Q4 2022 Powell Industries Inc Earnings Call

Speaker 1: quarters. We have an incredibly talented resourceful group across the company that I am very proud of. Their tenacity, dedication and creativity have helped Powell effectively navigate the difficult labor environment thus far. I'd like to conclude with a quick recap of our strategic initiatives and where our attention has been focused throughout fiscal 2022. It was on this call one year ago that we formally introduced our three areas of focus for Powell. One year later, I am very pleased with the progress we have made around each of these areas. Powell continues to develop and expand our established and reputable line of electrical automation solutions. This past year, we released several digital products that will help our customers safely and reliably control the operation of the breaker. Additionally, we recently released a new and innovative product to measure and control the operation of switchgear with Powell's first digital current measurement sensor. And we have taken our first steps to offer secure subscription based service contracts, helping our customers protect, monitor and control their high value assets and ensure peak performance. Our global services team is delivering strong results in line with our strategy. I'd like to take a moment to congratulate and thank all of our team and our service business. Their performance in the fourth quarter and for the entire year has been very strong. While there remains more work to be done, we have taken significant steps to expand Powell's value proposition beyond installation and commissioning of our electrical products and solutions. This past year, we have demonstrated our ability to offer increased value to our customers, providing value add engineering earlier in the project during the development phase of the power network solution. And we have demonstrated our ability to take an expanded scope of site services to help our clients more efficiently and cost effectively meet their schedule and project requirements.

Speaker 2: around the modification or repair of their electrical distribution systems. I am confident that our service strategy will continue to build on these initial successes and be a true differentiator for Powell and for our customers going forward as we expand our portfolio of value-added services. And finally, in addition to our digital products, our research and development teams have made good progress in our low and medium voltage product offerings. This past year, we have further expanded our low voltage flex gear product.

Speaker 3: with additional low voltage breaker offerings. Powell's FlexGear is the only ANSI offering that provides a common platform allowing our customers to use any commercially available low voltage air circuit breaker.

Speaker 4: Also notable this past year, our medium and high voltage bus team in Chicago led the adoption of our bus solutions to commercial markets.

Speaker 5: This is one of the contributing factors that led to Powell introducing the new commercial and other industrial sector noted earlier in my comments.

Speaker 6: And last, we welcome a new Vice President of Research and Development, Marshall Monet, Jr., joined Powell this past fall. Marshall brings a proven track record of over 30 years successfully mapping and developing products and solutions that help customers improve their operations.

Speaker 7: Dennis Thonsgaard, who has contributed an impressive 50 years of service with Powell, is transitioning from the R&D leadership role, a position he led for over 12 years, to the R&D leadership role, and is now the R&D leader in the R&D leadership role.

Speaker 8: to helping me further develop our organic and inorganic roadmaps in support of our growth strategies.

Speaker 9: Dennis is an invaluable part of Powell's success. He has held roles in operations and he led the development of what today is Powell's Global Service Organization.

Speaker 10: Overall, I am very excited about the path we are on and where Powell is positioned within the broader electrical distribution and management ecosystem.

Speaker 11: Our status as a leader in Engineer to Order, value-added solutions for complex electrical distribution applications, is ideally suited for a growing number of electrification requirements across the globe that is driving increased demand for power, often with new applications.

Speaker 12: With that, I'll turn the call over to Mike to provide more detail around our financial results.

Speaker 13: Thank you, Brett, and good morning, everyone.

Speaker 14: I'll begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2022 results.

Speaker 15: Revenues for the fourth fiscal quarter of 2022 increased by 26% to $163 million compared to last year's fourth quarter of $130 million.

Speaker 16: and were higher sequentially by 27 million as revenues increased across all of our market sectors on a sequential basis.

Speaker 17: Notably, we successfully executed a number of projects in the commercial and other industrial market sector this quarter, making accretive gains in markets where Powell has not historically focused.

Speaker 18: As Brett mentioned, as a result of the increasing activity across commercial and other industrial applications, we determined that it is appropriate to add an additional sector to our reporting.

Speaker 19: As such, a commercial and other industrial sector has been added to our traditionally reported sectors, which will encompass applications such as data centers, pulp and paper, and mining applications, among others.

Speaker 20: Growth in these markets is a core component of our strategic initiative.

Speaker 21: Net borders for the fourth fiscal quarter were $259 million, $138 million higher than the same period one year ago, on strong demand spanning across most of our core end markets.

Speaker 22: Our industrial end markets remain very active, specifically within the gas market, evidenced by securing a large LNG project in the quarter.

Speaker 23: Complementing the positive recovery of our core industrial end markets, we also continue to see positive commercial activity across all of our end markets.

Speaker 24: As a result of the strong orders in the quarter, our fourth quarter book to bill ratio was 1.6 times.

Speaker 25: The reported backlog at the end of our fiscal fourth quarter was a record high of $592 million.

Speaker 26: 177 million higher versus the end of fiscal 2021.

Speaker 27: The substantial increase in the order book was driven primarily by the strength across our oil and gas, utility, and commercial and other industrial end markets.

Speaker 28: Overall, we are very pleased with the Order's performance across all sectors in the quarter and the resulting backlog position as we enter our fiscal 2023.

Speaker 29: Compared to the fourth quarter of fiscal 2021, domestic revenues of $133 million increased by $38 million or 41%.

Speaker 30: while international revenues decreased by 15% to 30 million on the winding down of large customer projects in the Middle East and Asia.

Speaker 31: From a sector perspective, revenues from our core industrial sector increased by 4%.

Speaker 32: The utility sector was higher by 42% while the commercial and other industrial sector was higher by nearly three times versus the same period one year ago.

These sector increases were offset somewhat by traction, which was lowered by 18% versus the same period a year ago as we successfully wind down a large municipal project in Canada.

With respect to the year over year volume increase across our core industrial sector, this was driven by a 24% increase in oil and gas revenues, while petrochemical sector was lower by 37% versus the same period a year ago.

We reported $33 million of gross profit in the fiscal fourth quarter of 2022, which was higher by $11 million or 49% versus the same period in the prior year.

Gross profit as a percentage of revenues increased by 320 basis points to 20.6% of revenues in the fourth fiscal quarter compared to one year ago.

The higher margin rate was driven by an increase in services volume across the business.

coupled with a favorable mix of fast turn service work in the quarter, as well as broad-based project productivity and associated project closeouts.

Notably, the margin rate also benefited from the favorable closure of a long-standing prior year claim related to costs associated with a U.S.-based municipal project.

which generated $2.5 million of gross profit or an incremental 130 basis points to the margin rate in the quarter.

Selling, general, and administrative expenses increased by $4.5 million or 27% in the quarter versus the prior year attributable mainly to variable performance-based compensation.

SG&A expenses were $21 million in the fiscal fourth quarter or 13.2% of revenue compared to 13.1% of revenues a year ago on the higher volume in fiscal 2022.

Overall, the team remains diligent in managing overhead costs while continuing to focus on addressing the critical resource requirements necessary to fulfill the order book.

On a net reported basis, fiscal fourth quarter net income was $8.7 million, or 73 cents per diluted share, which included $2 million of non-operational income attributable to the previously mentioned prior year municipal project cost recovery.

generating 17 cents per diluted share.

We generated $24 million of free cash flow in the fiscal fourth quarter, driven by favorable project collections and strong working capital performance in the period.

CapEx spending during the quarter was $686,000.

Now, recapping our total year fiscal 22.

Revenues of $533 million increased by $62 million, or 13%, compared to the prior year.

Orders were $719 million, 78% higher versus fiscal 2021, led by the sustained recovery of our oil and gas endmarket, coupled with the continued market penetration in the utility sector and the incremental growth in the commercial and other industrial endmarkets.

Gross profit as a percentage of revenues was flat year over year at 16%, successfully offsetting the inflationary headwinds and supply chain challenges that we encountered throughout most of fiscal 2022. Selling, general, and administrative expenses were higher by $3.6 million.

We reported net income of $13.7 million or $1.15 per diluted share.

During fiscal 2022, we had three non-recurring events, two previously noted in the third fiscal quarter earnings call, and the municipal cost claim recovery impacting the fourth fiscal quarter, that when combined contributed to 80 cents per diluted share in fiscal 2022.

Total fiscal year 2022 free cash flow was a usage of $6 million versus a cash usage of $33 million in the prior year.

At the end of fiscal 2022, we had cash and short-term investments of $117 million, $17 million lower than our fiscal 2021 year-end position.

The company holds zero long-term debt.

As we look forward to Fiscal 2023, we are encouraged with the current commercial momentum across our core end markets and are optimistic that this will continue throughout Fiscal 2023.

Based upon our fiscal year end order book at $592 million, coupled with the strong commercial activity that we're presently experiencing, we anticipate solid revenue growth into fiscal 2023 versus the prior fiscal year.

Additionally, as a result of the pricing actions and cost discipline initiated throughout the past 12 to 18 months,

As well as the anticipated productivity that the operational teams are focused on, we expect continued improvement in project quality, resulting in increased profitability across the business in fiscal 2023.

Based upon these dynamics and accounting for the typical seasonality that we will experience during the first fiscal quarter of 2023, we expect a significantly improved total year outlook in terms of revenue and earnings versus fiscal 2022, excluding the non-recurring items that I mentioned previously.

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.

If you're using a speakerphone, please pick up your handset before pressing the keys.

To withdraw a question, please press star then 2.

At this time we will pause just momentarily to assemble the roster.

And our first question here will come from John Friendsrep with the Sidonian Company. Please go ahead.

Good morning Brett and Mike and thanks for taking the questions and congratulations on a great quarter.

Thanks, John .

I guess I want to start with some of the prepared remarks, Brett. You kind of talk about the 80 cents of one-time items. Kind of suggest that we should use as a starting point of 35 cents for fiscal 2022 as the number going into 2023.

Is that how we should look at it? And if so, you mentioned the seasonality in the business in the press release. Has the seasonality playing in Q1 versus Q4?

Thanks, John . Yeah, absolutely. That's how I would look at it. Underlying gross margins are still where our operational focus has been, always is, and will continue to be even more so heading into next year with the backlog to ensure we can continue to...

make incremental growth on those margins and improve the overall profitability of the base business.

The seasonality, it always hits us first quarter. We fight the two holiday periods.

just from a spin down, spin up time and managing through. So there'll be some of that as we kind of plow into the fiscal year, but then at this point we expect to recover in the Q2 and on throughout the rest of the fiscal year.

It seems like the services business was a sizable contributor to the profitability in the quarter. Can you talk a little bit about why that was the case, what percentage of revenue it was in the quarter, maybe relative to the third, any kind of context there would be helpful?

It was a very significant contributor to the year. I think two general themes. One, as we come out of the pandemic, just sort of the pent-up demand in aftermarket brownfield work that was not being done in 20 and 21. There was certainly some of that. That's the short cycle comments that both Mike and I alluded to.

And then there is the element of the strategic side, where the team did a nice job taking a risk approach to other projects out there to expand our services, both on the front end of the project as well as the back end of site services to prudently look at the jobs and make commercial tenders.

into these markets to test our strategies and to build capability into the team. And we're successful throughout the year. These jobs tend to be a little quicker on the cycle than a long burn capital project. Not always. Some of the service jobs are larger, they're a little longer, but definitely contributed to the success of the financial year.

Okay, and I hate to put you on the spot, but it looks like the adjusted gross margin this quarter was about 19.3%. You had a record backlog. I remember a time when 19-20% gross margin was eminently achievable.

Is this a run rate that you can maintain for the full year?

I can think of the headwinds, but there are not headwinds that kind of prevent that from materializing.

Yeah, no, I wouldn't sit here today and say it's a full year. You know, I'll call it a goal. But we're, you know, today, Powell that sits versus those years past, it's that theme of we got a lot more mouths to feed on our footprints than what we had 10 or 15 years ago.

We do have a sizable backlog and it is across all divisions, which is a nice power to have heading into the year, but our goal will be to increment from the underlying operational gross margin coming out of the year without the one times.

I think you hit it right on the head, the mix that we're experiencing over the last year and looking into fiscal 2023 is substantially different than you referred to prior periods back when oil and gas was really going.

It's a little different mix heading into 23.

Okay, I will get back to the queue guys. Thanks for taking my questions.

Our next question will come from John Bratz with Kansas City Capital. Please go ahead.

Morning Brett, morning Mike.

Good morning, John . I was wondering if you could add a little color to the LNG award. You know how big it might be, bigger than a breadbasket. And then maybe also maybe the sequencing of revenue and cash flows that might be associated with that project and also maybe the margin.

what we classically would call a mega project. So back in the days when the offshore market was screaming, we used to call that kind of the 30 to $50 million range. This is on the north side of that. And so it's a very complex project, a lot of challenges to it, which is where we're well built.

The burn rate on this will go two plus years.

There's a lot of...

When they get difficult, there's usually a lot of uncertainty in the back end of the project. This has a little bit starting off, but it's a job we know very well, high complexity, and we're pretty excited to have it. On the margin side, just general pricing comment I'd make is it is still competitive, but...

I think we've made some progress on price in the market throughout the entire fiscal year, but still cognizant that it's a competitive world. Generally, the larger the job, it draws more attention competitively. I think we've made some progress on price in the market throughout the fiscal year.

Okay, okay. You know, you've done LNG work before. Is this, the aspect of this project different than what you've done before?

No, I call them meat and potatoes, but that's a general statement. It's just the complexity of how the electrical distribution, not just the electrical design, but the mechanical design. These LNG facilities, they're being squeezed into small footprints. They're on the coast area, which have a lot of challenges mechanically on the building side.

When you combine the two together, John , it's just the engineering side of it, it is constant throughout the entire project. And given that we carry 10% of our employees, our engineers and designers, there's a lot of changes that happen. And we just do it really well, really fast and efficiently. And I don't think you're going to beat Paul in that model.

Okay, okay, good. And then lastly, can you talk a little bit about maybe the, if you're seeing.

or the prospects I should say for improvement on the international front. Obviously that's been geographically a weaker area.

might we see some improvement in 2023?

Yeah, Mike noted in his comments about sort of the winding down of a couple projects in Asia. I think we, you know, the end of

2021, there was a pause in market activity in terms of where we participate. There are some projects, I just did some touring this fall, traveling around, mostly in Asia, and then I've got a trip planned for the Middle East in the next year, so we see some things starting to spin back up.

So, going up on the LNG question, have you worked with that customer before?

Yes, we have. Okay, so you've done projects with them and you understand how?

I don't know if you can answer this, but...

looking out to fiscal 23 what percentage of capacity do you think you might be operating at?

You know your sales were close to a record and I know

You know you reduce some capacity you sold some operations, but you know What percentage of capacity do you think you might be operating at in fiscal 23?

John , the first question, first way I'd respond to your question is the growth...

the growth and the record backlog that we shared on the call today as a result of Q4, you're right to look at it, but it is much more broad-based than maybe what we've seen in the past brought up when we saw these sort of levels. So if you think about 12 and 13 as we were building Canada, you know, Canada is participating, and then the UK business. So everybody, it is spread out.

because these large projects tend to move around on the schedule. On average, I'd say we're somewhere in the...

to take the top side of that in the next couple years. Okay, so you've got enough manpower and infrastructure and material sourcing to handle all of this business. We do, I mean if it continues to grow on the pace it's at, I wouldn't say that we're, you know, we'll continue to have manpower challenges and but I think some of the changes in the macro side, the consumer side has slowed down this past summer. I've seen some indications from our operations, we've done a little bit better. You know, when we go out into the market and bring in different skill sets, whether it's in the factory leadership or even on the engineering side.

you know we're doing I think a little better overall there so as I look out you know and if we're successful at the same pace into the next two years wouldn't be without its challenges but I think I think we're well positioned to overcome it and really capitalize. That's helpful and I guess finally the new segment commercial and

Hi, John , this is Mike. It actually carves out from that bucket and segregates these new markets that we're seeing all this accretive growth in. So yes, it is a subset of that traditionally reported other bucket. Okay, good. And the new segment will be basically everything that you talked about a year ago in terms of electric automation, service expansion, all of that kind of thing.

It would be in there. This would be the other segment of specifics, sort of the end market segment. You know, we've always done work in pulp and paper. We've gotta make sure we have it right, and we do our best to be consistent and trust us.

done work in data centers, although sporadically, it just become more consistent over the last 18 months and started rising on the revenue side, so we felt it was prudent to carve it out in this segment.

Okay, good. Congratulations and best of luck.

Congratulations and best of luck. Thanks, Jeff. Thank you.

And our next question will come from Tom Spiro with Spiro Capital. Please go ahead.

Tom Siro, Siro Capital. Thanks for joining.

Hey Tom, how are you?

Fine, fine. Congratulations on a strong fourth quarter and on getting that LNG business. Good for you.

fourth quarter and on getting that LNG business. Good for you. Yeah, thank you.

Just one little housekeeping. Your utility business, what segment will that show up in? Is that going to be in the new segment or in an old segment?

your utility business, what segment will that show up in utility? Is that going to be in the new business, a new segment, or in an old segment? Where will that be reported?

That has been reported in its own sector and it will continue to be reported in the utility sector. No changes there.

Okay, great, thanks. R&D spending for the new year, do you think it's going to change much?

No

So I think heading into the year, you know, flattish up to up a little bit, but in line with what we've talked on our strategic plans and with with

adding to the team with Marshall and others. There's some work we've done this year to allocate that capital into longer term.

look at the market, you know, five, ten years out. We've made some moves this year on investment, and I think as Marshall comes on and the team spins up, I think in future years, we would anticipate increasing that, but not quite yet into next year.

What is the background of the new VP of R&D? Where does he come from?

Most recently, SNC Electric has also had... Started his career with Eaton and Schneider in his background, so really well rounded on the primary and as well as the secondary side of switchgear, which fits us perfectly.

That's great, that's great. You're, I guess, coming to the end of that large LNG project you won a couple of years ago. I wondered, number one, when you'll finish it up, and number two, how has it gone?

Number two, it's gone very well, I think, from all aspects. It hasn't been without its challenges. We knew heading into the project, I really give credit to the project team and the commercial team that secured the bid. They've done a great job from the outset of securing the job, identifying the risks, managing those risks through the project.

Certainly, staying very close with our client, both the engineering partner and the end client. I think all I can say is I'm very pleased with how it's executed. It still is somewhat ongoing, although it'll be tailing off as we get through both the bulk of 23 here. Thank you very much for watching.

I see. And earlier in this call you had a little discussion of the impacts on gross margin of a changing mix of business and I didn't really understand the point you were trying to make. Maybe you could take another go at it. But as your mix changes, some of these new lines of business grow, services and the technologies and stuff, how will that affect your margins?

Yeah, Tom, this is Mike. When you look at our mix, as you know the question that John brought up, you know back five, seven years ago when gross profits were in the high teens, that mix contained a lot of oil and gas work as Brett alluded to the oil and gas.

sectors now are just beginning to recover, but what we're seeing that's supplementing a lot of this volume is utility type of work, commercial and other industrial work, which typically doesn't carry the margins that the oil and gas industry has.

work did back five, seven years ago. So that was my comment on the mix when you look versus prior years. Right. Yeah. The complexity of those jobs from what Powell's built for in our 75 year history...

It's not to say they're easy, but they're just not as in-depth or complex with a lot of changes on loads, because you don't have all of the process changes that happen on an industrial facility. So, it's been a great build in our diversification last year, and we look to continue that, both in the market side as well as the development side.

higher or lower than your traditional oil and gas business.

Higher.

especially on the labor side, when you're bringing a lot of the talented labor to bear on a project both on the design side or site services, it tends to bring in a higher margin.

than some of the products.

And our next question will be a follow-up from John Friendsreb with Sidoti & Company. Please go ahead. If you have any questions, please feel free to contact me at Sidoti & Company.

Just a couple points here. I'm curious about the project that contributed $2.5 million to revenue. Was that a recent project? How old was the project? It was older? There wereift No one live in the Pit's

Yeah, John , this is a project that we executed, we actually won it, I think in 2013 or 14. It was executed over a number of years and Powell incurred costs via change orders. Thank you for your patience John .

several years ago and due to the uncertainty of recovering, the timing and the recovery of those costs, the costs flowed through the P&L but revenue was not...

was not recorded. Now in this last fiscal fourth quarter, that project was finalized by the ultimate end user and the general contractor and the amounts were defined and settled. And as a result, I'll recover.

the majority of the costs that we had incurred several years ago, and that's the $2.5 million uplift in margins this quarter.

All right, and Brett, you kind of referenced

You travel to Asia, you have a coming trip to the Middle East. I'm curious about the opportunity pipeline today versus say three months ago.

Is it still as robust? I mean are we looking at a

exit backlog in fiscal 2023 that's similar to the exit backlog in fiscal 2022 just your thoughts about what's out there relative to what you were seeing

Yeah, and already captures still pretty strong John

You know, hard to say what the exit backlog will be. I think the potential to have a strong backlog at the end of 23 is definitely there. The oil and gas side that has been building for the better part of 12 to 18 months, and as we shared, certainly very appreciative to have received the award in Q4, but the oil and gas part continues. There isn't just one project, there's a number of projects.

the utility cadence. We've talked about that for years, five, six years. We continue to have a very strong strategic focus, especially in our home countries of the US, Canada, and the UK. So I expect to continue there, incrementally gaining share where we can.

continue to execute and demonstrate to the utility customers that Powell is the best solution. And then in the broader markets that have kind of come up in the last 12 to 18 months, maybe a little bit more uncertainty in the latter part of the year, but as I sit here today, pretty robust activity.

So I think at least in the first half it will continue at a good clip.

Okay, great. Thanks for taking my questions. Congratulations again.

Thanks for taking my questions. Congratulations again.

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, Joe. Overall, we are pleased with our financial performance in the quarter and for the full year as our core end markets continue to improve.

We are seeing the early success.

the early successes of our growth initiatives, and are entering fiscal 2023 with very encouraging momentum.

I would like to thank our nearly 2,000 talented employees for their enthusiasm and exceptional service to our customers.

their strong focus on operational excellence.

safety and a commitment to improve combined with a can-do spirit gives me great confidence.

that Powell's future is very bright.

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 is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.