Powell Industries Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Powell Industries Fiscal Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries' conference call 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, The replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, August 2, 2023, and therefore, you are advised that any time sensitive information may no longer be accurate at the time of replay listening or transcript 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 future results may differ materially from those projected in these forward looking statements.

Speaker 1

These risks and uncertainties include, but are not limited to, competition and competitive pressures, cereals 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.

Speaker 2

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2023 Q3 results. I will make a few comments and then turn the call over to Mike Our Q3 marked another solid performance by the Powell team as we deliver financial results that were once again among the best in our history. Market dynamics in our core industrial end markets remain very favorable, particularly within LNG, while we also saw encouraging results in our utility and commercial and other industrial sectors. Total revenue in the Q3 was $192,000,000 which is 42% higher than the prior year and marks sequential growth of about 12%.

Speaker 2

By market sector versus the same period a year ago, revenue from our oil and gas sector increased 25%. Petrochemical and utility revenue each grew by 45%, while revenue from our commercial and other industrial sector more than doubled. Traction saw a slight revenue decline compared to the prior year, largely a function of the conclusion of a large project in Canada, as well as our more selective bidding approach toward the sector. Because the strength of our results in recent quarter Has been led by the sharp recovery of our core oil and gas and petrochemical markets, it is easy to lose track of the encouraging performance of both the utility and commercial and other industrial sectors. On a year to date basis, our utility revenue of 100 $15,000,000 is 40% higher than the comparable period last year, while our commercial and other industrial sector Revenue more than doubled over the same time period.

Speaker 2

These results speak both to the success of our strategic actions as well as the mix of our current backlog. Order activity in the 3rd quarter was again very strong as new bookings exceeded $500,000,000 for the 2nd consecutive quarter. The $505,000,000 of new orders compares to $202,000,000 last year and $508,000,000 last quarter. Our book to bill ratio in the quarter of 2.6 times also marked the 7th straight quarter with a book to bill over 1 and consecutive quarters above 2 times. I'm pleased to note that Powell was awarded 2 large greenfield LNG projects, both to be located along the U.

Speaker 2

S. Gulf Coast that combined for roughly $200,000,000 in awards in the quarter. This marks 4 straight quarters of significant project activity in this market sector as the near and long term setup remains favorable. Our bookings in the Q3 also speak to the breadth of new order activity as we recorded roughly $300,000,000 of new orders excluding these large LNG projects. Notable highlights include a sizable an uptick this quarter for new bookings from the traction sector.

Speaker 2

Gross margin in the 3rd quarter was 22.2%, increase of 8 10 basis points compared to the prior year. Strong project execution, volume leverage and positive closeouts are all helping to drive our margin growth. On a year to date basis, our gross margin of 19.5% is firmly within our unchanged target of the high teens. Moving to the bottom line, net income in the 3rd quarter more than doubled to $18,500,000 or $1.52 per diluted share compared to $9,100,000 or $0.76 per diluted share in

Speaker 3

the prior year. And lastly,

Speaker 2

We ended the quarter with an order backlog of over $1,300,000,000 an increase of 31% compared to the end of the prior quarter And more than doubled versus the prior year. As we've stated, we are very comfortable with the size, mix and quality of our order book. Our project backlog is well balanced across our 8 manufacturing facilities and project schedules are extending into fiscal 2025, providing us with a steady balanced cadence of future activity. We previously shared that our teams have identified capital improvement projects that will facilitate both incremental capacity as well as improved production efficiency in several of our facilities. During the Q3, we initiated an expansion of our Houston facility located along the Gulf Coast.

Speaker 2

The capital investment in our offshore yard will provide for additional capacity Electrical substation supporting the recent rise of our backlog, while also helping us remain competitive on our schedules for future business. The recovery of our end markets led predominantly by our oil and gas sector has been sharper and more pronounced than we had initially expected roughly 1 year ago. The complexity of LNG projects combined with construction and start up schedules that have little room for error speak to the strength and trust that our customers have placed in Powell. We are very grateful for that confidence as we aspire to be the supplier of choice for Critical Electrical Infrastructure. Although our end markets remain strong, we expect the pace at which our backlog has grown over the last 9 months to stabilize at levels that are higher than average historically, but will be more measured relative to the growth of recent quarters.

Speaker 2

That said, Coating activity across all of our markets remains active and we are in a very strong position and expect that our focused efforts And our strategic initiatives and the health of our end markets will support the positive momentum into fiscal 2024. Operationally, our teams across each of our facilities continues to perform well, deriving our production volumes up over the last several quarters. We remain disciplined to ensure we are meeting project milestones, while working to maintain high standards of quality for our products and solutions, while also Eliminating inefficiencies throughout our manufacturing process. The investments that we have made in the tools, processes and our people over the last 6 plus years have prepared the business to meet this record backlog. Unfortunately, the price and availability of key engineered components continue to create challenges in the near term, including in some cases longer lead times.

Speaker 2

However, we continue to effectively manage through each of these headwinds and where possible factor contingencies allowances for these components in our bidding activity and project schedules. Labor availability remains a challenge and is very much top of mind across the company. While our ability to attract and retain quality team members has not had a significant impact on the business to date, it has become an item of increased importance and urgency given the growth in our backlog. Our operational leadership along with our human resources teams continue to work extremely hard And remain closely aligned as we plan our future work and engage the market to attract the talent to meet our future goals. Overall project activity and our participation across the markets we serve remains robust.

Speaker 2

The LNG, gas pipeline and gas to chemical sector all continue to be very active and favorable markets for Powell. We've also been pleased with the quoting activity and our ability to win projects within the renewable markets such as hydrogen, biodiesel and related biofuels such as sustainable aviation fuel, as well as increasing activity within carbon capture and sequestration as previously noted. Our near and medium term priorities remain unchanged. We are focused on growing our electrical automation platform, Expanding our existing services franchise and diversifying our product portfolio, be it through tangential applications that complement Our existing offerings as well as expanding the scope of our product catalog into new electrical technologies. Overall, we are pleased with our financial performance in both the Q3 and 1st 9 months of the year.

Speaker 2

We have confidence that project activity across the markets we serve will continue to support healthy levels of order activity into fiscal 2024. While we do expect new booking totals to moderate, we anticipate that they will remain healthy and well balanced across market sectors. We have also improved the quality of the backlog, which is currently at the highest level in the company's history. Altogether, these factors should support solid financial performance that extends into fiscal 2024. With that, I'll turn the call over to Mike to provide more detail around our financial results.

Speaker 3

Thank you, Brett, and good morning, everyone. In the Q3 of fiscal 2023, we reported net revenue of $192,000,000 compared to $136,000,000 or 42% higher versus the same period in the prior year. Commercial activity across most of our core markets remains strong, recording new orders booked in the 3rd fiscal quarter of $505,000,000 This is the 2nd consecutive quarter that we have recognized new orders booked in excess of $500,000,000 which has resulted in fiscal year to date new orders booked of $1,200,000,000 through the fiscal Q3. During the fiscal Q3, we booked 2 large projects that totaled roughly $200,000,000 of the reported $505,000,000 of new bookings, both of which are large greenfield LNG projects being constructed on the U. S.

Speaker 3

Gulf Coast. The fiscal 3rd quarter bookings results of $505,000,000 is $304,000,000 higher than the same period 1 year ago Roughly flat sequentially. It is worth mentioning that the demand that we are currently supporting carries with it longer lead times On a fiscal year to date basis, our book to bill ratio is 2.5 times, resulting in backlog growing to $1,300,000,000 at the close of our fiscal Q3. Yet again, this is a record high backlog level for the company and is 8 $136,000,000 higher versus 1 year ago and $318,000,000 higher sequentially. Reflecting on the orders cadence over the last four quarters, we do anticipate that our backlog will begin to moderate as we expect the current pipeline of large projects be awarded on a more measured basis going forward.

Speaker 3

Moving on to revenue. Domestic revenues were higher by 49 versus the prior year to $153,000,000 and international revenues were higher by 20% were $7,000,000 compared to the prior year driven by volume uptick in our European and Middle East markets versus the prior year. In total, international revenues were $39,000,000 in the 3rd fiscal quarter of 2023. From a market sector perspective, revenues across our petrochemical sector were higher by 45% and the oil and gas sector was were also significantly stronger versus the same period 1 year ago, increasing 45% and 137%, respectively. The traction sector was lower versus the 3rd fiscal quarter of 2022 by 27% and lighter volume in the plants driven by softer commercial activity across this sector through the first half of fiscal twenty twenty three.

Speaker 3

Gross profit reported in the period was $43,000,000 an increase of $24,000,000 in the 3rd fiscal quarter versus the same period 1 year ago. As a percentage of revenues, reported gross profit in the fiscal third quarter increased by 8 10 basis points to 22.2% versus the same period a year ago. The favorable trend in the project margins is attributable to the continued balance across input costs and pricing dynamics In addition to volume leverage and associated productivity across all of the manufacturing facilities, which contributed to favorable project closeouts during the quarter. And finally, we had a one time project cancellation that contributed 60 basis points of margin to the quarter. Selling, general and administrative expenses were $19,700,000 in the current quarter, higher by $3,000,000 versus the Same period a year ago on an increase in variable performance based compensation based upon the expectation for Higher levels of operating performance versus the prior year.

Speaker 3

SG and A as a percentage of revenue decreased by 190 basis points 10.2% in the current quarter on the higher revenue base. In the Q3 of fiscal 2023, We reported net income of $18,500,000 generating $1.52 per diluted share compared to net income of $9,100,000 or $0.76 per diluted share in the Q3 of fiscal 2022. The prior year comparison period did include 2 non recurring items that when combined accounted for $7,500,000 of net income or $0.63 per diluted share. During the Q3 of fiscal 2023, cash flow from operating activities was a positive $50,000,000 as we have reached a point in the cycle where we're experiencing an uptick in cash related to the advanced payments on the large projects. This precedes the eventual outlay of cash required for the working capital attributable to the new projects that have recently been booked into the backlog.

Speaker 3

Investments in property, plant and equipment totaled $650,000 during the fiscal Q3 as we invest in capacity and productivity projects across the business. As part of this initiative, we recently committed to a critical project that will expand our capacity in one of our Houston locations. This roughly $3,000,000 investment will help to ensure that we can confidently fulfill our delivery commitments to our customers. At June 30, 2023, we had cash and short term investments of $210,000,000 $93,000,000 higher than our fiscal 2022 year end position. The company holds no long term debt.

Speaker 3

Looking forward, we anticipate continued strength across most of our core end markets into fiscal 2024. Challenges of timing and mix. However, we continue to target margins in the upper teens on an annualized basis, including the normal seasonality impact that we regularly experience in our fiscal Q1. We also recognize that we may deliver quarterly margin levels that are modestly higher than our target level as we navigate through the remainder of fiscal 2023 and into fiscal 2024. Considering this, in addition to the sustained level of commercial activity across most of our end markets, As well as the strength of our balance sheet, we anticipate that these variables will provide the foundation for continued momentum relative to our financial results as we close out fiscal 2023 and look forward to fiscal 2024.

Speaker 3

At this point, we'll be happy to answer your questions.

Operator

At this time, we will pause momentarily to assemble our roster. Our first question comes from John Franzreb with Sidoti and Company. Please go ahead.

Speaker 4

Good morning, guys, and congratulations on a really solid quarter. I'd like to kick it off, Brett, With your perspective on the overall market outlook, how much big game hunting is there still out there for large projects Make it in the coming year or have you gotten past maybe the midpoint of maybe those large projects hitting the order book?

Speaker 2

Good morning, John, and thanks for the comments. Team's done a fantastic job getting us to this point in the cycle. As we look out, I mean clearly the last four quarters with the rate of mega projects that we booked, it's unprecedented in our history and certainly grateful as I My comments are customers for the trust. As we look out, there are there's the potential projects that are Wanting to push forward and those that are moving into their decisions in FID. So a little uncertainty there.

Speaker 2

Are we at midpoint? It depends how many get funded actually. I do think the pace of them is going to space out a little bit more looking forward. We're still working a number of what if scenarios on various projects that are out there, especially in the LNG space, again, as previously noted. So A little more uncertainty.

Speaker 2

There are not as many lined up as quick as they were coming in last 4 quarters, but Midpoint is up to them. If the spread still look good, gas was at 268,000,000 therm yesterday, What happens internationally, it could run a while. So a lot of factors in there, but I do think it spaces out and Construction resources and other things that may affect just availability of resources for the constructors. There's a lot of factors in how that will look over the next 1 to 2 years.

Speaker 4

Okay. In your prepared remarks, you highlighted an under appreciation of any of the utility market, What's changed in the utility sector today versus maybe 6 months ago?

Speaker 2

I don't think it's changed. In previous calls, I've highlighted that Coming out of the pandemic, it was a sector that returned. It also went through a period of not as robust activity for the company during Late 2021, it did come back nicely. It's an area we've been focused on for the better part of a decade in trying to add to the portfolio and expand our presence, Especially within the North American and our home markets including the UK, I think it's been a nice progression. The team And our front end marketing teams and project teams have done a great job just staying methodic in our home countries.

Speaker 2

And I think That is really I like to point to it is one of our strategic goals to build a stronger presence in that market and we're

Speaker 4

Great. And you had a great gross margin in But you said your target gross margin is still the high teens. What could weigh on the gross margin profile On a go forward basis that wasn't evident in the June quarter results?

Speaker 3

Hey, John. This is Mike. I'll take that one. Yes. Look, we're really pleased with our 3rd quarter results as well as our year to date margin results.

Speaker 3

Through the 1st three quarters of fiscal 2023, We've reported 19.5 percent gross profit. And if you exclude the non recurring item that I mentioned in my prepared Statements were 19.2%. So we're still squarely in our targeted range of the high teens. And looking forward, As you consider the quality of our backlog, which we're very pleased with as well, the ongoing productivity and efficiency projects in the business, We're comfortable maintaining this margin target as we close out 'twenty three and head into 'twenty four.

Speaker 4

Okay. Fair enough. And one last question, I'll get back into queue. I mean, cash is building. I know you're going to use it at some point in this process, But at the end of the day, you're still going to have a sizable cash position a year or so from now at least.

Speaker 4

Can you talk a little bit about priorities for the use of cash?

Speaker 3

Yes. I mean, over the last 6 months With the large projects entering our backlog, we've built considerable cash balance about $105,000,000 over the last 6 months. Over the next 6 months, I think we would begin to consume some of that cash as we begin to the procurement and manufacturing cycle These large projects, so we'll start to use some of that cash in those cycles as we build working capital.

Speaker 4

Okay, guys. Thanks. I'll get back in the queue.

Speaker 3

Thanks, John.

Operator

Our next question comes from Ambratz with Kansas City Capital. Please go ahead.

Speaker 3

Good morning, guys. Good morning, Ben.

Speaker 5

Congratulations on a wonderful quarter. One question I have is when you look out towards 2024 and you look at your backlog and the incoming orders and so on, How much of that production is already spoken for? How do you look at your 2024 schedules and how completed production schedules and how complete is it As you see it right now?

Speaker 2

As we look out, as we end up the fiscal year, It's roughly half the backlog is already planned into the next year. And so that's how We're heading into planning right now as we speak as we kind of conclude Q4. Most of the constraints With the build are hitting more of the Houston facilities and some of our other facilities, although all of our facilities have risen with the wave here. We're doing a lot more looking at each opportunity carefully to see where we can put it, especially Things that come in and have a need from our customers to execute a little quicker. So there are still slots.

Speaker 2

And then just in general capacity, We're doing an expansion of offshore for just capacity expansion, but we're also doing things like we've gone to a 3rd shift At a couple of facilities, we're doing all the creative things on the production side to help address and expand capacity. So really more of a people driven Trying to get our teams in and get our talent to lead us forward here. So we still have some capability there to kind of round out and And I think we've got that's why we still feel we feel confident for the prepared remarks and feel good heading into the next year

Speaker 5

Okay, okay, good. When you look at the big projects that you're being awarded, How might the margin on those projects be relative to some of the other projects, the one off projects In the industrial area and so on. And how much those margins compared with the other projects you're earning? And maybe is there are the margins on the bigger projects a little bit higher than maybe where they were a couple of years ago Because maybe conditions are a little bit tighter?

Speaker 2

Well, certainly coming out of the pandemic in general, if I take a couple of years snapshot to say the last 24 months, we've risen the profile out in the market. A little bit in price, a lot on efficiency and execution through the team. In general, what I'd tell you, John, is the more complex a project, that's really where Powell shines. We carry a lot of fixed Cost on the engineering side, because not just on the product development side and what we build and what we develop and what we aspire to do in the future, These projects are very, very big. There's a lot of changes to the life of the project for the things that we make and build, as well as the things that we buy and integrate into the overall solution.

Speaker 2

So typically the larger the project there's a life to it and I think Powell gets a lot of credit For being able to respond to our customers and take care of their need and then be properly rewarded for ability to hit our schedules to deliver that trust to our customers.

Speaker 5

Okay. One last question. With the 2 large LNG awards this quarter, were those greenfield

Operator

Next question is a follow-up from John Franzreb with Citi and Company, please go ahead.

Speaker 4

Hi, guys. Just on the facility expansion, Does that change your CapEx budget? And just kind of remind us what you're going to spend as far as CapEx spend this year?

Speaker 3

Yes, John. It will bump the CapEx spend this year. It's roughly a $3,000,000 expense this year, it's roughly a $3,000,000 project. A little of that will fall into fiscal 2024, but the majority of it We'll hit fiscal 2023, so it will be a little higher CapEx spend this year.

Speaker 4

Okay. And I'm curious about The revenue mix in the June quarter, how much of revenue was derived from some of those shorter duration Kind of equipment sales, typically I believe it's like $25,000,000 to $40,000,000 a quarter. Has that fluctuated Positively and negative lien, does that impact the profit profile one way or the

Speaker 3

other? Yes. I mean typically the book to bill within the quarter runs $30,000,000 to $40,000,000 that's kind of consistent, hasn't changed much to speak of John. So That's really kind of a constant running through the business.

Speaker 4

Okay. And Rick, you mentioned that labor is a priority, I think is how you phrased it as far as management is concerned. Can you talk a little bit about how challenging the labor markets are in the jurisdictions you operate and what we should think about as potential margin pressure from higher labor costs?

Speaker 2

So coming out of the calendar year, I think in previous calls, I noted and We're still seeing the trend on we've had better success after the 1st year on the variable costs. The variable side of the equation where we're adding heads to address the increased volume, we're still methodically working through that fairly well. We're feeling a little bit more pressure on the fixed cost side. So bringing in the supervision and management As we expand out the labor force, whether it be on the professional side and our front end project engineering resources or out in the production supervision. So that's been a little bit more of a challenge here as of late.

Speaker 2

Making progress just that looking at the ramp that's going to Hit us as we hit into next year, little bit more effort into that to prepare for it. So we've been through the ramp before at Powell. We know the challenges of the ramp and so just a little bit more of urgency as we come out of the summer and get ready for that heading into the fall. So from a cost standpoint, look through the pandemic, we maintained taking care of our people. We're planning well As we look forward to ensure that we're taking care of them as well as we look forward.

Speaker 2

So it is It has been a much bigger issue. It's relaxed a little bit with some of the other sectors that we don't participate becoming a little softer. That certainly helped on the variable side with attracting talent and understanding what that price point is and cost is for the labor on direct costs and overhead. But we've I think we've got it pretty well factored into the model for the next 2 years, John.

Speaker 4

Okay. That was a great call holding on to that The personnel, during the downturn. One other question and I guess I haven't brought this up in quite some time, especially Considering the recovery in the margin profile, but give us some of your thoughts on the competitive landscape. What's the pricing environment like With the competition out there, just some thoughts in general?

Speaker 2

Yes. Well, again, on the mega projects, Certainly, very grateful and as I noted, it is unprecedented in our history to have 4 straight quarters of mega awards like this. And We're humbled by the awards. It isn't without competitive notice we know in the market, whether it be a mega or Bread and butter, you know, dollars 1,000,000 substation for the utility. So, we're cognizant of that.

Speaker 2

We are very sensitive to the pricing in the market. We certainly like to be rewarded for that that we do best. And keeping note that we are a long term relationship pace So we are always going to approach our customer relationships with that in mind and being very fair for the outlook. But Competitively, I do think I think I know the last quarter on the pricing side, probably a little bit more competitive, nothing like we've seen in past down cycles, but it is certainly not as urgent on short term needs. And so we're a little bit more thoughtful around that to adjust, so we can ensure that we're taking care of as many of our customers as we can as they come in with their needs.

Speaker 4

Okay, fair enough. Congratulations again. Thank you.

Speaker 2

Thanks, John.

Operator

Next question is a follow-up from Jon Brock with Kansas City Capital. Please go ahead.

Speaker 5

One follow-up. I think you mentioned that international revenues were ticking up in the quarter. I think they were up 20% or something like that. Do you see some momentum building there or would you characterize it more as possibly sort of a one off increase?

Speaker 2

I think it's generally momentum. I don't think it's any one thing as I think about the past Couple of quarters, it's kind of more of also a multi sector participation. In the UK, The dynamics there are interesting given what they're going through in their break from the EU. We are certainly Looking to capitalize where we can in the markets and expand in areas that we historically had not been as strong, AKA utility like I noted earlier, John.

Speaker 4

That has

Speaker 2

been an area we've been hunting in and winning in the UK. Not something that we did a lot Years ago, but we are definitely doing it there today. The Middle East, another area where we see both electrical standards, IEC and ANSI, we have a big footprint there. Little bit more of an uptick here lately, not relative to the rest The business, but for the region and our historical profile, it's been on a little bit of an upturn this summer. I was there 1st calendar quarter making a visit in the region, I'm generally positive on the region and our prospects.

Speaker 2

Again, nothing that would spike It's a profile relative to everything else, but it is a market we know very well. We love being there and I think we'll be there for decades to come. So Just generally kind of boats floating up and having the right people in the right time and not losing sight of it amidst The gas wave that we're experiencing.

Speaker 4

Yes. Okay.

Speaker 2

All right. Thanks so much.

Operator

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

Speaker 2

Thank you, Sarah. Our 3rd quarter delivered solid performance with sequential improvements in our top and bottom line. The significant growth in improving quality of our backlog combined with the strength of our balance sheet provides solid momentum as we enter our final quarter of the fiscal year and plan for 2024 and beyond. I would like to thank our incredibly talented employees. Through their talent, leadership and tenacity, they have prepared Powell well for this growth cycle in our business.

Speaker 2

Thanks also to our valued customers and our supplier partners for their continued trust and support of Powell. With that, thank you for your participation on today's call.

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Key Takeaways

  • Total Q3 revenue rose to $192 million, up 42% year-over-year and 12% sequentially, with strong growth across oil & gas (+25%), petrochemical and utility (each +45%), and commercial & other industrial (more than doubled).
  • New orders exceeded $500 million for the second consecutive quarter, driving a book-to-bill ratio of 2.6x and including two greenfield LNG awards worth roughly $200 million.
  • Backlog reached a record $1.3 billion, up 31% sequentially and more than double year-over-year, with project schedules extending into fiscal 2025 and well balanced across eight manufacturing facilities.
  • Gross margin expanded to 22.2% in Q3 (up 810 basis points year-over-year) and net income more than doubled to $18.5 million (EPS $1.52 vs. $0.76), reflecting strong execution and volume leverage.
  • The company faces ongoing operational headwinds from higher costs and longer lead times for key engineered components, as well as increased urgency around labor availability to support the growing backlog.
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Earnings Conference Call
Powell Industries Q3 2023
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