Q2 2024 Powell Industries Inc Earnings Call

Operator: Good day, and welcome to the Powell Industries fiscal second quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchtone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would like now to turn the conference over to Mr. Ryan Coleman with Investor Relations. Please go ahead.

Good day and welcome to the Powell Industries' fiscal second quarter 'twenty 'twenty four results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be.

Operator: An opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Mr. Ryan Coleman with Investor Relations. Please go ahead.

Ryan Coleman: Thank you and good morning everyone. Thank you for joining us on the Powell Industries conference call today to review fiscal year 2024 second quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO, and Mike Metcalf, Powell's President. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until May 8. The information on how to access the replay was provided in yesterday's earnings release.

Ryan Coleman: Thank you and good morning, everyone. Thank you for joining us for Powell Industries Conference call today to review fiscal year 2024 second quarter results with me on the call are Brett Cope Powell's, chairman and CEO and Mike Metcalf Powell's CFO.

Ryan Coleman: It 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 may eight the.

Ryan Coleman: The information on how to access the replay was provided in Yesterdays earnings release. Please note that this information reported on this call speaks only as of today may one 2024, 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.

Ryan Coleman: Please note that this information reported on this call applies only as of today, May 1st, 2024, 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 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 1995.

Ryan Coleman: 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 1995 investors are cautioned that such forward looking statements involve risks and uncertainties and that actual results may differ materially.

Ryan Coleman: 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 the Securities and Exchange Commission. With that, I'll turn the call over to Brett.

Ryan Coleman: Really 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.

Ryan Coleman: More information please refer to the company's filings with the Securities and Exchange Commission with that I'll turn the call over to Brett.

Brett: Thank you Brian and good.

Brett A. Cope: Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2024 second 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. Powell's second quarter financial results showed strong year-over-year growth supported by continued strength and healthy levels of project activity from our core industrial and markets, and complemented by impressive performances from both the utility and the commercial and other industrial sectors.

Brett A. Cope: Everyone. Thank.

Brett A. Cope: New orders in the quarter totaled $235 million, reflecting another strong quarter of bookings and in line with our expectations of a normalized but still elevated cadence of awards. Notably, there were no mega-projects included in our second quarter bookings.

Brett A. Cope: Thank you for joining us today to review policy fiscal 2024 second quarter results.

Brett A. Cope: Rather, the $235 million in orders is comprised of a strong volume of small and medium-sized awards that speak to our core competencies and are well-balanced across our market. Our revenue in the quarter grew 49% to $255 million, driven mainly by strong performance from our largest markets, oil and gas, and petrochemical, which grew 66% and 93%, respectively, compared to the same period of fiscal 2023. As our operations have ramped up to meet the demand of higher overall project volumes, we remain focused on project execution and operational efficiency.

Brett A. Cope: I'll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.

Brett A. Cope: Oh second quarter financial results showed strong year over year growth supported by continued strength in healthy levels of project activity from our core industrial end markets are complemented by impressive performances for both utility and commercial and other industrial sectors.

Michael W. Metcalf: New orders in the quarter totaled $235 million, reflecting another strong quarter of bookings and in line with our expectations of a normalized but still elevated cadence of awards.

Michael W. Metcalf: Notably there were no mega projects included in our second quarter bookings, rather the $235 million of orders is comprised of a strong volume of small and medium sized awards that speak to our core competencies and well balanced across our markets.

Brett A. Cope: Our revenue in the quarter grew 49% to $255 million.

Brett A. Cope: Driven mainly by strong performance from our largest markets oil and gas and petrochemical, which grew 66% and 93% respectively compared to the same period of fiscal 2023.

Brett A. Cope: As our operations have ramped to meet the demand of higher overall project volumes, we remain focused on project execution and operational efficiencies.

Brett A. Cope: Many of the initiatives and process improvements put into place during the lean quarters of the pandemic continue to work well, as we are benefiting today from improved and more efficient manufacturing operational processes. These streamlined operations also help to create additional capacity while also delivering attractive returns for our stakeholders. Our gross profit was very strong in the quarter, growing 88% versus the same period in the prior year, leading to a gross profit of 24.6% of revenue, or 510 basis points better than the prior year.

Brett A. Cope: Many of the initiatives and process improvements put into place during the linked quarters of the pandemic continued to work well as we are benefiting today from improved and more efficient manufacturing operational processes. These.

Brett A. Cope: The streamline operations also help to create additional capacity, while also delivering attractive returns for our stakeholders.

Brett A. Cope: Our gross profit was very strong in the quarter growing 88% versus the same period in the prior year.

Brett A. Cope: Leading to a gross profit of 24, 6% of revenue or 510 basis points better than the prior year.

Brett A. Cope: We are also benefiting from the quality of our backlog, as it carries a more favorable margin profile than that of recent years. This is mainly driven by a higher share of industrial projects where Powell's core expertise and competencies lie, and conversely, a more selective share of work which tends to carry a lower margin profile due to either the nature of how this type of work is awarded or content less favorable to our strength of handling complex, heavier engineering requirements.

Brett A. Cope: We are also benefiting from our quality of our backlog as it carries a more favorable margin profile than that of recent years.

Brett A. Cope: This is mainly driven by a higher share of industrial projects, where Polish core expertise and competencies lie and Conversely, a more selective share of work, which tends to carry a lower margin profile due to either the nature of how this type of work is awarded our content less favorable to our strength of handling complex heavier engineering requirements.

Brett A. Cope: <unk>.

Brett A. Cope: While we are, of course, always conscientious of how we utilize our resources to pursue and quote projects, Powell's focus on custom engineering to order solutions for complex projects means that we rarely aspire to win projects on price.

Brett A. Cope: While we are of course always conscientious how we utilize our resources to pursue and port projects Palace focus on custom engineered to order solutions for complex projects. It means that we rarely aspire to wind projects on price rather the value. We provide is our industry leading track record for both our product technology and our project expertise.

Brett A. Cope: Rather, the value we provide is our industry-leading track record for both our product technology and our project expertise, and that we deliver for our customers on every project. The strength of our engineering teams is equally important as it enables us to be closer to the customer throughout the project life cycle, allowing us to adapt quickly as project requirements, scope, and timing change while fostering healthy, long-term customer relationships. On the bottom line, we recorded net income of $33.5 million, or $2.75 per diluted share, which was roughly four times higher than the $8.5 million, or $0.70 per diluted share, in the year-ago period.

Brett A. Cope: <unk>.

Brett A. Cope: And that we deliver for our customers on every project.

Brett A. Cope: The strength of our engineering teams is equally important as it enables us to be closer to the customer throughout the project lifecycle, allowing us to adapt quickly as project requirements scope and timing change, while fostering healthy long term customer relationships.

Brett A. Cope: On the bottom line, we recorded net income of $33 $5 million or $2 75 per diluted share, which was roughly four times higher than the $8 5 million or <unk> 70 per diluted share in the year ago period.

Brett A. Cope: Our backlog remains near the highest in policy history.

Brett A. Cope: Our backlog remains near the highest in Powell's history and was roughly flat sequentially at $1.3 billion. Regarding our capacity initiatives, the expansion of our Houston facility on the Gulf Coast is complete, and that expansion is providing us with incremental fabrication and integration support for large power control rooms, especially for projects that support delivery and transport by water. In addition, the expansion of our electrical products factory in Houston is progressing as planned.

Brett A. Cope: Roughly flat sequentially at $1 3 billion.

Brett A. Cope: Regarding our capacity initiatives the expansion of our Houston facility on the Gulf Coast is complete and that expansion is providing us with incremental fabrication and integration support for large power control rooms.

Brett A. Cope: Especially for projects that support delivery and transport by water access.

Brett A. Cope: In addition, the expansion of our electrical products factory in Houston is progressing as planned this $11 million expansion is expected to be completed in the middle of fiscal 2025 and coincides with our initiative to release new products in support of our future growth across the customers and markets we serve.

Brett A. Cope: This $11 million expansion is expected to be completed in the middle of fiscal 2025 and coincides with our initiative to release new products in support of our future growth across the customers and markets we serve. We remain comfortable with our current staffing levels and are confident that we have the right people in place to meet the demanding project schedules of our backlog. However, as we look out over a multi-year period and evaluate the markets we serve, finding talented engineers to help us increase our throughput will remain a critical area of focus for us.

Brett A. Cope: We remain comfortable with our current staffing levels and are confident that we have the right people in place to meet the demanding project schedules of our backlog. However, as we look out over a multiyear period and evaluate the markets. We serve finding talented engineers to help us increase our throughput will remain a critical area of focus for us.

Brett A. Cope: Our HR team continues to do a terrific job finding great people to join the Powell team, as well as developing creative staffing plans to improve efficiency and help us service a backlog that has tripled in just two years.

Brett A. Cope: Our team continues to do a terrific job finding great people to join the policy as well as developing creative staffing plans to improve efficiency and help US service our backlog. It has tripled in just two years.

Brett A. Cope: Looking forward, our expectations for project activity and new orders are relatively unchanged. Overall, quoting activity remains very healthy and balanced within the oil and gas LNG market. Fundamentals of the U.S. natural gas market remain favorable and support many global economic and environmental goals over a long-term horizon. Natural gas price spreads across global markets remain conducive to U.S. export activity. That said, it is our assessment that the comments earlier this year from the U.S. Department of Energy regarding U.S. LNG export permitting have had a slight dampening effect on new projects coming to market for bid.

Brett A. Cope: Looking forward our expectations for project activity and new orders are relatively unchanged overall quoting activity remains very healthy and balanced.

Brett A. Cope: Within the oil and gas LNG market the fundamentals of the U S natural gas market remain favorable and support many global economic and environmental goals over a long term horizon.

Brett A. Cope: Natural gas price spreads across global markets remained conducive to U S export activity.

Brett A. Cope: That said it is our assessment that the comments earlier this year from the U S Department of energy regarding U S. O U S. LNG export permitting have had a slight dampening effect on new projects coming to market forbid. These.

Brett A. Cope: These projects are likely being pushed out to the right and have not yet impacted Powell's long-term planning for this market. The fundamentals for our oil and gas and petrochemical markets continue to underwrite our expectation for continued strength for these sectors, which also includes energy transition projects such as biofuels, carbon capture, and hydrogen. Activity within our commercial and other industrial market also remains attractive. Revenue in this segment grew 57 percent.

Brett A. Cope: These projects are likely to be likely being pushed out to the right and have not yet impacted power's long term planning for this market.

Brett A. Cope: The fundamentals for our oil and gas and petrochemical markets continue to underwrite our expectation for continued strength for these sectors, which also includes energy transition projects projects, such as Biofuels carbon capture and hydrogen.

Brett A. Cope: Activity within our commercial and other industrial market also remains attractive revenue.

Brett A. Cope: Revenue in this segment grew 57% this quarter.

Brett A. Cope: Over the past several quarters the growth in this sector has been driven by our growing presence in the data center market and has mostly been driven by a limited amount of the total value that we can offer.

Brett A. Cope: Over the past several quarters, growth in this sector has been driven by our growing presence in the data center market and has mostly been driven by a limited amount of the total value that we can offer. We believe that the strong growth that we have seen so far in this fast-growing market for Powell has greater potential as we continue to qualify more of our products and services for the future of this important end market.

Brett A. Cope: We believe that the strong growth that we've seen so far in this fast growing market for Pollo has a larger potential as we continue to qualify more of our products and services for the future of this important end market.

Brett A. Cope: We have primarily served the outside connection of the data center to the grid and see the potential for further penetration within the four walls of the data center, where Powell can provide increased value. In addition, sales to data center customers have generally been smaller in scale and focused on individual products.

Brett A. Cope: We are primarily serve the outside connection of the datacenter to the grid and see the potential for further penetration within the four walls of the data center, where Paul can provide increased value.

Brett A. Cope: In addition.

Brett A. Cope: Sales to data center customers have generally been smaller in scale and focused on individual products. However, as data centers grow in both physical size and computing power. The electrical energy demanded by these facilities will only grow in scale.

Brett A. Cope: However, as data centers grow in both physical size and computing power, the electrical energy demanded by these facilities will only grow in scale. As a result, the power solutions required by data centers will also grow in sophistication and require companies like Powell to build customized and fully integrated solutions within a single power control room to ensure the reliability and uptime performance of the servers to store and secure data. We are prepared for this future and are building relationships with both hyperscalers as well as co-locators to better understand the power demands of these facilities to deliver Powell's engineer-to-order solutions for these customers.

Brett A. Cope: As a result, the power solutions required by data centers will also grow in sophistication and require companies like Paul to build customized and fully integrated solutions within a single power control room to ensure the reliability and uptime performance of the servers to store and secure the data.

Brett A. Cope: We are prepared for this future and are building relationships with both hyperscale as well as co locators to better understand the power demands these facilities to deliver power engineered to order solutions for these customers.

Brett A. Cope: Lastly, the outlook for our utility market is among the most positive in recent years. Powell has grown to become a leading provider of utility distribution subsidies. These types of projects remain core to our results in this market, but recently, we have seen the return of new generation. Helped by increasing electrical power demands, such as data centers, it is clear that overall power generation capacity across the U.S. must grow in the coming years. We are optimistic that we are beginning to see the initial stages of an increase in utility projects to meet this expected demand.

Brett A. Cope: Lastly, the outlook for our utility market is among the most positive in recent years.

Brett A. Cope: <unk> has grown to become a leading provider of utility distribution Substations. These types of projects remain core to our results in this market, but recently, we have seen the return of new generation work.

Brett A. Cope: By the increasing electrical power demands such as data centers. It is clear that overall power generation capacity across the U S must grow in the coming years.

Brett A. Cope: We are optimistic that we are beginning to see the initial stages of an increase in utility projects to meet this expected demand.

Brett A. Cope: The quality of projects we are seeing in this market remains favorable, as does our ability to secure new orders on the projects we produce. To wrap up, we are pleased with our financial performance in the first half of our fiscal 2024, and our outlook for each of the markets we serve remains favorable. We benefit from a strong balance sheet and a $1.3 billion backlog that we believe will sustain our profitability through fiscal 2024 and into 2025.

Brett A. Cope: Quality of projects, we are seeing in this market remain favorable as does our ability to secure new orders on the projects we pursue.

Brett A. Cope: To wrap up we are pleased with our financial performance in the first half of our fiscal 2024 and our outlook for each of the markets. We serve remains favorable we benefit from a strong balance sheet and a $1 $3 billion backlog that we believe will sustain our profitability through fiscal 2024 and in to 2025.

Brett A. Cope: Meanwhile, our near and medium term priorities remain unchanged. We are focused on growing our electrical automation platform expanding our services franchise.

Brett A. Cope: Meanwhile, our near and medium-term priorities remain unchanged. We are focused on growing our electrical automation platform, expanding our services franchise, and diversifying and expanding our electrical products and solutions portfolio. We remain committed to these initiatives and are pleased with the progress we are making in each of these areas. With that, I'd like to turn the call over to Mike to walk us through our financial results.

Mike: And diversifying and expanding our electrical products and solutions portfolio we.

Mike: We remain committed to these initiatives and are pleased with the progress we are making in each of these carriers.

Brett A. Cope: With that I'd like to turn the call over to Mike to walk us through our financial results in greater detail.

Mike: Thank you Brett and good morning, everyone.

Michael W. Metcalf: Thank you, Brett, and good morning, everyone. In the second quarter of fiscal 2024, we reported total revenue of $255 million compared to $171 million, or 49% higher versus the same period in fiscal 2023. New orders booked in the second fiscal quarter of 2024 were $235 million, which was 54% lower than the same period one year ago on a difficult comparison, as the prior period included two megaproject bookings. As we focus on diversifying our project backlog, we continue to experience positive momentum in new bookings across both the electric utility sector and the commercial and other industrial sector, which are both higher sequentially by 61% and 3%, respectively.

Mike: In the second quarter of fiscal 2024, we reported total revenue of $255 million compared to $171 million or 49% higher versus the same period in fiscal 2023.

Michael W. Metcalf: New orders booked in the second fiscal quarter of 2024 or $235 million, which was 54% lower than the same period, one year ago and a difficult comparison as the prior period included two Mega project bookings.

Michael W. Metcalf: As we focus on diversifying our project backlog, we continue to experience positive momentum in new bookings across both the electric utility sector and the commercial and other industrial sector, which are both higher sequentially by 61% and 3% respectively.

Michael W. Metcalf: With these end markets contributing to the solid order activity in addition to the sustained commercial activity in our core industrial end markets, they combine to generate a 0.9 times book-to-bill ratio in the current quarter, which results in the fiscal second quarter ending backlog at 1.3 billion dollars.

Michael W. Metcalf: With these end markets contributing to the solid order activity. In addition to the sustained commercial activity in our core industrial end markets. They combined to generate a 0.9 times book to Bill ratio in the current quarter, which results in the fiscal second quarter ending backlog at one 3 billion.

Michael W. Metcalf: $255 million higher versus one year ago, and $23 million lower sequentially.

Michael W. Metcalf: $255 million higher versus one year ago and $23 million lower sequentially. Compared to the second quarter of fiscal 2023, domestic revenues improved by 62% to $217 million, while international revenues were 2% higher, driven predominantly by increased project volume at our Canadian facilities. In total, international revenues were up by $1 million to $38 million in the second fiscal quarter. From a market sector perspective, revenues across our oil and gas and petrochemical sectors continued their positive momentum.

Michael W. Metcalf: Compared to the second quarter of fiscal 2023 domestic revenues improved by 62% to $217 million, while international revenues were 2% higher driven predominantly by increased project volume at our Canadian facility.

Michael W. Metcalf: In total international revenues were up by $1 million to $38 million in the second fiscal quarter.

Michael W. Metcalf: The oil and gas sector was higher by 66%, while the petrochemical sector nearly doubled, higher by 93%. In addition to the continued year-over-year growth in these sectors, we also experienced solid growth in both the electrical utility and commercial and other industrial market sectors, increasing by 11 percent and 57 percent, respectively, reflecting our ongoing focus to grow in tangential markets outside of our core industrial end market. The light rail traction power sector was lower by 38% as we continue to be very selective in this market.

Michael W. Metcalf: From a market sector perspective versus the second quarter of fiscal 2023 revenues across our oil and gas and petrochemical sectors continued their positive momentum.

Michael W. Metcalf: The oil and gas sector was higher by 66%, while the petrochemical sector nearly doubled higher by 93%.

Michael W. Metcalf: In addition to the continued year over year growth in these sectors. We also experienced solid growth in both the electrical utility and commercial and other industrial market sectors, increasing by 11% and 57% respectively.

Michael W. Metcalf: Reflecting our ongoing focus to grow in tangential markets outside of our core industrial end markets.

Michael W. Metcalf: The light rail traction power sector was lower by 38% as we continue to be very selective in this market sector.

Michael W. Metcalf: Yeah.

Michael W. Metcalf: Gross profit increased by $29 million to $63 million in the second fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue increased by 510 basis points to 24.6% versus the same period a year ago and was 25 basis points lower sequentially. The margin rates exiting backlog continue to benefit from favorable volume leverage and solid operational execution across all of our manufacturing facilities. There has been no change from our last update in our gross profit percentage projections in the low to mid-twenties throughout fiscal 2020.

Michael W. Metcalf: Gross profit increased by 29 million to $63 million in the second fiscal quarter versus the same period, one year ago.

Michael W. Metcalf: Gross profit as a percentage of revenue increased by 510 basis points to 24, 6% versus the same period, a year ago and was 25 basis points lower sequentially.

Michael W. Metcalf: The margin rates exiting backlog continue to benefit from the favorable volume leverage and solid operational execution across all of our manufacturing facilities.

Michael W. Metcalf: There is no change from our last update in our gross profit percentage projections in the low to mid twenties throughout fiscal 2024.

Michael W. Metcalf: Selling, general, and administrative expenses were $21 million in the current period, lower by $1 million on a lower level of variable performance-based compensation versus the same period one year ago. SG&A, as a percentage of revenue, decreased 450 basis points to 8.2% in the current fiscal quarter on the higher revenue base in Diligent Overhead Management.

Michael W. Metcalf: Selling general and administrative expenses were $21 million in the current period lower by $1 million on a lower level of variable performance based compensation versus the same period, one year ago.

Michael W. Metcalf: SG&A as a percentage of revenue decreased 450 basis points to eight 2% in the current fiscal quarter on the higher revenue base and diligent overhead management.

Michael W. Metcalf: In the second quarter of fiscal 2024, we reported net income of $33 $5 million generating $2.75 per diluted share compared to net income of $8 $5 million or <unk> 70 per diluted share in the second quarter of fiscal <unk>.

Michael W. Metcalf: In the second quarter of fiscal 2024, we reported net income of $33.5 million, generating $2.75 per diluted share, compared to net income of $8.5 million, or $0.70 per diluted share, in the second quarter of fiscal 2023. During the second quarter of fiscal 2024, we generated $17 million of operating cash flow, driven by higher earnings generated in the second quarter, partially offset by a negative working capital impact as we allocate capital to fund projects in the order.

Michael W. Metcalf: 23.

Michael W. Metcalf: During the second quarter of fiscal 2024, we generated $17 million of operating cash flow driven by higher earnings generated in the second quarter, partially offset by a negative working capital impact as we allocate capital to fund projects and the order book.

Michael W. Metcalf: Investments in property, plant, and equipment in the fiscal second quarter totaled $900,000. At March 31st, 2024, we had cash and short-term investments of $365 million, compared to $279 million at September 30, 2023, and $355 million at December 31, 2023. The company does not hold any debt.

Michael W. Metcalf: Investments in property plant and equipment in the fiscal second quarter totaled $900000.

Michael W. Metcalf: At March 31, 2024, we had cash and short term investments of $365 million compared to $279 million at September 32023, and $355 million at December 31, 2023.

Michael W. Metcalf: The company does not hold any debt.

Michael W. Metcalf: As we look forward, we are optimistic that our strategic focus to grow in tangential end markets combined with the sustained strength across our core industrial end markets will continue throughout fiscal 2024. We are cognizant, however, of the recent uncertainties in the macro environment that may have a timing impact on near-term LNG market activity, notwithstanding this minor disruption from a commercial perspective. Both the sustained level of market activity across our other end markets, as well as the quality and level of our backlog, position the business favorably to sustain the momentum that we experienced in the first half of fiscal 2024 and continue our solid financial performance throughout the remainder of this fiscal year. At this point, we'll be happy to answer your questions.

Michael W. Metcalf: As we look forward, we are optimistic that our strategic focus to grow in tangential end markets combined with the sustained strength across our core industrial end markets will continue throughout fiscal 2024.

Michael W. Metcalf: We are cognizant, however of the recent uncertainties in the macro environment that may have a timing impact on near term LNG market activity.

Michael W. Metcalf: Notwithstanding this minor disruption from a commercial perspective, both the sustained level of market activity across our other end markets as well as the quality and level of our backlog positions the business favorably to sustain the momentum that we experienced in the first half of fiscal 2024 and continue.

Michael W. Metcalf: Our solid financial performance throughout the remainder of this fiscal year.

Michael W. Metcalf: At this point, we'll be happy to answer your questions.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then one, on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw it, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Franzreb of the Sidotian Company.

Operator: Anytime your question has been addressed and you would like to withdraw it. Please press Star then two at this time, we will pause momentarily to assemble our roster.

John Edward Franzreb: Our first question comes from John friend Thread of Sidoti <unk> Company. Please go ahead.

John Edward Franzreb: Good morning, Brett and Mike, and congratulations on another stellar quarter. Thank you, John.

John Edward Franzreb: Good morning, Brian Mike and congratulations on another solid quarter.

John Edward Franzreb: Good morning, John.

John Edward Franzreb: I'd like to start, I guess, with the top line, because that surprised me the most, personally. Last quarter, you kind of referenced that you were running at full capacity but were still able to generate really strong revenue gains in the quarter. I'm curious, what should we think about that? Was there anything unusual as far as revenue recognition is concerned? Is that a sustainable level? Can you just kind of walk us through how, at full capacity, you can generate that kind of energy?

John Edward Franzreb: I'd like to start I guess with the top line because that surprised me the most personally.

John Edward Franzreb: Last quarter, you kind of referenced you were running at full capacity, but we're still able to generate.

John Edward Franzreb: Really strong revenue gains in the quarter I'm curious how should we think about that was there anything unusual as far as the revenue recognition.

John Edward Franzreb: Is that a sustainable level can you just kind of walk us through how at full capacity can generate that kind of at that size of.

John Edward Franzreb: Right it environment.

Brett A. Cope: John, it's Brett. I'll start, and I'll ask Mike to jump in here too.

John Edward Franzreb: John It's Brett I'll start and I'll ask Mike to jump in here too.

Brett: During the quarter.

Brett A. Cope: During the quarter, it, About midway through the quarter, it did catch us a little surprised, too. It's a little lumpy as we look at all the things we're buying. So when we looked at the results on the revenue side, there was a fair amount of large buyouts. And the way the POC works for us, it sort of jumped up a little bit. So, looking at the back half of the year... I'm going to ask Mike to jump in here, but I don't think that level that we just saw has potential. It just kind of depends on timing as the schedules move around, but it was a little bit higher than we expected as we went into the quarter. Yeah, and John, this is Mike. Good morning.

Brett: About midway through the quarter it did catch us a little surprise to it's a little lumpy as we look at all the things we're buying so there when we looked at the results on the revenue side. There was a fair amount of large buyout and the way the POC works for us it sort of jumped up a little bit.

Mike: So looking at the back half of the year.

Brett A. Cope: Hum.

Brett A. Cope: I'm going to ask Mike to jump in here, but I don't I don't stay at that level that we just saw it.

Mike: Its potential just kind of depends on timing.

Brett A. Cope: Schedules move around but it was a little bit higher than we expected as we went into the quarter, Yes, and John This is Mike good morning.

Michael W. Metcalf: To follow on Brett's comments, you know, the major buyout in the projects business does introduce some choppiness across the quarterly landscapes for sure, but as we look at our backlog and we profile it out the next 12 months, typically it is between 50 and 60% convertible over the next 12 months, and that, you know, that will vary very slightly given how the major buyout falls, but no major changes from what we communicated last quarter in our total top line expectations, and the like.

Mike: To follow on Nebraska comments, you know the <unk>.

Michael W. Metcalf: Major buyout in the projects business does introduce some choppiness across the quarterly landscapes for sure, but as you know as we look at our backlog and we profiled it out. The next 12 months typically it is between 50 and 60% convertible over the next 12 months.

Michael W. Metcalf: And that that will that will very very slightly given how the major biopharma, but.

Michael W. Metcalf: No no major changes from from what we communicated last quarter and our total our total top line expectations.

Michael W. Metcalf: Yeah.

Michael W. Metcalf: Does that suggest that normal seasonality will be limited.

Michael W. Metcalf: Does that suggest that normal seasonality will be limited? We won't see the big bump, maybe, in revenue we typically see in the fourth quarter, and maybe we should think about it a little bit differently?

Michael W. Metcalf: Don't see the big bump maybe revenue, we typically see in the fourth quarter and maybe you should think about it a little bit flatter.

Michael W. Metcalf: I, you know, I think the delta between the 2Q, 3Q cadence and the 4Q cadence probably will be less than it normally is, but I still think, traditionally, the fourth quarter is usually a seasonally heavier quarter from a fiscal standpoint, fiscal year standpoint, as we profile the year.

Michael W. Metcalf: I you know I think the.

Michael W. Metcalf: The delta between the two Q3 Q cadence in the <unk> cadence probably will be less than it normally is but I still think traditionally fourth quarter is usually a seasonally heavier quarter from a fiscal standpoint fiscal year standpoint.

Michael W. Metcalf: As we as we profile of the year.

Brett A. Cope: And you maintained your gross margin expectations of low to mid-20s. What are the limits to a better gross margin profile that you're seeing?

Michael W. Metcalf: Understood.

Michael W. Metcalf: You maintained your gross margin expectations.

Brett A. Cope: Mid twenties.

Brett A. Cope: <unk>.

Brett A. Cope: What are the limits to two.

Brett A. Cope: A better gross margin profile.

Brett A. Cope: Are you seeing.

Brett A. Cope: Yeah.

Brett A. Cope: Well, one of the biggest contributors has been the leverage, and being this ramped up, kind of for your earlier question, I think that is one of the limiting factors, because we're kind of butting up against capacities. We're eking out that leverage.

Speaker Change: Well one of the biggest contributor has been has been the leverage and being this ramped up kind of for your earlier question.

Brett A. Cope: I think that is one of the limiting factors as we're kind of budding up against capacities, there's eating out.

Brett A. Cope: That leverage we're kind of down to cost management, and we've kind of echoed that throughout the organization on our operational reviews of spring.

Brett A. Cope: We're kind of down to cost management, and we've kind of echoed that throughout the organization in our operational reviews this spring, that the incrementals can come on the cost side. We're always cognizant on the employee side, making sure we're getting good quality folks on the team and supporting them as best we can. I think at this point forward, our best avenue forward is maintaining productivity and watching our cost side.

Brett A. Cope: The incrementals can come on the cost side.

Brett A. Cope: We're always cognizant of on the employee side, making sure we're getting good quality folks.

Brett A. Cope: On the team and supporting them as best we can but I think at this point forward our best Avenue forward is maintaining productivity and.

Brett A. Cope: And watching our cost side.

John Edward Franzreb: Okay, I guess one last question; I'll get back in the queue. The cash bill has been sizable. I mean, historically, when you had good revenues, you know, you had working capital outflows. I haven't seen the cash flow statement yet, but that doesn't seem to be the case. Can you talk about how you should think about cash usage as jobs ramp up? And also your priorities for excess cash. Has the board addressed maybe a potential special dividend or something along those lines?

Speaker Change: Okay, I guess, one last question I'll get back in queue.

John Edward Franzreb: The cash build has been sizable I mean, historically when you had good revenues.

John Edward Franzreb: Working cap at capital outflows.

John Edward Franzreb: I haven't seen the cash flow statement, yet, but it doesn't seem to be the case.

John Edward Franzreb: Can you talk about how we should think about cash usage as jobs wrap up.

John Edward Franzreb: And also your priorities for excess cash.

John Edward Franzreb: Has the board address maybe a potential special dividend something along those lines.

Michael W. Metcalf: Okay. Yeah, John. I'll start, and then Brett can chime in here.

Speaker Change: Okay, Yeah, Yeah, John I'll start and then.

Michael W. Metcalf: Red can chime in here first.

Michael W. Metcalf: First, you know, as we sit here today, the $365 million of cash marketable, market securities we feel has, in large part, plateaued. We consumed roughly $20 million of capital, the fund's working capital, this quarter. The offset to that was replenishment with the balance of new orders and that orders came in backlog with the associated advance payments. So, you know, we anticipate as we look forward, given the healthy and normalized booking cadence, providing cash inflows, this should, the cash balance should maintain about where it is, maybe slightly recede as we fund working capital and capex requirements in the second half.

Speaker Change: As we sit here today, the $365 million of cash America.

Michael W. Metcalf: Securities We feel is in large part plateaued.

Michael W. Metcalf: We consumed roughly $20 million of.

Michael W. Metcalf: Of capital to fund working capital this quarter.

Michael W. Metcalf: The offset to that was replenishment with the balance of new orders and the orders cadence in backlog and the associated advanced payments. So we you know we anticipate as we look forward given the healthy normalized booking cadence provided cash inflows.

Michael W. Metcalf: This should the cash balance should maintain about where it is maybe slightly recede as we as we fund working capital and Capex requirements in the second half.

Brett A. Cope: And then on the uses of capital in the future, John, you know, in the prepared comments kind of made an update on the $11 million expansion. There are some other things we're looking for to tweak capacities as we go out through the rest of the fiscal and calendar year. Nothing to share today, nothing that would be above what we've already done, got on the books for plans, but there are... Discussions about, you know, different facilities and what we can do.

Speaker Change: And then on the uses of capital in the future John.

Brett A. Cope: Prepared comments kind of made an update on the $11 million expansion.

Brett A. Cope: There are some other things we're looking for tweaking capacities as we go out through the rest of the fiscal and calendar year nothing to share today, nothing that would be above what we've we've already.

Brett A. Cope: Got on the books for plans, but there are.

Brett A. Cope: Discussions about different facilities and what can we do.

Brett A. Cope: What's sustainable in the markets and where we're going with our product and strategy? So there are a few things that we're looking at that I think in subsequent quarters we'll be reporting on, and then back to just the inorganic funnel, you know that that continues in earnest Mike. I'd management team the board again. Nothing immediate this quarter to share, but it continues to become a bigger part of the time Mike and I are spending year over year, and I'm pretty excited by what the next couple of years have in store for us.

Brett A. Cope: It is sustainable in the markets and where we're going with our product and strategy. So there are a few things that we're looking at that I think in subsequent quarters will be reporting on and then back to just the inorganic funnel.

Brett A. Cope: It continues in earnest, Mike I'd management team the board again, nothing immediate this quarter to share, but it continues to become.

Brett A. Cope: A bigger part of the time, Mike and I are spending over year over year and.

Brett A. Cope: Hum.

Brett A. Cope: Pretty excited by what the next couple of years has in store for us there.

Speaker Change: Great. Thanks, Mark we've got paid and I'll get back into queue.

Brett A. Cope: Great. Thanks, Brett, for the update. I'll get back into queue.

Brett A. Cope: Yes.

Operator: As a reminder, if you have a question, please press star then 1. Our next question comes from John Braatz of Kansas City Capitol. Please go ahead.

Brett A. Cope: As a reminder, if you have a question. Please press Star then one our next question comes from Jon Braatz of Kansas City Capital. Please go ahead, good morning brought Martin Mike.

Jonathan Paul Braatz: Good morning, Brett. Good morning, Mike. Back to the revenue side of the business, Brett and Mike. What are you seeing in terms of sort of the quarterly book-to-burn numbers? We've talked about this in the past, Mike. Has that accelerated? Is that, you know, more than what is typically the case?

Jonathan Paul Braatz: Good morning.

Jonathan Paul Braatz: After the revenue side of the business brought in Mike.

Jonathan Paul Braatz: You know what are you seeing in terms of sort of the quarterly book to burn numbers, we've talked about this in the past Mike but.

Jonathan Paul Braatz: Has that accelerated is that you know more than what is typically the case.

Michael W. Metcalf: That's been pretty static, John, over the past several quarters, and we typically run $30 to $40 million a quarter of book-to-bill on top of the traditional backlog burn. So, no, that's been pretty stable.

Jonathan Paul Braatz: That's been pretty static John over the past several quarters, and we typically run $30 million to $40 million a quarter of book to Bill on top of that.

Michael W. Metcalf: Sure.

Michael W. Metcalf: Log burn so now that's been pretty stable.

Jonathan Paul Braatz: Okay, okay, very good. And pricing, when we look at pricing throughout the quarter?

Michael W. Metcalf: Okay, Okay, very good and pricing.

Jonathan Paul Braatz: When we look at pricing throughout the quarter.

Jonathan Paul Braatz: Any benefit from pricing.

Brett A. Cope: I've been pretty flat for a couple quarters now. There's always some opportunity there, but schedule still dictates overall, I'd say, on competition and where we're at in the market. But pricing has become gradually more of a factor as, not so much for Powell, but the engineering components that still dominate most of what we compete on when we're out in the market. It's improved, and so with that, it has settled the pricing market a little bit. It's not eroded, but I don't think it's going to be much more attractive.

Jonathan Paul Braatz: Nothing pretty been pretty flat for a couple of quarters now.

Brett A. Cope: There's always some opportunity there but.

Brett A. Cope: Schedule still dictates overall, I'd say on competition and where we're at in the market, but pricing has become gradually more of a factor as not so much for power, but the engineered components is still throttle most of what we compete on and were out in the market.

Brett A. Cope: It's it's got it has improved and so with that <unk> settled the pricing market a little bit it's not eroded, but I don't I don't think it's going to be much more.

Jonathan Paul Braatz: Okay, Brett. Most of the strength has been from a geographical standpoint in the U.S. Anything you're seeing on the international front that suggests that we might see some stronger days ahead? Yeah, it's good.

Brett A. Cope: Okay, but the most of the strength has been from a geographical standpoint in the U S. Any.

Brett: Anything you're seeing on the international front that suggests that we.

Brett: We might see some stronger days ahead.

Brett A. Cope: We were just in the UK, you know, where we have the Bowen factory. We compete in IEC, also doing very well, by the way. They're having one of their best years in many years. But we were talking internationally; we're seeing some resurgence of potential in the Middle East. It's been a little white there for a couple years, so we see some potential growing for international work and also some work in Africa that's pretty interesting to us.

Jonathan Paul Braatz: Yes.

Brett: In the U K.

Brett A. Cope: We have the <unk> factory, we compete AUC also doing very well by the way they are having one.

Brett A. Cope: Their best years and in many years.

Brett A. Cope: But we were talking internationally, we're seeing some resurgence of potential in the middle East it's been a little a little light there for a couple of years. So we see some potential growing.

Brett A. Cope: For International and also some work in Africa, that's pretty interesting to US we have pretty good base of installed base from north of Africa around mostly to the.

Brett A. Cope: We have a pretty good base of installed bases from the north of Africa around mostly to the west side of Africa, and we're seeing some brownfield work resurge that has got our interest. So yeah, I feel pretty good about that for next year.

Brett A. Cope: West side of Africa, and were seeing some brownfield work research that as it's got our interest so I feel pretty good about that for next year. Okay. And then last Bret you spoke a little bit about the data center market and getting inside the four walls of a data center as opposed to outside and can you talk.

Jonathan Paul Braatz: Okay, and last, Brett, you spoke a little bit about the data center market and getting inside the four walls of a data center as opposed to outside, and can you talk a little bit about the process of getting inside the four walls, what the opportunity size might be, what the potential might be, and you know, where you see it going from here.

Jonathan Paul Braatz: A little bit about the process of getting into salt into the four walls. What this opportunity size might be what the potential might be in and you know where you see it where do you see it going from from here.

Brett A. Cope: Sure, so when you get inside the four walls, you're stepping down on the electrical line into lower voltages. And we today could compete, but we're not optimized to compete in that. And it's, of course, a space that's guarded pretty strongly by some very large multinational competitors. But as we've got a foothold now with a lot of these folks over the last three or four years, we're having very good substantive discussions about, you know, what are their designs. Do they want a fixed mount breaker or a withdrawal breaker?

Jonathan Paul Braatz: Sure.

Jonathan Paul Braatz: So.

Brett A. Cope: When you get inside the four walls youre stepping down on the on the electrical one line into lower voltages and week to date could compete but were not optimized to compete in that and it's a core space that started pretty strongly by some very large multinational competitors, but as we've got a foothold now with a lot of these folks over the last three.

Brett A. Cope: For years, we're having very good substantive discussion about.

Brett A. Cope: What are their designs do they want a fixed mount breaker of withdrawal breaker that dictates a little bit how we compete but it also is giving us a lot of ideation of discussion about the R&D side, what can we do to our products to make them more competitive to provide optionality to our client to go with Paul on a wider wider scale of products and services.

Brett A. Cope: That dictates a little bit how we compete, but it also gives us a lot of ideation and discussion about the R&D side. What can we do with our products to make them more competitive, to provide optionality for our client, to go with Powell on a wider scale of products and services? So it's a little bit of a process on the AVL, the approved vendor list, but it's bidirectional. So we definitely have to do some things to improve the product.

Brett A. Cope: So it's a little bit of.

Brett A. Cope: Process on the ABL the approved vendor list.

Brett A. Cope: It's bidirectional so we definitely have to do some things to it.

Brett A. Cope: The product I think the service side of Paul is ready to go and I'm.

Brett A. Cope: I think the service side of Powell is ready to go. I'm hopeful that it's just a matter of time that we'll solve that equation with a few of the large folks out there and build some really sticky relationships for years to come.

Brett A. Cope: Im hopeful that its just a matter of time that will solve that equation.

Brett A. Cope: The equation with a few of the large folks out there and build some really sticky relationships for years to come is that where some of your a lot of your R&D spending is growing and in that area.

Jonathan Paul Braatz: Is that where a lot of your R&D spending is going in that area?

Brett A. Cope: Some of the more recent R&D. We have some projects that have been going on for years that are very targeted at the core industrials and utilities. You know, utility has become a really important market segment for us, but more recently, there are some things that we're learning. We think for the products we already have, we have some ideas that we're running on the ground right now that if we can solve the technical problems, we think we'll have a plus one differentiator. Okay, thank you very much.

Jonathan Paul Braatz: Some of the more recent R&D, we have some projects that have been going on for years that are very targeted at the core industrials and utility.

Brett A. Cope: Utilities become a really important market segment for us, but more recently there are some things that we're learning we think for the products. We already have we have some ideas that we're running the ground right now that if we can.

Brett A. Cope: All the technical problem, we think we'll have a plus one differentiator okay. Thank you very much.

Jonathan Paul Braatz: Okay, thank you very much.

Brett A. Cope: Yes.

Jonathan Paul Braatz: Okay.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Brett Cope for any closing remarks. Thank you, Alan.

Jonathan Paul Braatz: This concludes our question and answer session I would like to turn the conference back over to Mr. Brett Cope for any closing remarks.

Brett A. Cope: Thank you Allen. Overall, it was a very solid second quarter, and we are pleased with our performance across the organization. We have a great focus on productivity and efficiency across our operations, and our teams are delivering on schedule and on budget to our commitment. I would like to thank all of our employees for their energy and commitment as we have raised the bar with the incredible growth of our backlog. Also, of course, thank you to all our valued customers. We appreciate your continued trust and support. Thank you all for your participation today. We appreciate your interest in Powell and look forward to speaking with you next quarter.

Brett A. Cope: Thank you Alan overall, it was a very solid second quarter and we are pleased with our performance across the organization, we have a great focus on productivity and efficiency across our operations and our teams are delivering on schedule and on budget to our commitments.

Brett A. Cope: Like to thank all of our employees for their energy and commitment as we have raised the bar with the incredible growth of our backlog.

Brett A. Cope: Also of course, thank you to all our valued customers. We appreciate your continued trust and Paul.

Brett A. Cope: Thank you all for your participation today, we appreciate your interest in Powell and look forward to speaking with you next quarter.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: [music].

Operator: Okay.

Operator: Yeah.

Operator: Sure.

Operator: [music].