us to leverage our overhead while working our existing backlog until the broader markets recover.
First quarter revenues totaled $107 million down, 20% when compared to the prior year.
And lower by roughly 7% sequentially.
The decline was driven by lower revenue from both of our oil and gas petrochemical customers, which were down 33% and 70% respectively.
In terms of the first quarter of fiscal 2020.
Those declines were partially offset by the sustained demand, we're seeing in our utility and traction markets, which grew by 22% and <unk>.
The 60% compared to the first quarter of last year.
As a reminder, our first.
The results typically experienced seasonality from a revenue and new bookings perspective.
First quarter gross margin as a percentage of revenue of 17, 1%.
Which is an increase of 80 basis points compared to one year ago. The.
Year over year increase resulted from restructuring activities that we took in may of fiscal 2020, as well as continued strong productivity in our domestic operations.
We continue to prudently manage travel and other discretionary expenses in this environment.
We are also closely monitoring dynamic regulatory changes in geographies that we serve.
The regularly evaluating our cost structure to ensure we are aligned with the current environment.
With that said we are in a long cycle business and it is essential that we retain the knowhow to remain properly staffed for the eventual recovery of our major end markets.
At the bottom line, we are slightly below breakeven as we reported a net loss of $364000 in the.
The quarter compared to net income of <unk>.
$2 $8 million from the prior year.
Primarily due to lower operating earnings, resulting from a decline in revenues and gross profit amidst slower new orders and adverse market conditions.
We ended the first quarter with backlog totaling $465 million slightly lower than the $477 million at the end of the fourth quarter.
But solidly above the $426 million of backlog at the end of the first quarter in the prior year.
The year over year increase includes the previously announced large industrial order that was booked in the second quarter of fiscal 2020 to support the design manufacture integration and testing of a Powell custom integrated electrical distribution solution.
As previously reported this project will convert to revenue over the total of a three year horizon.
We also ended the first quarter with $150 million of cash and short term investments and essentially zero debt, which speaks to our strong liquidity position as well as the optionality afforded to the company.
Visibility remains challenged from any of our customers as they grapple with the currently we can state of both the cyclical and secular growth drivers for their businesses.
And we continue to work in close concert with them to respond accordingly.
Power platform is a full electrical solutions provider with extensive technological expertise and an exemplary track record of execution makes us a trusted partner during these periods of the cycle and I believe we are benefiting from the earned reputation.
Looking forward, we believe the economics of low cost of abundant natural gas will continue to provide favorable opportunities in the LNG gas pipeline and gas chemical process industries.
We are also seeing developing opportunities in the renewable markets of hydrogen.
Biofuels biodiesel as well as carbon capture and sequestration.
We are also closely monitoring the possibility of tightened environmental regulations that may require a lower level of software attributable to the emissions of transportation fuels.
Our strategic focus on improving operational excellence over the last few years physicians policy to quickly help our refining customers respond quickly and safely to upgrade facilities in order to meet improved emissions requirements.
Before I turn the call over to Mike.
I'd like to reiterate our key focus areas for fiscal 2021.
First and foremost is the health and safety of our employees customers and suppliers.
We are also focused on maintaining our solid execution performance to ensure that we continue to meet the high expectations stakeholders half of Powell.
Next is the continuous evaluation of our current cost structure supply chain and resource planning to optimize operations across the geographies and markets that we serve.
And last.
It is also critical that we continue to lay the foundation for future growth opportunities.
While also broadening of the markets were part of.
The human capital balance sheet strength, and technological expertise allow us to be proactive in the current environment.
With that I'll turn the call over to Mike to provide more detail around our financial results before we take your questions.
Thank you Brett and good morning, everyone.
In the first quarter of fiscal 2021, we reported net revenue of $107 million, a 20% reduction versus the same periods in the prior year.
Bookings for the first fiscal quarter were $91 million $46 million lower versus the prior year.
As a result of our book to Bill ratio was 0.9 with $465 million of backlog at the end of the first fiscal quarter.
Which was $39 million higher as compared to the same period a year ago.
Compared to one year ago, domestic revenue decreased by $26 million or 25% to $80 million.
And international revenue fell 4% year over year to 27 million balance.
These declines reflect the continued softness across our core industrial end markets.
From a market sector perspective revenues across our oil and gas and petrochemical sectors were lower by 46% versus the prior year.
While the utility sector was higher by 22% and traction volume experienced a 60% increase versus the first fiscal quarter of 2020.
Compared to the first quarter of fiscal 2020 gross profit decreased by $4 million.
On to $18 million on the lower revenue.
However, as a percentage of revenue gross profit increased by 80 basis points to 17, 1% versus the same period, one year ago on favorable project Closeouts and settlements as well as overall continued focus on productivity cost management.
Selling general and administrative expenses were $17 million in the current quarter flat versus the same period a year ago.
SG&A as a percentage of revenue increased to 16% in the current quarter on the lower revenue.
In the first quarter of fiscal 2021, we reported a net loss of $364000 or a loss of <unk> <unk> per diluted share compared to net income of $2 8 million or 24 per diluted share in the first quarter of fiscal 2020.
During the first quarter of fiscal 2021 net cash used in operating activities was $25 million driven by annual variable incentive compensation as well as the buildup of working capital for the projects that are currently in the manufacturing stages of production.
Investments in property plant and equipment totaled $1 million.
At December 31, 2020, we had cash and short term investments of $150 million compared to $179 million at September 32020.
Long term debt, including current maturities was $400000.
As we look forward to the remainder of fiscal 2021, we anticipate continued commercial headwinds driven by the ongoing uncertainty across our industrial end market and the overall pace of recovery.
Considering the long cycle nature of our business as well as the associated softness across our industrial end markets, we do foresee a more challenging fiscal 2021 versus the prior year.
We are however, anticipating the based upon our solid backlog.
And increasing orders cadence that we are well positioned to improve our financial performance as we progress through the balance of fiscal 2021.
With that in mind, our fundamentals are solid.
Maintaining our cash cost vigilance, while ensuring that we execute on our backlog.
Our strategy of maintaining minimal debt and ample liquidity as the essential during this down cycle.
And it also provides an element of optionality as we continue to focus on opportunities to grow the business and diversify our revenue and mix going forward.
At this point, we'll be happy to answer your questions.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
If you are you the speaker phone please pick up your handset before pressing.
To withdraw your question please.
<unk>.
At this time of pause momentarily to assemble the roster.
The first question today comes from John.
Kansas City capital.
Good morning, Brett Mike.
Hey, John morning, Jon.
Oil and gas prices have been moving up a little bit.
Do you think were they were in a position there out of level I should say that we might begin to see some pickup in your core business and.
You know what are you hearing from from your customers.
As he is a core of oil and gas prices have moved up.
Yes.
John.
I guess I'd say, that's the answer not yet.
It is a positive sign for sure for the longer term, but I haven't seen it move the needle yet on.
On larger activity.
Okay. Okay, and then can you talk a little bit more you mentioned.
A little bit of all of them.
The towards.
Some of the alternative energy like hydrogen and carbon sequestration and so on Biofuels.
What kind of activity levels of you've seen in there and and might we see that become a more.
More meaningful piece of the business as we go forward.
I do absolutely believe its pretty broad.
We have some projects that are actually in the in the <unk>.
Bidding and working through the commercial stage right now as well as a very broad geographically speaking.
Set of opportunities not just of the states, we're seeing some things on the UK as well as some things in the new lease that are that are pretty exciting in the hydrogen arena. So lots of lots of activity coming in on.
Some of it is early stages some of the larger projects, but it is very broad across the different different segments and I think there is a huge opportunity for power it fits us well can they.
How sizable can those projects be should you should be should you be awarded a contract. I mean are they you know 30 $40 million to $50 million on and in size or a much smaller of it.
Yes, it depends so like on carbon capture and sequestration, we participated in a few in the past kind of more smaller facility.
Localized projects that have driven some projects.
Those are kind of more.
The $5 million to $10 million in the past the tender.
Special projects, we're seeing now.
There's a couple of out there that are pretty pretty decent that can't get up to the $50 million to $60 million of a truly will fund.
Right now so theres the big ones out there, but there is still the bigger they are the further out the RFP.
Sure Okay. Okay.
Mike.
We talked a little bit last conference call, but your your cash flow expectations for the year on and in cash flow as cash balances were down.
And as you've noted the probably would be after the and in the first quarter.
How do you see the cash our cash flow expectations from this point forward and in 2021.
I think the large projects that Brett alluded to will we'll continue to build working capital is probably true.
Three quarters of the way through the year.
At that point, we will probably plateau out.
The fourth quarter is probably going to be neutral, but overall as I communicated last quarter I think when you look at year over year 2020 versus 2021, we will be in the cash usage.
Physician.
It's really due to net working capital buildup for the large projects okay. Mike. Thank you.
Thanks, Jonathan.
As a reminder, if you do have the question. Please press Star then one of the next question comes from John Ransom of Sidoti Inc.
Go ahead.
Good morning, guys.
Yes.
Okay.
The gross margin on a sequential basis December versus September of course.
It was down rather meaningfully.
I'm wondering if you could talk to us about which of that.
Because of how much of that is pricing of jobs and how much of that maybe just under absorption.
Yes, really we aren't seeing a lot of price impact at this point.
John because our backlog that we came into 2021 with as we've communicated previously is really we didn't have much adverse price impact when you look at the gross profit margins sequentially.
A little bit unfair because you've got the seasonality impact in first quarter versus.
Fiscal fourth quarter, very very strong tip.
Typically so we do see we do see a considerable amount of under liquidation.
Under recovery across the across the landscape for Powell.
In the first quarter and that's really what's driving most of it price is not a not a significant factor at this point.
And commodity costs.
Yes.
Once you have a commodity I wanted to add one comment on price of John in terms of the quality of the backlog and agree with Mike.
Going forward.
We've talked about this in the summer a couple of questions that came up into summer on this I think coming back from the new year.
Looking forward I do believe price continues throughout this year to be.
More of a challenge on on various jobs, not it's still not consistent across the board of all markets.
But coming back from the holiday seasonality piece of your I do see some sort of I do see renewed competition sort of started the ramp up a little bit.
Okay, Mike do you want to add about the commodities before I fall.
Alright.
As far as the commodity again, when youre talking sequential comparisons and what we booked in the in the prior year again, we are.
Our commodity pricing has not yet leaking through I do think with particularly copper in the $3 50.
<unk> at this point, we do have we will see some inflation in the commodities as we as we go forward. We book these jobs that we're booking today that will ultimately execute later this year and into next year.
Okay.
So Brett is it fair to assume.
Based on seasonality of the March quarter on the pricing of the jobs that you have.
The March quarter gross margin will be better than the December quarter gross margin.
No.
Due to due to recovery, we will get more more of liquidation more efficiencies through the through the facilities.
But it is something to watch going forward on the mix you might hear I wouldn't be surprised as we go forward again, a lot of near term uncertainty. So on the under that umbrella on the market, which looks like it's going to continue for a little while longer this year.
There is just more or fewer.
It feels like John on what I'm seeing that in the first couple of weeks of the new year Theres, there seems to be some more ramp up in competition.
More people on reported you can kind of see it from other other folks that are public.
Especially those that have of market tied to oil and gas petrochemical, which is a big big segment for us.
Sure Okay with the previous question can.
Can you give us some of it.
<unk> expense.
The expense business.
Into new product lines and adjacent markets.
EBIT.
Turtle.
Our total it means or the.
M&A is something adjacent.
That's kind of outside your core competence.
Okay.
So organically you recall, a little over a year ago.
Some of the calls we've talked about wrapping up some efforts.
We had some trouble last year getting some sort of technical things, where we needed them.
We've.
We're still on that plan with retooled and are executing.
Still executing that plan and putting some some things in place to look at really the longer term trends things that will happen.
What will sustain on the grid, how things change how things on the distribution side really.
Evolve to handle all of the new supply demand thats happening on the grid and how can pop us positioned so we're doing some organic development there on R&D.
M.
And adding we've added some people to help us there as well as the retooled some of our just core investment programs around product development.
So that's one in terms of inorganic as we've talked about there kind of three areas.
We're looking at I would say definitely on the product area of anything in the industrial the electrical distribution stills on the space of mobile because of the medium voltage.
We do play a little bit higher than the 38038 kv level.
On an integration basis, but in terms of.
Adding to the portfolio.
We are having a lot of chatter around the ELV the NV level.
And then.
Also talked in the past we've rolled out some R&D on the sensor side. So.
You know, we aren't running right of the big data and AI of Internet of things.
I mean, we are not in the sense of running two big massive server based solutions at Crunch data, where we're focused is on the end of getting the data out of the system and moving up the scale from that standpoint. So we've got a lot of sensors that we rolled out last couple of years. They continue to roll into the market across multiple sectors very broad the acceptance not just oil and gas.
We're seeing it in commercial as well as utility so a very broad acceptance into the market on the sensor side and the feedback is.
Driving our thought process around the next evolution of what do you do with the data how do you best Crunch. It what's the what's the role that Paul could play to monetize the next level of our business opportunity.
Whether we can do that inside of the company of outside the company. That's an area and then in the strategic thoughts around service again, not on all things for all of all people type of model, but but select markets, let geographies, where it makes sense.
And just on the R&D side.
We anticipate full R&D expense for 2021.
I think we are loaded with about $1 three of one 4% of of revenues for.
'twenty one.
Got it alright, thanks, guys I'll get back into queue. Thanks for taking my question.
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 Melissa.
Our markets remain challenged by near term uncertainty is driven in large part by the global pandemic. All of this is uniquely positioned to weather the storm we.
We have an incredibly challenged team the healthy backlog and a strong balance sheet.
Our strategic focus on operational excellence over the last three years has further strengthened powell as a trusted partner with our customers.
And we remain focused on advancing our efforts of new and encouraging growth opportunities to support the continued success of the company well into the future.
With that thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking to all of next quarter.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.