Q3 2021 Powell Industries Inc Earnings Call
[music].
Welcome to the Powell Industries earnings Conference call at this time, all participants are in a listen only mode.
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I would like to turn the conference over to Ryan Coleman of Investor Relations. Thank you and you may begin.
Yeah.
Thank you and good morning, everyone. Thank you for joining us for Powell Industries Conference call today to review fiscal year 2021 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 Powell.
<unk> dot com or a telephonic replay will be available until August 11, the information on how to access the replay was provided in yesterday's earnings release.
Please note that information reported on this call speaks only as of today August 4.2021, and therefore, you're advised that any time sensitive information may no longer be accurate at the time of replay listening or transcript reading.
This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 investors are cautioned that such forward looking statements involve risks and uncertainties that actual results may differ materially.
Lee 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.
Asian, 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 fiscal 2021 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 financial results for the third quarter largely in line with the prior period.
Revenue was relatively unchanged sequentially, while our gross margins were slightly higher.
We continue to work through and manage pressures across our cost base.
Industrial metals, such as copper and steel as well as within our labor cost book variable and fixed as we are always working to balance. The current volume of project work I guess, the timing of our backlog fully utilize our overhead.
There were a number of positive signs in the quarter, which we regard as important steps in the right direction towards a recovery.
For example, we saw an encouraging sequential uptick in new orders I'll touch on this in more in a few moments.
First revenues for the third quarter totaled $116 million slightly below the $119 million in the prior quarter and $118 million in the prior year.
Compared to the prior year revenue from our petrochemical sector was down 48%.
Oil and gas revenue was higher by 7% year over year.
While our while our municipal markets, which include traction grew 52%, marking 7 consecutive quarters of year over year growth.
And our utility revenue grew by 57% in the quarter, which marks 4 consecutive quarters of year over year growth in this segment.
Our gradual and continued success in both new municipal utility markets is a direct result of our efforts to focus and compete more effectively helping to partially offset the softness in the industrial sectors.
Third quarter gross margin as a percentage of revenue was 14, 8%, which is 40 basis points better than last quarter, but remains below the 18, 1% from the comparable period 1 year ago.
The year over year decline is mainly the result of underutilized overhead on a lower revenue.
As well as raw material cost pressures that I noted earlier.
While commodity prices have recently started to stabilize we continue to increase our awareness throughout the organization to book.
Patrick through the inflationary costs, where possible along with being diligent with our suppliers.
On a similar note we are monitoring the labor availability situation, which is causing upward pressure on wage costs across wide sectors of the economy.
While labor inflation is not currently a significant problem for us it may cause some margin pressure in the future as our end markets continue to recover and we increase our staff accordingly.
As always we continue to closely monitor our cost structure to protect our margin profile in these periods of lower volumes.
Is it predominantly long cycle business.
It is critical that we retain the domain expertise and technical knowhow to ensure that we capitalize on crushed opportunities as they become increasingly available.
Moving to the bottom line.
We reported a net loss of $2 million in the quarter compared to net income of $3.5 million in the prior year.
The decline was the result of lower earnings driven by the decrease in revenues and gross profit amidst the current environment of adverse market conditions.
We ended the quarter with $129 million of cash and short term investments and essentially zero debt.
As we retain our strong liquidity position, which offers us continued flexibility to manage through this down cycle.
As I mentioned earlier new.
New orders in the third quarter with an encouraging bright spot totaling $103 million.
That compares to the second quarter total of $89 million and $91 million of new orders in the first quarter of 2021.
While new orders remained lower than what we ultimately aimed to achieve.
We view the $103 million this quarter as an important step in the right direction.
We ended the quarter with backlog totaling $426 million, which is roughly 3% lower than the second quarter.
It is also lower when compared to the $532 million backlog at the end of the comparable period last year. So that number was benefited by the largest ever award and policy history. During the second quarter of fiscal 2020.
The increase in our third quarter orders was accompanied by robust quoting activity supporting both new projects, along with request to update pricing for several projects, mostly within our core oil gas and petrochemical markets that were previously delayed at the start of the Covid pandemic.
View this as an additional positive step for the longer term recovery process of our end markets.
Overall, our financial results remained challenged by industry conditions. However, I remain pleased with the level of execution across our operations. We have a strong focus on driving efficiencies and project execution net power as well as working closely with our customers.
Looking forward, we continue to believe the economics of natural gas will offer favorable opportunities in the LNG gas pipeline and gas chemical process industries for the foreseeable future.
As the world transitions to cleaner energy sources, we are actively participating in the development and planning of projects and the renewable markets, the biofuels and biodiesel carbon capture and sequestration as well as the early stages of hydrogen related projects.
Obviously, these renewable markets and technologies are still developing and a bit distant.
But our exciting and offer an opportunity to leverage <unk> products and solutions.
Additionally, we also continue to monitor the possibility of tightened environmental regulations that may require additional investment in existing infrastructure.
Effectively competing in these new and growing markets requires a history of operational excellence as well as an ability to continuously develop new and innovative technologies.
We remain committed to our research and development activities and throughout our fiscal 2021, we have continued to entity.
Our recent accomplishments include a new unique design for an underground distribution switch specific to the need of 1 of our utility customers. This new underground switch will meet or exceed operational specifications, while providing an upgrade path to replace aging infrastructure and the distribution network.
We are always working to ensure power products are the safest in the industry and this year, we added new remote racking technology to our power back line of Breakers and switch gear.
This enhancement further increases operator safety and will benefit all of the markets that we compete including our OEM customer base.
And last we continue to build out our suite of digital asset management sensors and.
In fiscal 2021, we released the latest in a suite of sensors to help our customers move to an event based maintenance strategy.
We believe that digital digital technologies will continue to play a larger role in the future of electrical distribution.
All of our customers achieve higher operating performance from their invested capital while also serving as an enabling technology to help achieve carbon reduction goals.
Overall, we are encouraged by some of the trends that we saw in the third quarter.
However, we are remaining somewhat cautious as it will certainly take more time to understand the direction of our customers' capital spending plans.
In the meantime, our financial position and deep expertise enables us to weather periods of lower volume.
Additionally, the core elements of our history and foundation remain important attributes as we continued to be a partner of choice for critical electrical infrastructure delivered on time and on budget.
Reiterating our key focus areas as we enter the final quarter of our fiscal year.
First and foremost is the health and safety of our employees customers and suppliers.
Second we remain we remain focused on maintaining our solid execution performance to meet the high expectations that our customers have come to expect from palm.
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 finally identifying more nascent applications for our electrical systems and technology, where we can be competitive as we look to broaden and diversify our pipeline of future opportunities.
And last before I turn the call over to Mike.
I would like to draw your attention to past 2020, corporate responsibility report that we recently published.
You will find posted on our website.
The report provides an expanded view of our environmental social and governance performance.
Including support for the sustainability accounting standards Board framework.
Across all of our teams our employees have and continued to be excellent stewards of the resources that we use to produce our products and solutions.
We have always embraced adversity, and we value all of our employees.
And we track the critical metrics are important to all of our stakeholders such as a constant focus on safety.
Which is an area that we are proud to share in our corporate responsibility report.
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.
As Brett mentioned, new orders for the third fiscal quarter showed an encouraging upward trend both sequentially and year over year basis.
$103 million this.
This is higher by $15 million sequentially and $22 million higher versus the third fiscal quarter of 2020.
Our fiscal third quarter total orders represents the first period of year over year growth in the last 5 quarters.
Our revenues for the third fiscal quarter of 2021 were $116 million lower both sequentially and versus the prior year by 2%.
The challenging macro environment that we've been navigating throughout the past 12 months to 18 months that has resulted in a significantly lower orders cadence, particularly across our oil and gas and petrochemical end markets.
Has had an adverse impact on the fiscal 2021 revenue.
The third quarter, ending backlog was $426 million.
This is lower by $11 million sequentially and $107 million lower versus the prior year as we have continued to convert the backlog, particularly the large industrial orders that was booked in the second fiscal quarter of 2020.
Overall, we feel that our backlog position remains healthy, particularly when comparing to historical levels.
The book to Bill ratio for the third quarter was 0.9 times, which is an improvement from the prior quarter book to Bill ratio of <unk> 17.
Compared to the prior year domestic revenues decreased by $3 million or 3% to $88 million and international revenues were 2% higher on a year over year basis and $27 million.
The overall revenue decline versus the prior year is a reflection of the softness across our oil gas and petrochemical end markets.
That we've experienced throughout the past year and a half.
From a market sector perspective revenue across our oil and gas and petrochemical sector was lower by 14% versus prior year.
Breaking this sector down further oil and gas increased by 7%, while petrochemical end markets were lower by 48%.
Helping to offset this reduction the utility sector was higher by 57%, while traction volume generated a 52% increase versus the third fiscal quarter of 2020.
Gross profit in the third quarter of fiscal 2021 decreased by $4 million or 330 basis points as a percentage of revenue versus the prior year, but was higher sequentially by 40 basis points.
The margin pressure versus the prior year was driven primarily by the lower volume generating unfavorable utilization and leverage across our operating facility.
In addition to volume increasing commodity prices, specifically in copper and steel were a headwind as well.
As Brett mentioned earlier, we're moving quickly to pass this inflationary pressure through his price. However, there is a timing lag relative to the increase in costs.
Selling general and administrative expenses were $17 million from the current quarter, a $1.2 million increase versus the same period, a year ago and flat sequentially.
From a year over year perspective, we're experiencing modestly higher employee benefit cost in large part driven by the lower expenses incurred during the COVID-19 line.
SG&A as a percentage of revenue was 14, 5%, which compares to 13, 2% in the prior year and 14, 1% sequentially.
In the third quarter of fiscal 2021, we reported a net loss of $2 million or a loss of <unk> 17 per diluted share compared to net income of $3.5 million or <unk> 30 per diluted share from the third quarter of fiscal 2020.
During the third quarter of fiscal 2021 net cash used in operating activities was $22 million driven primarily by the ramp up of working capital as we execute the large industrial project that was booked in the second quarter of fiscal 2020.
Investments in property plant and equipment for the quarter was $857000.
At the end of our third fiscal quarter, we had cash and short term investments of $129 million $35 million lower than 1 year ago, and $50 million lower than our fiscal 2020 year end position.
Long term debt, including current maturities was $400000.
As we exit our third fiscal quarter and look forward to the fourth fiscal quarter and beyond we are cautiously optimistic that our industrial end markets are beginning to show signs of a slow recovery based upon the current quarter's orders uptick.
That said, we continue to expect a challenging operating environment with anticipated inflationary headwinds as well as the competitive commercial land landscape globally.
As we navigate through this environment, we are continuing to closely manage our liquidity and operating costs.
As noted previously our backlog position is solid and our balance sheet remains strong.
Going forward, we anticipate some choppiness across the quarterly landscape driven in large part by the ongoing uncertainty across many of our industrial customers a day align their capital projects to the current market environment.
At this point, we'll be happy to answer your questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
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To withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question will come from Jon Braatz of Kansas City Capital. Please go ahead good.
Good morning, Brett Good morning, Brian.
Hey, John Good morning, Ken.
Brett Mike.
Obviously, the petrochemical sector is very soft are you seeing in your incoming orders any improvement.
Any any new activity that would suggest that maybe.
Maybe that you are seeing the light at the end of the tunnel in that particular sector.
Josh Brett the answer to your question in short is yes.
We are seeing it has been a very soft sub sector for us over the past 12 to 16 months, so absolutely spot on.
We've seen that part of the sub sector, we saw pick up in the Q3 and kind of continuing to flow into Q4.
I wouldn't go so far as to say the line at the end of the tunnel, but definitely encouraging and nice to have activity pick back up some of that is new activity as I noted in the prepared comments and some is.
A mix of some jobs that were delayed and some of those engineering only.
Attunity that we see at the start of a downturn kind of items being.
Being brought forward and funding so it has been.
A lot more fun in that sub sector of last few months.
Okay Annie.
Obviously, the Delta is in the news these days.
Anything you're seeing and hearing most recently.
Impacting impacting.
Projects start day, its activity levels and so on or is it too soon.
Yes, yes, a little early but the radars up.
I would say nothing as of today todays call as Ben.
<unk> changed but obviously, we're very.
Anxious for any data that comes in but not nothing nothing as of today, Okay. And then secondly in terms of gross margins.
You are feeling pressure because of the lower volumes and also the raw material costs, but when you think about your price increases that you're putting in there that are impacting.
Impacting the new orders and so on.
Everything else being equal what kind of recovery do you think you could see in gross margins sort of assuming flat.
Flat revenue is just just from getting the price increases through.
How much of a drag do you.
Is that this year and sort of what kind of recovery might we expect to just recovering those costs the cost increases.
That's a good question China.
There are a lot of dynamics on the inflationary front on the material side, which has stabilized a little bit in the last couple of months. The inflationary piece on the cost for labor is a constantly changing equation right now and of course don't forget the non.
On the cost structure side, we're constantly watching it trying to balance the resources looking forward over the 6 to 12 month period of the project cycle. So.
I'll, let Mike comment here.
We are having some success I'll say on pushing that through on price I think across the market.
It's always a competitive concern, but I think it is so broad that it is kind of floating back into the market.
I don't think it's unexpected at the customer level, but there is the normal back and forth with what we can legitimately pass through what's real cost was.
And so we are having some success on alleviating those those short term issues, while getting the pricing updated from our longer term projects that are yet to be awarded.
No.
Wouldn't get overly excited but I would expect.
Looking at my point to recovery.
Our success.
What I'd offer channel as we as we close out third quarter year to date, and we understand the inflationary pressures and the efficiencies due to the lower volume.
We we actually got things about 70 basis points, just on the on the leverage and productivity front just on the lower volume.
The inflation was about 100 basis points now as I mentioned in my prepared comments that commodity inflation a lot of that specifically the metals.
We've acted judiciously to get that into our estimating models, but there will be a timing estimate just tightening lag on when that will be realized. So this will be it'll be a slow clawback from a pricing perspective, just to answer your question to quantify how much that will be there is a lot of moving parts at this point if volume comes back that will help.
That will help tremendous leverage line Larry.
Okay, Alright, Brett Mike Thank you very much.
John.
The next question comes from John the share of Pinnacle. Please go ahead.
Good morning, everyone.
Good morning.
2 questions 1 you mentioned.
Increased environmental regulations that might prompt an increase.
And investment in your infrastructure.
Tell us more about that in terms of regulations and what the cost of complying with that might be.
Hmm.
Well the 1 that we always watch very closely is anything on the fuel side.
Current administration just came out last week I think with guidance on not only some targets for some of the new EV vehicle aspiration that they have by the end of the decade. They also came out and renewed.
And change with the last ministration did on fuel economy, so that will.
Be a mix of what the automakers do as well as what they can do on the fuel side, so any time.
There is a default position or dehydrogenation type projects in the refining side, we always see a an investment cycle. So it's not firmed up yet John but that's that would definitely be an upside to that sector of the business for us.
But over the near to mid term.
Oh, Okay. So there's no budget or anything for increasing the inc.
Increased investment in your infrastructure at this point.
No not yet this would be.
An increase in activity around floating and budgeting and planning and then it'll come down to timing of what the New administration was down here in their final rule.
Okay fair enough.
The other question is.
Back in December December 9 from 2020, which.
What is your fourth quarter earnings call.
There was some discussion of the board and management working on our strategic plan.
To lay out the direction of the company and.
I think you were going to disclose the results.
Early soon I haven't heard anything about this although I may have missed it.
And I was just wondering did anything ever come of that strategic plan you highlighted thanks.
In December 2020.
Well.
We continue on we've not published an updated IR deck that clearly lays out some of the words that we've used in the past earnings call, but there are generally 3 areas John that we're very focused in.
But I have mentioned in prior calls and we will have the deck updated here I can't give you a firm date, but again sooner as opposed to later, but first area is around the core electrical products part of Paul what we believe makes us.
Partially relative to the industry and our customers as the products and solutions that we produce that make up that solution the breakers to switch gear.
Along with that would be.
This drive into the digital automation.
We spent we spent considerable R&D time and money and to learn and to develop new sensors around the asset management side.
Those are now making the weighted the market had been for the last few years and we're learning as we go about what we are doing well and where we need to adjusted plan strategically for the future and then the and then the last area is.
A couple of years ago.
<unk> III here off top my head, we combined all of our service teams across Powell footprint to really drive.
A more synergistic.
<unk> strategy across the company as opposed to segmented.
Visions that we had to drive a more cohesive service strategy for where were installed and really to be a partner in this.
The COVID-19.
With the changes.
Downturn sees the changing demographics.
Paul will be more relevant in our clients' operations on the maintenance of their assets and extend the life of the capital Tomorrow. So that's an area that we believe.
We can do better than that.
And that's an area, we're driving pretty hard.
Okay. That's helpful.
You mentioned updating the deck is that going to happen anytime soon.
Uh huh.
Yes.
Can't give you a day as of today, but it is something that.
We're working on collaboratively with with the board as well as with our management team.
Okay. It sounds like it's a work in process. It doesn't work in process and we are.
Wanting to get that out there as soon as we can okay.
Great. Thank you very much okay, John Thank you.
This concludes our question and answer session.
Like to turn the conference back over to CEO, Brett cope for any closing remarks.
Thank you Andrea while our financial results remain challenged by the Underutilization of our overhead driven by lower volume levels.
The core.
Operational capability across Paul is extremely strong.
Our world class employees are leading through these challenging times and we are committed to being a supplier of choice. When it comes to meeting the needs of our customers for their electrical distribution products and solutions.
We are encouraged by improved activity in our industrial markets and the continued strength in our utility and municipal sectors our balance sheet.
<unk> remains a core strength and we are actively pursuing new and exciting projects in emerging market opportunities that will better diversify our backlog and project mix going forward.
With that thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you all next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.