Q3 2019 Earnings Call
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Thank you operator, and good morning, everyone. We appreciate you joining us propel Industries' conference call today to review our fiscal 2019 third quarter results.
With me on the call or Brett Cope Bell's CEO and Mike Mccown calcium.
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Now I will turn the call over to Powell CEO Breco right.
Thanks, Zack and good morning, everyone. Thank you for joining us today to review our fiscal 2019 third quarter results.
I will make a few comments and then I will turn the call over to Mike for more financial commentary before we take your questions.
I'm very pleased to report that Pall delivered solid financial performance at our third quarter.
We entered the second half of our fiscal year, having built possible momentum in the first two quarters of the year.
And our operating teams across the company continue that momentum and executed well over the reporting periods.
In the quarter, we reported 136 million in revenues, an increase of 10% or $12 million sequentially.
Gross profit in the quarter was 24 million or 17, and a half a percent of revenue a $4 million or 18% increase from the fiscal 2019 second quarter gross profit of $20 million.
During the third quarter, we experienced alignment of several factors. These included a continued improvement in the quality of our backlog.
Coupled with a favorable project mix.
And several of our production facilities continuing to deliver incremental efficiency gains.
I would also highlight our project and engineering leadership and their contributions to our manufacturing and profitability story.
Thus far we have been able to cost effectively maximize scheduled capacity to meet the changing requirements of our customers.
Hi, there by moving schedules out into the right.
Or by accommodating a customer need to shorten the cycle.
These requests are frequently received both pre and post award and our inherent in the long cycle project business.
Our ability to meet the constant changes, while working to minimize the impact.
The business as well as our customers as a strength.
And differentiation for model Apollo.
New orders in the quarter were $145 million and have contributed to our third consecutive quarter of backlog growth.
At the end of our fiscal third quarter, our backlog has grown to $407 million, which is an increase of $10 million sequentially.
From our second quarter, ending backlog of $397 million.
We had an increase of $146 million versus year end fiscal 2018.
Throughout our fiscal 2019, we have seen the majority of new project activity from our domestic oil gas and petrochemical markets.
We did however experience more activity and new awards for the utility sector in the third quarter.
We also experienced strong contributions to the backlog from our international operations for the second straight quarter supporting our divisions in both Canada and the United Kingdom.
Additionally, as we as we have reported over the last few quarters, we continue to work with our customers on engineering only orders.
The upfront Engineering awards are driven by a variety of reasons, but primarily due to the timing around full funding investment decisions.
As a result were able to stay close to our customers during early phases of project planning.
Well continuing work on the design of the project and utilizing our engineering capability to bridge the schedule until such time that the full award is released.
Looking forward as our backlog grows the market is challenging our need to increase our just resource planning around our people and facilities.
It is important that we are committed to not only being flexible for our customers, but also to improve the utilization of our people and facilities in order to solidify our production profile and workforce efficiency.
We continue to monitor the wider macroeconomic environment.
Our supply chain and purchasing teams are really working with our supply base partners to mitigate inflationary pressures.
The largest headwind that we have experienced over the last several quarters.
And we believe we will continue in the near term is our ability to recruit high quality employees and an exceptionally tight labor market.
If there is anything we have learned in the past it is that our people are the lifeblood of our company.
They underscore our ability to secure future projects and continue to drive new strategies to improve productivity and profitability.
In turn our workforce is continuously changing.
To keep pace, we continue to hire new employees use contractors were prudent and leverage our unique ability to ship backlog across our beer various facilities in order to maximize our ability to meet the needs of our customers.
Inquiry activity remains robust across our operations, especially from our core industrial customers in our domestic markets.
We expect the abundance of natural gas reserves within the U.S. and to continue to be one of the key drivers of new project activity over the next several quarters.
We are also heavily engaged with our customers and their engineering partners on several sizable greenfield projects.
A couple of these projects have recently moved forward on their funding decisions well others are continuing to work through their due diligence cost optimization and design revisions.
As we shared in the last call pricing pressure on these larger projects may increase and become more relevant as we prepare for fiscal 2020.
We expect to incur some additional costs as we strategically invest in the training and development of new employees as well as our current workforce.
We will continue to exercise discipline around the mix and timing of these larger projects. However, we remain optimistic that with the sustained end market activity and a continued focus on customer satisfaction and customer loading Paul is well positioned to successfully execute on our growing backlog for the remainder of 2019 and into fiscal 2020.
With that I'll turn the call over to Mike to provide more detail around our financial results before we take your questions.
Thank you Brad and good morning, everyone.
Overall, it was a solid quarter driven by both topline strength in our core end markets as well as from strong operational execution across the power global network of manufacturing facilities.
With that let me begin with a summary of our fiscal Q3 results.
Bookings in the quarter was strong led by the industrial sector end market demand.
New orders placed during the third quarter of fiscal 2019 was $145 million, which was 6 million or 4% higher than a year ago, and 52 million lower sequentially on a challenging comparison.
Our book to Bill ratio finished the third quarter of fiscal 2019 at 1.1.
Flat to the third quarter of the prior year, which positively add it to the order book with backlog ending the third quarter of fiscal 2019 at the highest level in over three years at $407 million 91 million higher than a year ago, and 10 million higher versus the prior quarter.
Revenues in the quarter of $136 million increased $12 million sequentially, and $14 million or 11% higher versus the third quarter of fiscal 2018.
We are experiencing healthy revenue trends across all of our product sectors led by the domestic industrial sector, which is providing the most significant year over year uplift.
Domestic revenues increased by 14% or 12 million to $104 million for the third quarter of fiscal 2019 versus the prior year and the continued recovery across our key industrial end markets.
International revenues generated from our foreign operations as well as export shipments from our domestic facilities increased by 4% or $1 million to $32 million versus third quarter of fiscal 2018 as the activity levels in our international markets are strengthening.
Now looking at the fiscal Three Q2 019 revenues by sector.
We experienced revenue growth across all of our business sectors versus the third quarter of the prior year.
In the industrial sector revenue increased by 6% or $6 million to $99 million in the third quarter of fiscal 2019 compared to the prior year.
This positive trend is driven in large part by the continued strength of the petrochemical and oil and gas end market demand on both plant upgrades and capacity additions.
Revenues from our utility sector increased by 37% or $7 million to $27 million in the third quarter of fiscal 2019 versus the same period, a year ago, while revenues generated from the municipal sector were higher by 6% or 1 million to $10 million in the third quarter of fiscal 2019 versus the prior year.
Compared to the fiscal third quarter of 2018 margin rates across the business improved by 240 basis points, resulting in 17.5% gross profit as a percentage of revenue.
Versus the prior year gross profit increased by $5 million to $24 million unfavorable plant volume and fixed cost leverage across most of our manufacturing facilities.
On a sequential basis gross profit improved by 130 basis points as we continue to benefit from higher factory utilization and favorable mix.
Selling general and administrative expenses were $17 million, 13% of revenues, which was lower by 50 basis points versus the prior year.
And lower sequentially by 120 basis points.
We continue to manage this cost pool very carefully while ensuring that the business maintains the resources necessary to execute safely and efficiently.
In the third quarter of fiscal 2019, we reported net income of $5.1 million or 44 cents per share compared to $300000 or three cents per share in the third quarter of fiscal 2018.
During the quarter, we reported a net gain of approximately $425000, which was the result of nonrecurring items that generated a favorable gain.
Which was partially offset by onetime adjustments to our leased facilities in Canada.
Excluding this net gain earnings per share on a non-GAAP basis would have been 40 cents per share.
The business generated $8 million of operating cash flow in the third quarter of fiscal 2019 and improvement of $23 million versus third quarter of fiscal 2018.
And has improved by $16 million year over year through the first nine months of fiscal 2019, predominantly driven by working capital efficiencies.
Excluding restricted cash at the end of our third quarter, we had cash and short term investments of $78 million, which was 28 million higher than our fiscal 18 year end position and higher by $6 million sequentially.
Long term debt, including current maturities was $1.2 million.
Looking forward, we anticipate continued strength and sustained end market activity as well as generating operational efficiencies driven by better plant utilization across the global landscape.
We remain focused on our operational priorities as we execute on the order book.
And continue to deliver the anticipated productivity through the end of fiscal 2019 and into fiscal 2020.
With that said, we do recognize the usual challenges of project timing in mix. However, we feel that we are well positioned to successfully execute on our backlog.
In closing, we remain optimistic that with the sustained end market activity combined with the quality of our backlog and focus on execution. These variables will provide a platform for continued free cash flow and profitability performance into fiscal 2020.
At this point, we'll be happy to answer your questions.
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Thank you. Our first question comes from the line of John Franzreb with Sidoti. Please proceed with your question.
Good morning Britain Mike.
Good morning, Brett.
I was wondering if you could just characterize the opportunity pipeline today versus say three months ago is it better is it worse, especially in light of the moves we've seen oil and then maybe the global economic conditions, what are your thoughts as far as what the outlook is now versus then.
I would say our outlook, probably hasn't really changed that much in last three months were more cognizant of the macro.
Conditions that are kind of going on can you cannot.
Attention to it I haven't seen it really materialize an inquiry side yet.
No we talked last quarter about the base business.
What's the status of that.
The funnel looks.
Reasonably healthy John looking out.
But we are cognizant of whats going on and looking for any sign of.
But how that might impact the future so.
Okay, and when you talking about the poor quality backlog, what end markets are pricing better than they were again versus three months ago.
Yes.
So no real big change in price from the recovery last year.
Say overall.
That trend that we saw coming out of the downturn from 18 months ago as sort of sustain so its not getting any worse.
A little bit more wary of the large projects as a good competitive here in the fall and into early 2000 2020.
I think as we've shared in the comments today and given the previous calls, but our expectation is those will draw a little bit more pressure because they're just.
Gravity gravity plays a role in these big job on people come in play so.
Okay and it sounds also like in your prepared remarks, you talked about labor being tight.
You know you're going to be reinvesting existing plays but sounds like hiring more.
Does that temper should that temper our expectations on the slope of gross margin recovery into 2020.
I think it could have a slight impact is something we're managing our way through its predominantly in Gulf Coast region.
There is a lot of pull that lever from various sectors by the way.
So we are managing through it.
Fairly well, but it is a headwind that we think continues for the next couple of quarters if not.
So.
Beyond a year. So if you look at the projections on construction trades from New Orleans down through the Gulf Coast, Texas.
Okay, I was actually get back into queue. Thank you.
Thanks, Jeff.
Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Hey, guys as Stefano, it's Chris calling for John Congrats on the quarter.
Thanks, Thanks Stefano.
Can you guys talk about the implied margins and the orders that into backlog during the quarter and if they're improving compared both to what you've been executing on and from last quarter.
Yes, Thanks, Stefano as Bret just alluded to in the last question.
The sequential price, we arent seeing any any.
Aggregation or.
Or accretion in price quarter over quarter versus last year, clearly as we burn through the backlog from from last year. Yes, we are seeing year over year price, but really I think prices kind of flattened out at this point.
And and we don't expect it to increase creatively much more from here.
Got it thanks.
And how much closer are we to larger project awards, especially on the LNG side or if there's any other petrochemical or offshore prospects on the horizon.
From my prepared comments the couple that up that are out there you've got the.
Well, we've talked on past calls the.
One in Canada Kitimat LNG.
The other one that as move forward is the.
Exxon Qatar petroleum.
Golden Pass project that has been awarded to engineering firms and they are.
Moving from the design side too.
To fully PC mode. So those are probably in the queue for the next couple of quarters and early next year.
And the other one that had at a nice announcement in the quarter was Chevron Phillips also teaming up with Qatar petroleum.
On two projects one of the Middle East, but also one here in the Gulf Coast, They announced an $8 billion cracker moving forward. So.
Again, thats going to be on time from us Thats, a little behind the Exxon job of those of those are.
Public releases on announces on the job and then and then there's the Q and the other ones that are still trying to figure out where they're going to go.
All right. Thanks, guys.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.
Morning, everyone.
Brett I'm wondering if you talk a little bit about the difficulties getting late qualified labor and so on.
Is that.
Impinging at all on your ability to to bid on projects have you had to.
Ill just say no because you don't have the.
The labor resources at all.
No it hasnt affected our ability to bid or.
Weve, so far found our way through it we have.
While we work to.
Forecasts and higher our teams and ended the company John .
We also have the option of using.
Contractor partners on that have been with us for 20 years and trying to help us.
Find the qualified resources for that especially for the Specialised trades on our on our integration side of our sub stations. So.
Those present, a little bit of a cost to challenge.
Term and we're trying to get a better long term.
Plan together to address it if it continues.
But it hasn't really affected our ability to bid at all.
Okay. Okay.
Going back to the LNG.
Sector.
Yes.
I think the difficulties with China, the trade issues with China.
LNG was going to be a big player and in the.
And the Chinese trade in.
Are you seeing at all any any push out of LNG projects, because there's a lack of agreement with us in China.
Are you seeing any delays in in any project and any LNG projects.
Until some type of resolution.
There is a resolution in the <unk> and the <unk> and then Chinese us trade.
Issues.
So John personally speaking I haven't I'm not.
I don't know what happens behind closed doors with our customers and what they're talking about.
Certainly is something you cannot think about forecast out into your how long do you think these facilities will supply in those markets.
The only item I have heard.
As more short term really related to tariffs and steel.
Some of the some of these other operations trying to so up where there were other structural steel is going to come from for their process build out.
Securing that on the spot market have long term agreements coming from multiple countries I know thats a real concern some of the some of these facilities, where they're trying to do to shore up their their return calculations, but haven't heard anything on the supply side and production agreements and were all the cargoes are going to go.
Okay, well, thank you very much.
Our next question is a follow up question from John Franzreb with Sidoti. Please proceed with your question.
Yes, I guess, it's too.
Two questions kind of interrelated here.
Firstly, if you said this in your prepared remarks, I apologize what was the free cash flow for the quarter.
And secondly in regards to your guidance you kind of said you're going to deliver Sop solid operating cash flow for the remainder of 2019.
What does that mean and what is it going to take for you to reinstate guidance, what kind of operating conditions, you need to have that confidence level going forward.
Yes, John so free cash flow for the quarter and I did I did touch on it in the.
In the opening remarks, so operating cash flow for the quarter was was $8 million and we had about 1.2 of.
Of Capex still with a little better than $9 million for the quarter.
So really really strong performance from a free cash flow standpoint.
Okay and the second part of the question could you repeat that second part I'll take that so John .
Yes, we know we suspended since the downturn and.
As we were about to start our fiscal 2020 budgeting. It is a conversation we have an and.
Theres still a lot of unknowns on the timing and these larger jobs. So while we recovered on the base business and that continues to be a strengthen that.
Order order book in the third quarter, but just a few jobs over double digits in terms of award.
The bigger jobs present.
While they're sexy and.
They are fun to Jason certainly more fun to win.
They present a whole another.
Challenge to plan the business. So we'll look at it hard and chats about it and we are talking to the board about it but.
As we get into Q4, we will look to update and talk about it.
Yes, I think John is we had you know as we go through Q4.
And we continue to you know we continue to build the order book will get better definition of what 2020 looks like in our Fourq convertibility as we exit Threeq. You is is relatively to find that at this point.
Q4, Q2 thousand 20 is still taking shape.
I mean in light of the fact, the last two quarters the backlog levels relative to we saw in 2016.
No. It's it's kind of a portion where we were in 2015.
I would assume that give you some level of confidence of what the outlook looks like going forward, but maybe I'm just reading too much into it.
It does but the but the strength is still domestic operations and it's not as consistent still even though we had a better international quarter and the third really second and third in terms of backlog.
Still I'd say more uncertainty in those markets than the domestic Gulf coast area.
Okay. All right. Thanks for taking my follow up guys appreciate it good quarter.
Our next question is a follow up from Jon Braatz with Kansas City Capital. Please proceed with your question.
Mike.
Your tax rate is bouncing around a little bit.
How should we think about the tax rate going forward.
Year to date, we're at a 22% HCR in discrete Threeq you. We ended I think of about 14% and really what that was.
Generated from John is our Canadian facility and the impact of.
The offsetting tax.
I ability there so.
I think when we look at the total year, we're going to come in right around where we are on a year to date basis.
Okay and do you think as you look out towards as you look out towards next year.
How would you see that.
The tax rate changes versus this year.
I don't I don't anticipate we'll see.
Any substantial changes in tax rate for next year, we're still holding in the low twentys. Okay. Thank you much.
Alright.
Mr. Cope we have no further questions at this time I would now like to turn the floor back over to you for closing comments.
Thank you Christine.
Overall, it was a solid third quarter and we are pleased with our operational performance across the organization, we delivered productivity and efficiency and our teams have done a tremendous job on improving operating cash flow throughout fiscal 2019.
Current backlog provides excellent momentum as we planned fiscal 2020 current activity in our core end markets position positions us well for sustained growth and value creation.
While we are encouraged by the current level of client engagement. There is lingering uncertainty around the timing of the order cycle process as customers begin planning 2020 projects.
I would like to again, thank our teams for their discipline reliability for demonstrating quality execution. Thank you for your participation. We appreciate your continued interest in power and look forward to speaking with you next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.