Q2 2022 Powell Industries Inc Earnings Call
Good morning, and welcome to the Palo 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 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 2022 second 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.
Going through the company's website Paolo I N V dot com or a telephonic replay will be available until may 11.
The information on how to access the replay as provided in Yesterdays earnings release.
Please note that the information reported on this call speaks only as of today may four 2022, 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.
This conference call includes certain statements, including statements related to the company's expectation 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 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 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 policy fiscal 2022 second quarter results I.
I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.
Our results in the second quarter saw a strong sequential uptick in new order activity as well as year over year revenue growth of 8% as our customers and end markets continued to recover from the pandemic induced downturn.
The $151 million of new orders for the second quarter marks four consecutive quarters rising new order activity and is the highest quarter of new order intake activity since our second quarter of fiscal 2020.
Our bookings performance led to a book to Bill ratio of 1.2 times in the quarter and is the second consecutive quarter with a book to bill ratio above one.
Our revenue of $128 million compares to $107 million in the prior quarter and 8% higher than last year.
Within our industrial markets revenue from our oil and gas sector increased year over year by 7% for the second straight quarter.
While the petrochemical sector increased by 85% after growing by 88% versus the prior year in the first quarter of fiscal 2022.
Year to date revenue from our industrial markets is 21% higher than the comparable period in fiscal 2021.
Revenue from our utility sector grew by 7% compared to the prior year, while traction fell by 34% due largely to timing and our continuing efforts to exercise discipline and risk management within this market segment.
We remain pleased with the focus and level of execution throughout all of our operations as we saw our gross margins improved sequentially by 230 basis points to 14, 9% in the second quarter.
We continue working to find ways to mitigate the effects of the higher cost environment as.
As we stated last quarter, we are beginning to recognize revenue on projects booked in the first half of fiscal 2021 that carry higher raw material and component costs continuing to create a near term headwind. However, we are cautiously optimistic that we have begun to see the stabilization in the prices of key commodities, such as copper and steel.
Left engineered components continued to present, a challenge both through supply availability and pricing.
We are actively engaged with our suppliers and where possible passing through inflationary costs.
We also continue to monitor and navigate the tight labor situation.
Why do you expect that upward pressure on wage costs remain an added potential headwind we have largely been successful working through these challenges across all of our manufacturing operations.
As you May recall, while we did execute a modest restructuring at the outset of the global pandemic in 2020, we.
We deliberately retain the majority of our workforce during fiscal 2021, despite lower revenue levels.
We knew it was critically important to retain the technological and commercial knowhow and skilled labor for the eventual return of our order and project activity.
That decision is presumably benefiting us as we start to pivot and plan for the growth of our backlog.
Nonetheless, we will continue to prudently manage our fixed cost as we plan for future project activity.
Moving to the bottom line, we reported a net loss of $1 $2 million in the quarter compared to a net loss of $225000 in the prior year.
The net loss was mainly driven by our second fiscal quarter tax provision as Mike will explain shortly in more detail.
We ended the quarter with $114 million of cash and short term investments and no debt.
Our net cash position is $12 million higher than the prior quarter. Despite building working capital in the face of rising order activity to support the steady improvement or end markets.
Lastly, we ended the quarter with backlog totaling $440 million, which mark a sequential growth of 6% from $416 million at the end of the first quarter and is $3 million higher than one year ago.
While we see our second quarter results as another step in a positive direction.
Perhaps most noteworthy is the fact that we continue to see an encouraging and broad recovery and overall order activity. Despite the slower recovery dynamics of our industrial end markets.
These are legacy markets for Paul that had historically constituted the majority of our order book and revenues.
And while we have been experiencing a steady increase in cost estimating activities across an increasing funnel for our industrial end markets, including our core oil gas and petrochemical customers capital spending still remains modestly below pre pandemic levels.
Offsetting the pace of the industrial recovery during the second quarter the business recognized a greater proportion of utility and light industrial orders. While also continuing from the first quarter of fiscal 2022, our global services team has delivered strong performance in line with our strategic objectives.
These results clearly demonstrate that the commercial strategies and deliberate strategic efforts to diversify our business enhancing the share of growth opportunities in new markets and applications for polished technologies is beginning to deliver for all of our stakeholders.
These positive changes will aid and Derisking, our business and lead to less reliance on the heavy cyclical nature of our core markets.
There are also significant steps towards our stated strategy of expanding into new markets that are demanding innovative solutions and products, where power can leverage its leading R&D capabilities and operational excellence.
Overall, our view of a steady recovery and positive momentum across our markets on a month to month basis remains intact and unchanged.
Customer attitudes around deploying capital are becoming gradually more positive we expect the industrial markets to continue their pace of gradual but steady improvement and thoughtful capital investment for the remainder of fiscal 2022.
Customer activity across projects related to LNG gas pipeline and gas to chemicals continues to remain attractive and opportunities within the more nascent like commercial and renewable sector remains active providing opportunities for us to leverage <unk> strengths and capabilities.
Additionally, we expect to continue our strategy of steady methodical growth across the utility distribution market throughout North America, and the U K and for the traction sector. We will continue to leverage the strength of technical solutions and proven execution capability balanced against prudent commercial risk management for light and mid rail projects.
Reflecting on our second quarter results and measuring progress against the strategic priorities that we've set forth and the associated alignment of the business against these initiatives. We are pleased with the progress.
To date.
As a reminder, we are focused on broadening the following attributes.
Growing our electrical automation platform <unk>.
Expanding our existing services franchise, and diversifying our product portfolio through both targeting tangential applications that complement our existing product offerings as well as expanding the scope of our product catalog into new electrical technologies.
We are beginning to see the benefits materialize as a result of these efforts and look forward to sharing additional examples of our successes within each initiative.
Lastly, our priorities for the year are unchanged first and foremost is the health and safety of our employees customers and suppliers.
Second we remain focused on maintaining our solid execution performance strong project Closeouts and factory efficiencies as we look to protect our margins and an inflationary cost environment.
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 lastly, as we look over a longer term horizon, we are committed to thoughtfully executing on our three strategic priorities and updating investors on our progress as appropriate.
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 second quarter of fiscal 2022, we reported net revenue of $128 million higher by $9 million or 8% versus the same period in the prior year.
New orders booked for the second fiscal quarter of 2022 was $151 million $62 million higher versus the prior year and $43 million higher sequentially.
As a result, our book to Bill ratio based upon reported orders was $1 two in the period with $440 million of backlog at the end of the second fiscal quarter, which was $3 million higher as compared to the same period a year ago.
Compared to one year ago domestic revenues were slightly lower by 1% versus the prior year to $87 million.
While international revenues were 33% higher compared to the prior year driven by strong volume across all of our traditional international markets based in Canada, U K and the middle East.
In total international revenues were $41 million in the second fiscal quarter.
From a market sector perspective revenues across our oil and gas and petrochemical sectors were higher by 20% versus the prior year.
In the utility sector generated a 7% year over year increase in revenues.
Offsetting these year over year revenue increases our traction sector was lower by 34% versus the second fiscal quarter of 2021 on the timing of new large traction projects.
Gross profit increased by $6 million sequentially and $2 million versus the same period, one year ago to $19 million in the second fiscal quarter.
As a percentage of revenue gross profit increased by 230 basis points sequentially, and 50 basis points versus the prior year to 14, 9%.
While inflationary pressures continue to be a headwind to the overall profitability. The business is beginning to recognize incremental pricing gains in the short cycle side of the business. While also offsetting the cost pressure with factory efficiencies and labor productivity.
Selling general and administrative expenses were $17 million in the current quarter, 2% higher versus the same period a year ago.
SG&A as a percentage of revenue decreased to 13% in the current quarter and higher revenues and diligent cost management.
In the second quarter of fiscal 2022, we reported a net loss of $1 2 million or a loss of 10 cents per diluted share compared to a net loss of $225000 or a loss of <unk> <unk> per diluted share in the second quarter of fiscal 2000.
'twenty one.
Although pretax income in the second fiscal quarter was positive the fiscal 2022 second quarter net loss is primarily attributable to a tax provision that was recorded in anticipation of a stronger earnings profile than was previously expected for the total year fiscal 2022.
As such our fiscal 2022 tax provision is currently aligned on a total year basis with these profitability expectations.
Additionally, during the second fiscal quarter, we sold a small parcel of non revenue generating land adjacent to one of our operating facilities, which was accretive to EPS by <unk> <unk> per diluted share in the quarter.
During the second quarter of fiscal 2022, net cash generated in operating activities was $15 million.
This in lieu of holding higher levels of inventory in order to help facilitate new orders and alleviate supply chain disruptions.
Investments in property plant and equipment totaled $680000.
At March 31, 2021, we had cash and short term investments of $114 million.
$20 million lower than our fiscal 2021 year end position.
The company holds zero long term debt.
Looking forward and considering the progress that the team has made in the first half of fiscal 2022 towards growing a commercial presence outside of our traditional industrial end markets. We're optimistic that continued growth in these markets will deliver counter cyclical accretive revenue and earnings.
In future periods that will complement our historical industrial market base.
From a profitability perspective, we continue our efforts to proactively address the macro inflationary pressures through pricing actions productivity initiatives and commercial terms to more directly address the current supply chain cost and material availability challenges.
While also thoughtfully building inventory levels in order to maintain commercial competitiveness.
In closing, we maintain our expectation that the second half of fiscal 2022 will show substantial improvement from a profitability standpoint as compared to the first half.
With that we will be happy to open the lineup for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from John <unk> with.
Adobe <unk> company. Please go ahead.
Britain, Mike Thanks for taking the questions.
Good morning, Good morning, John .
I guess, they're going to sell one of the things you left off with Mike about the tax reversal.
Could you talk a little bit about why that was necessarily happened what changed versus three months ago Hasnt already been pulled forward any color there would be helpful.
Yes, sure John and to be clear it wasn't necessarily a tax reversal. It was a provision that was made.
Due to the.
The realignment of our of our income so first I'd say.
On a total year basis, the effective tax rate when were near at or near breakeven very very difficult to predict.
Predict but considering the commercial activity that we're seeing across our light industrial and utility end markets.
Especially during the second quarter here in conjunction with the gradual recovery that Brent mentioned across our core industrial end markets. We anticipate additional revenue revenue on margin versus our prior estimate and a total fiscal 'twenty two year basis. So considering this is a.
<unk>. This is this necessitates an adjustment to the tax provision, which was taken in the discrete <unk> period.
A $1 $8 million. So this essentially this provision essentially now aligns the business with our anticipated earnings for the entire fiscal year.
Okay. So it was more of a case of the light industrial side of the business.
Proving to be better firmer than I am.
Some of the longer lead time stuff do you have a handle on so it was really light industrial that was the delta there.
As well as utility.
A strong quarter.
In utility in light industrial.
Can you talk a little bit about the gross margin profile and the recent order book, how is that compared to <unk>.
Say three months ago.
Pushed through surcharges or escalators to offset commodity cost any little color there would be helpful.
Yeah, Hey, John spread.
So in the last quarter, Yes, we are we are doing better and some of the market on price, especially that that's tied to speed.
Short short cycle shorter cycle deliveries something thats kind of the next two to six months and we see a lot of that in some of the light industrial and utility piece, but not not only on projects that have a longer time horizon. There is still a fair amount of competition is something kind of year year and a half out for delivery.
So it's a little bit of a mixed market, but we definitely have taken a step forward this past quarter doing better across the business.
And understanding where the market's at and pricing appropriately ended up market.
Okay, and one last question I'll get back into queue, just on the bigger picture side here.
What are your thoughts about <unk>.
Geopolitical events and how does that change the opportunity profile at all or is it too soon to tell just your thoughts along those lines.
Yeah, I think there's two parts.
So this because we do talk a lot about it let.
Let me cover some of the market.
In terms of booking revenue and I'll, let Mike address some of the things on the cost side and the ripple So first of all.
Yeah.
For me, it's an advantage in the way we are structured right now we are what we would call the integrated factory structure.
At our at our locations not a feeder factory, where we compete against a lot of multinationals that they've developed their factory systems over the last 30 years, so from an exposure standpoint, and when we go to market and what we convert when we buy our commodities the convert and as we're selling into the market today, which is actually enhancing our ability to deliver on the speed side.
Which really did help second quarter.
Topline order performance, we're not that exposed and we have.
Some exposure sort of into some suppliers.
Europe , and India, but really more of the Americas, North and South where we're aligned so thats been an advantage for <unk> and will be for the for now.
The next couple of quarters I believe is this sort of plays out that said, where we do get exposure indirectly is sort of the ripple effect on logistics and not not material for Powell per se, but when we have an integrated.
Either large integrated switch gear offering of our PCR there might be some exposure there with things that we buy and so mike's been very.
Involved with the teams on that I'll, let him comment on some of that John .
John just on the core raw materials that the business consumes copper aluminum.
Steel stainless steel things of that nature clearly the.
Upheaval in Ukraine, Russia has an impact on those core commodities, which we are keeping very close close to end.
Buying forward, where we can and looking at potentially hedging some of these things.
The flip side.
With the.
LNG pressure that Europe's feeling that potentially mid longer term perspective may have some some benefits to the.
The U S producers in this half.
Okay, guys, great I'll get back in queue. Thanks for taking my questions.
Thanks, Chuck Thanks, Ken.
Our next question comes from Jon Braatz, with Kansas City Capital. Please go ahead.
Good morning, Brett Mike.
Good morning.
Brett.
When you look at the incoming orders are that you're.
That you are generated here in the second quarter can you sort of parse that out between some of the.
The legacy business versus.
The new activity in the commercial area, what kind of inroads are you making progress.
Progress Youre, making on the ink and the commercial side.
So.
Yes on the legacy side.
I would first talk about utility.
Do you remember John Rowe really over the last five plus years Ive talked a lot about our methodical progress in the utility starting with Canada will go back to the 14 to 15 downturn never really recovered in West Canada as quick as we did in the states and so we had to pivot and we did do R&D development support of that effort into our utilities strong.
East, Canada strategy, and we talked about that over the last couple of years and so.
Along with that we've seen Masonic.
Progress in the U S on distribution.
More so the generation four are offering are.
<unk> closed solutions saw.
For a more robust little lower higher initial price, but you get longer life out of the asset for the utility and so.
I think in the second quarter.
It's along those lines and I think that theres been some because of the way we are structured and the ability to still kind of hit some some quick deliveries.
Sort of saw some upturn in that market specifically.
New markets.
The three straight stated strategies, especially around.
Developing new products for the markets that we serve go back to when Tom acquired the GE power back line in 2006 subsequently the ice grouping sold the ABB.
That really through pile into.
Channels and having to develop new ways.
Ways into the market versus just direct sales through our stronger historical relationships with our core so that as we kind of working through our strategy over the last couple of years, one of the ones that one of the tactics that we had to develop was a better.
Understanding support and.
Our strategy around those channels. So we are seeing in this past quarter the results of that so.
There is a fair amount of opportunity that I think historically would not have seen it.
18 months two years ago, we wouldn't have beefed up that strategy on the churn piece, so it's giving us.
Exactly what we want it's giving us upside orders, but also a lot of Intel on where we've got a <unk>.
To invest in order to sustain that well into the future. So it's been it's been a real positive move for the company. Okay. Thank you.
To the extent that let's say some of these.
Projected LNG projects go forward.
And there's an opportunity for for Paul and in let's say in a large opportunity.
Sizable opportunity.
Given what we've seen in the past the most recent past in terms of the inflationary pressures.
How do you approach a project like that and are you able to and pursuing a project like that put in more protections at this point now to protect yourself from the.
The inflationary pressures or are we just still be sort of a at the whims of some escalating escalating costs again.
Yeah no great Great question. The short answer is yes, we're able to put in some protections, but there isn't an element of delicacy in that because.
You know theres still competitive pressures in the longer as I mentioned noted.
With John <unk> as you look out further there is still more competition for jobs that are two or three years out.
Some assumption of the recovery on the on the cost side.
They are real cost and so we are.
As I noted last couple of quarters doing a lot of work with our engineering partners and the end client on several jobs.
And we are putting protections in there.
Everything from validity and a lot more work, even with the sub supply piece, whether or not so much on the commodity piece I think Mike and the team have done.
Very well there, but on the engineered component piece there is a lot more work going into that.
And then we do project out what if and so theres a lot more.
How do we plan that out when would when would it hit what can we what can we buy upfront and really even modifying some of our engineering process to understand where can we do some things early in the project with their health, maybe pivoting some milestones to lock in things earlier in the project and we might have in <unk>.
So those are the collaborative discussions we have so there is a way through it so everybody.
There are of course, our goal is to deliver.
On time and on budget and certainly expand our brands. So we don't want to lose that and so I think being predictable with our clients in those discussions being transparent.
While also demonstrating that we still think we're the best to hit these complex projects more than any other model out there. So it is it has a lot more than a typical what.
What we saw in the past bidding these large jobs.
I think we're the best and Theres a couple still percolating.
Okay I was speaking specifically about LNG projects.
Do you see some of them are reaching F I D and moving forward here.
I do I think in the next.
Nine to 12 months, there's a couple of not just LNG, but there are a couple of LNG gas related jobs at R. R.
<unk>.
Theres still some sliding to the right on schedule there is whether it's geopolitical events.
Or how they're rolling off all their cost on the structural steel side I mean, I'm sure. There's a lot of moving parts that are more than just the electrical distribution, but.
I definitely believe there is some some jobs that are continuing to move closer to that go forward point, okay. Thank you.
Matt.
This concludes our question and answer session I would like to turn the conference back over to the CEO , Brett cope for any closing remarks.
Thank you Joe.
As we stated on today's call we view, our second quarter results as a significant and positive step in the recovery and we are optimistic about improved performance in the second half of the year.
Trends across our end markets remain favorable and we possess an incredibly talented team a healthy backlog strong balance sheet and great relationships with our customers and suppliers.
With that thank you for your participation on today's call. We appreciate your continued interest in Powell and we look forward to speaking with you all next quarter.
The conference.
<unk> has now concluded. Thank you for attending today's presentation you may now disconnect.