Powell Industries - Earnings Call - Q2 2021

Transcript

Operator (participant)

Good day and welcome to the Powell Industries Q2 Fiscal 2021 Results Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist or press 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. As requested by management, please hold to one question and one follow-up. Ryan Coleman, please go ahead.

Ryan Coleman (Head of Investor Relations)

Thank you, Operator, and good morning, everyone. Thank you for joining us for Powell Industries Conference Call to review Fiscal Year 2021 Q2 Results. With me on the call are Brett Cope, Powell's Chairman and CEO, and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until May 12. The information on how to access the replay was provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, May 5, 2021, 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. 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 now turn the call over to Brett.

Brett Cope (Chairman and CEO)

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's Fiscal 2021 Q2 Results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Our Q2 Results were mixed relative to our expectations. Revenues for the quarter improved to $119 million, an increase of 11% sequentially over our Q1. I would note that this growth was achieved in spite of the challenging operating environment that we continue to experience across our industrial markets, as well as the adverse impact of severe winter storm effects in Texas during the month of February that idled a majority of our Houston-based teams for nearly a week.

Compared to the prior year, Q2 revenues were down 22%, mainly driven by lower revenue from the petrochemical sector, which was down 78% compared to the second quarter of Fiscal 2020. Oil and gas was down 3% year over year, while utility and municipal markets, which include traction, grew by 17% and 9% respectively compared to last year. This marks another consecutive quarter of year-over-year growth in these segments, partially offsetting the softness across the industrial sectors. Q2 gross margin as a percentage of revenue was 14.4%, which compares to 19.6% one year ago. The year-over-year decline is mainly the result of underutilized overhead on the lower revenue, as well as raw material cost pressure resulting from higher copper prices and other industrial metals. These headwinds were partially offset by the restructuring activities taken in Q3 of Fiscal 2020.

We continue to prudently manage discretionary expenses and are also closely monitoring our cost structure to ensure that we are aligned with the current environment. We are a long-cycle business, and it is imperative that we retain the domain expertise and know-how, maintaining our capabilities and readiness to serve for the eventual recovery of our major end markets. Moving to the bottom line, we were slightly below break-even as we reported a net loss of $225,000 in the quarter compared to net income of $7.4 million in the prior year. The decline was the result of lower operating earnings driven by the decrease in revenues and gross profit amidst an environment of lower new orders and adverse market conditions.

We ended the quarter with $154 million of cash and short-term investments and essentially zero debt as we retained our strong liquidity position and continued to have optionality as we managed through this down cycle. New orders in Q2 totaled $89 compared to 91 million of new orders in Q1 of 2021 and $301 million of new orders in Q2 of Fiscal 2020. The $301 million of new orders during this comparable period of the prior year was attributable to a large industrial award booked and reported in Q2 of Fiscal 2020. We ended the quarter with backlog totaling $437 million, which represents a sequential decline of 6% and compares to $566 million as of the end of Q2 last year.

The industrial markets where we compete continue to be characterized by limited customer visibility and capital spending, as well as project delays. We are now more than one year since the pandemic hit and began impacting our end markets, and while conditions have started to improve, our industrial end market customers remain cautious as they evaluate future capital investment. Not withstanding this, I am pleased with the level of execution across the company. We have a strong focus on driving efficiencies and project execution while identifying the creative growth opportunities as we continue to work closely with our customers to adapt to the current environment by both responding quickly to any requested changes to ongoing work currently in our backlog while also providing the needed support they require for future capital spending plans.

Looking forward, as the energy complex across the globe transitions to a cleaner future, we continue to believe the economics of natural gas will offer favorable opportunities in the LNG gas pipeline and gas-to-chemical process industries. We also see developing opportunities in the renewable markets of hydrogen, biofuels, biodiesel, as well as carbon capture and sequestration. These markets are more nascent but are growing. We are also closely monitoring the possibility of tightened environmental regulations that may require additional investment in existing infrastructure. We possess a leading reputation and operating history that differentiates Powell from a customer service and technological perspective. Our financial position enables us to maintain our strengths while we navigate through these challenging economic cycles.

We have and continue to build long and valued relationships with our customers, and we believe that these core elements of our foundation remain solid and important attributes as we aspire to be the partner of choice for critical electrical infrastructure delivered on time and on budget. Before I turn the call over to Mike, I'd like to reiterate our key focus areas for Fiscal 2021. First and foremost is the health and safety of our employees, customers, and suppliers. We are also focused on maintaining our solid evaluation of our current cost structure, supply chain, and resource planning to optimize operations across the geographies and markets that we serve, and last, it is also critical that we continue to lay the foundation for future growth opportunities, while also broadening the markets for power.

Our human capital, balance sheet strength, and technological expertise allow us to be proactive in the current environment. With that, I'll turn the call over to Mike to provide more detail around our financial results before we take your questions.

Mike Metcalf (EVP and CFO)

Thank you, Brett, and good morning, everyone. The challenging macro environment that we've experienced throughout the past year, particularly across our core industrial end markets, continues to play out as the new order intake remains relatively flat across the last few quarters. New orders for fiscal Q2 totaled $89 million. This was lower by $3 million sequentially and 71% lower versus fiscal Q2 of 2020, as the prior year comparison includes the large industrial order that we booked in Fiscal 2020. Revenues for fiscal Q2 of 2021 were $119 million, higher sequentially by 11% but lower versus the prior year by $33 million, as the trailing 12 months' orders cadence across our oil and gas and petrochemical end markets and the associated impact on backlog continues to adversely affect revenue. Our Q2 ending backlog was $437 million.

This is lower by $28 sequentially and 130 million lower versus the prior year on the challenging comparison that I just noted, but overall healthy from a historical perspective. The book-to-bill ratio for the second quarter was 0.7x. Compared to one year ago, domestic revenue decreased by $33, or 27% to 88 million, while international revenues were 2% higher on a year-over-year basis at $31 million. This overall decline, particularly in our domestic industrial markets, reflects the ongoing uncertainty across the oil, gas, and petrochemical end markets. From a market sector perspective, revenues across our oil and gas and petrochemical sectors were lower by 39% versus the prior year. Alternatively, versus the same period one year ago, oil and gas was down 3%, while our petrochemical end markets was lower by 78%.

Providing a modest offset, the utility sector was higher by 17%, while traction volume experienced a 9% increase versus fiscal Q2 of 2020. Gross profit in Q2 of Fiscal 2021 decreased by $13 million, or 510 basis points, as a percentage of revenue versus the prior year and down sequentially 270 basis points. The pressure on margins in Q2 was primarily driven by lower volume and unfavorable leverage across our underutilized operating facilities, as well as increasing commodity prices. Selling, general, and administrative expenses were $17 in the current quarter, 2 million lower versus the same period a year ago and flat sequentially. SG&A as a percentage of revenue was 14%, which compares to 12% in the prior year and 16% sequentially.

In Q2 of Fiscal 2021, we reported a net loss of $225,000, or a loss of 0.02 per diluted share, compared to net income of $7.4 million or 0.64 per diluted share in the second quarter of Fiscal 2020. During Q2 of Fiscal 2021, net cash generated from operating activities was $7 million, driven by the increased focus on working capital as we continue to execute and plan for projects currently in backlog. Investments in property, plant, and equipment for the quarter was $662,000. At the end of our second fiscal quarter, we had cash and short-term investments of $154, 33 million higher than a year ago and $25 million lower than our Fiscal 2020 year-end position. Long-term debt, including current maturities, was $400,000.

Looking forward, we expect that our operating environment will remain challenged throughout Fiscal 2021, particularly across our industrial end market. Considering this, we continue to manage our liquidity position and operating costs very diligently. Our balance sheet remains extremely strong, generating an additional $6 million of free cash flow during the second fiscal quarter. As Brett mentioned, and a key tenet of Powell, we are working closely with many of our customers to accommodate their project schedules, which in turn may create some choppiness across our quarterly landscape and into Fiscal 2022. Considering this, we anticipate that our second half will have a similar or slightly favorable trajectory versus the first half as we navigate through the commercial uncertainty persisting across our industrial end markets while closely managing the cost and cash equation.

In closing, our backlog is healthy, our fundamentals are solid, and our strategy of maintaining ample liquidity through this downturn is sound. At this point, we'll be happy to answer your questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star or then one on your telephone keypad. If you're using a speakerphone, please take up your handset before pressing the keys. To withdraw your question, please press star or then two. Once again, as requested by management, please hold to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Jon Franzreb of Sidoti & Company. Please proceed.

Jon Franzreb (Senior Equity Analyst)

Good morning, Brett and Mike. How are you doing?

Brett Cope (Chairman and CEO)

Hey, John.

Mike Metcalf (EVP and CFO)

Hey, John.

Brett Cope (Chairman and CEO)

Doing well.

Jon Franzreb (Senior Equity Analyst)

Good, good. I guess I want to start with the quarter in and of itself. You shut down for a week. Was there any lost or deferred revenue as a result of those shutdowns that were pushed either into the quarter or that you missed out on entirely? Can you kind of quantify that and what the impact was for you in the quarter?

Mike Metcalf (EVP and CFO)

Yeah. Hey, John, this is Mike. We estimated that to be between $2-3 million of revenue for those essentially was about four days, which carried roughly $500,000 of margin. It did definitely have an impact. Some of that revenue, for example, of field service revenue, some of it may not, it wasn't necessarily a push-out, it may have been lost, but a lot of it was shop work that will be pushed out and recognized later.

Jon Franzreb (Senior Equity Analyst)

Okay. All right. And I'm curious about the order book and what you're seeing as far as quotation activity. Has there been any change in the tempo? Are people sniffing around maybe a little bit more than they were three months ago, or is it still an environment where everybody's risk averse?

Brett Cope (Chairman and CEO)

John this is Brett. In the most recent quarter, I think in a couple of other calls, we talked about looking out for the next couple of quarters. The conversation you and I had, we expected to continue to kind of move to the right. There is this uncertainty kind of overhang. So I'd say that still is what we see looking out. The most recent quarter, I like your comment about sniffing. There was a little bit more activity. It kind of popped up, popped down. So even with the winter storm, I think the inquiry level, there was some short-term urgency that sort of crept in, but I can't say another quarter on that I see any fundamental change to what we talked about last quarter. The horizon still looks uncertain.

Out a couple of quarters, I think my comment about the potential to rise above the run rate since the pandemic hit is there, but to say it's going to sustain and start heading in a positive direction over time, I still can't say that sitting here today.

Jon Franzreb (Senior Equity Analyst)

Okay. And in the interest of management's request, I'll get back into queue.

Brett Cope (Chairman and CEO)

Okay. Thanks, John.

Operator (participant)

As a reminder, if you have a question, please press star and then one. Next question is going to come from Jon Braatz of Kansas City Capital Associates. John, please proceed.

Jonathan Braatz (Equity Analyst)

Good morning, Brett. Mike.

Brett Cope (Chairman and CEO)

John, how are you?

Jonathan Braatz (Equity Analyst)

Pretty good. Pretty good. Brett, a question. When you look across your landscape of end markets and you talk about the weakness in the industrial markets, is there something out there that might give you a sort of a leading indicator of a turn in the trends? And is there a particular, I guess, a particular signal that something that would signal to you that we're at the bottom and we're beginning to turn up and the better days are ahead? Is there something out there that might be that signal for you?

Brett Cope (Chairman and CEO)

John, I continue to read and look across the world and making sure that our teams are as engaged as we need to be. Reading the space, I think the fundamentals of the gas market, as I've talked really over the last year, year and a half, continue to be one of the, still the economic indicators that the cost of the raw material and knowing what's out there and what's being planned. It's still driving a lot of potential projects that I think will eventually materialize. I think that macro consumption of what triggers that is still unclear, and I don't see anybody being able to pinpoint that, but we are pushing on our teams to, as the world is getting going again, if I could say that, today's call, we are all back traveling.

Customers are still a little bit hesitant to do in-person, but I'd say there's more activity today than there was just a quarter ago, so that's encouraging, but I can't say I can give you that trigger other than the fundamentals. The economics look solid, and I just think it's that mass consumption of when are they going to have the confidence to pull the trigger on the large CapEx. You see a lot of things going on. We're watching that gas-to-chemicals. That still is a very interesting space, as well as just core LNG projects that are still kind of building. I don't think they're all going to go, but the fundamentals look good for the landed price that some of these should go.

Jonathan Braatz (Equity Analyst)

Have you been able to secure any business, any contract awards with, let's say, some of those alternative energy projects, biodiesel, hydrogen, anything out there of being awarded?

Brett Cope (Chairman and CEO)

We have. In fact, in the most recent quarter, we had some awards. We were successful in some and not successful in a few others in that non-conventional conversion to diesel, and there's some more going right now, and so that's been a nice win, as well as the sustained utility and traction market. Those have picked up relative to the mass of the value, so.

Jonathan Braatz (Equity Analyst)

Okay. All right. Sounds good. Thank you very much, Brett.

Brett Cope (Chairman and CEO)

You bet.

Next question comes from John Franzreb of Sidoti & Company. Please proceed.

Jon Franzreb (Senior Equity Analyst)

Yeah. I just want to maybe talk a little bit about the commentary you said that utility was up in the quarter. That kind of contradicts what I've been hearing from some other companies. A lot of crews still came out there, and they were kind of bemoaning that. Why is your utility business actually up? Can you kind of delve into that a little bit?

Brett Cope (Chairman and CEO)

So from a revenue standpoint and from an order intake standpoint, John, it's a little bit of math. With a lower revenue, it kind of rises up with the slowdown, especially in the Petrochem report on the drop on the revenue year over year. But the distribution market on the utility side has, really, a couple of years ago, been an overall better market for us in the States. And then you recall in Canada, they never really recovered from the 2016 to 2017 on the core markets like we saw in the States. And so we were forced to accelerate our strategy as we kind of went into West Canada. So we were getting Canada's, geographically speaking, last couple of quarters actually been a highlight for the business, and a lot of that is supported by our diversification into other markets like utility distribution in East Canada.

Jon Franzreb (Senior Equity Analyst)

Okay. And can you just maybe talk a little bit about the competitive landscape given the marketplace? How aggressive is the pricing environment? What are you seeing out there? Are people being more disciplined?

Brett Cope (Chairman and CEO)

Pretty sure we talked about this last call, and I think I indicated in February that we saw a little bit of increase. I don't want to say it was a step change, but I'd say it moved up a notch in competitiveness over the last 90 days. So it definitely. I made a comment here to Mr. Braatz here a minute ago about win some, lose some. We have full faith in the team on every job and looking at this, and it's getting more competitive. It definitely took a step up this past quarter.

Jon Franzreb (Senior Equity Analyst)

Okay. All right. That's all I had, Brett. Thank you.

Brett Cope (Chairman and CEO)

Oh, yeah, John.

Operator (participant)

This concludes our question-and-answer session. At this time, I would now like to turn it back to Brett Cope for any closing remarks.

Brett Cope (Chairman and CEO)

Thank you, Operator. The continued uncertainty in our core end markets, as well as the long-cycle nature of our business, continue to challenge our ability to efficiently plan our resources and, as such, impact our financial results. However, we continue to benefit from a very strong and committed team of employees across the company, a strong balance sheet, and a robust backlog that will allow us to endure the current environment, as we have in the past cycles during our 75-year history. We remain focused on identifying new commercial opportunities for our solutions that will better diversify our backlog and project mix going forward. With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you all next quarter.

Operator (participant)

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