Powell Industries Q2 2024 Earnings Call Transcript

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Provided by Quartr
May 1, 2024

There are 6 speakers on the 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. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Mr.

Operator

Ryan Coleman with Investor Relations. Please go ahead.

Speaker 1

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. 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.

Speaker 1

Please note that this information reported on this call speaks only as of today, May 1, 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. 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.

Speaker 1

With that, I'll turn the call over to Brett.

Speaker 2

Thank you, Brian, and good morning, everyone. Thank you for joining us today review Powell's fiscal 2024 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. Powell's 2nd quarter financial results showed strong year over year growth supported by continued strength and healthy levels of project activity from our core industrial end markets and complemented by impressive performances from both utility and the commercial and other industrial sectors. New orders in the quarter totaled $235,000,000 reflecting another strong quarter of bookings and in line with our expectations of a normalized, but still elevated cadence of awards.

Speaker 2

Notably, there were no mega projects included in our 2nd quarter bookings, rather the $235,000,000 of orders is comprised of a strong volume of small and medium size awards that speak to our core competencies and well balanced across our markets. Our revenue in the quarter grew 49 percent to $255,000,000 driven mainly by strong performance from our largest markets, oil and gas and petrochemical, which grew 66% 93% respectively compared to the same period of fiscal 2023. As our operations have ramped to meet the demand of higher overall project volumes, we remain focused on project execution and operational efficiencies. Many of the initiatives and process improvements put into place during the lean quarters of the pandemic continue to work well, as we today from improved and more efficient manufacturing operational processes. These streamline operations also help to create additional capacity while also delivering attractive returns for our stakeholders.

Speaker 2

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 percent of revenue or 5 10 basis points better than the prior year. 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 competency lie and conversely a more selective share of work of complex heavier engineering requirements. While we are of course always conscientious of how we utilize our resources to pursue and quote projects, Powell's focus on custom engineered to order solutions for complex projects means that we rarely aspire to win projects on price. 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.

Speaker 2

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. On the bottom line, we recorded net income of $33,500,000 or $2.75 per diluted share, which was roughly 4 times higher than the $8,500,000 or $0.70 per diluted share in the year ago period. Our backlog remains near the highest in Powell's history and was roughly flat sequentially at $1,300,000,000 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 integration support for large power control rooms, especially for projects that support delivery and transport by water access. In addition, the expansion of our electrical products factory in Houston is progressing as planned. This $11,000,000 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.

Speaker 2

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

Speaker 3

of our

Speaker 2

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. 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 2 years. Looking forward, our expectations for project activity and new orders are relatively unchanged. Overall, quoting activity remains very healthy and balanced.

Speaker 2

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. Natural gas price spreads across global markets remain conducive to U. S.

Speaker 2

Export activity. That said, it is our assessment that the comments earlier this year from the U. S. Department of Energy regarding U. S.

Speaker 2

LNG export permitting have had a slight dampening effect on new projects coming to market for bid. 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% this quarter.

Speaker 2

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. We believe that the strong growth that we have seen so far in this fast growing market for Apollo has a larger potential as we continue to qualify more of our products and services for the future of this important end market. 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 PAL can provide increased value. In addition, 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.

Speaker 2

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 the 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 engineered to order solutions for these customers. 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 substations. These types of projects remain core to our results in this market, but recently we have seen the return of new generation work.

Speaker 2

Helped 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. We are optimistic that we are beginning to see the initial stages of an increase in utility projects to meet this expected demand. The quality of projects we are seeing in this market remain favorable as does our ability to secure new orders on the projects we pursue.

Speaker 2

To wrap up, we are pleased with our financial performance in the first half of our fiscal twenty twenty four and our outlook for each of the markets we serve remains favorable. We benefit from a strong balance sheet and a $1,300,000,000 backlog that we believe will sustain our profit ability through fiscal 2024 and into 2025. 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 carriers.

Speaker 2

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

Speaker 4

Thank you, Brett, and good morning, everyone. In the Q2 of fiscal 2024, we reported total revenue of $255,000,000 compared to $171,000,000 or 49 percent higher versus the same period in fiscal 2023. New orders booked in the 2nd fiscal quarter of 2024 were $235,000,000 which was 54% lower than the same period 1 year ago on a difficult comparison as the prior period included 2 mega project bookings. As we focus on diversifying our project backlog, we continue to experience positive which are both higher sequentially by 61% and 3% respectively. 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 0.9x book to ratio in the current quarter, which results in the fiscal 2nd quarter ending backlog at $1,300,000,000 $255,000,000 higher versus 1 year ago and $23,000,000 lower sequentially.

Speaker 4

Compared to the Q2 of fiscal 2023, domestic revenues improved by 62 percent to $217,000,000 while international revenues were 2% higher driven predominantly by increased project volume at our Canadian facility. In total, international revenues were up by $1,000,000 to $38,000,000 in the 2nd fiscal quarter. From a market sector perspective versus the Q2 of fiscal 2023, revenues across our oil and 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% and 57%, respectively, reflecting our ongoing focus to grow in tangential markets outside of our core industrial end markets. The light rail traction power sector was lower by 38% as we continue to be very selective in this market sector.

Speaker 4

Gross profit increased by $29,000,000 to $63,000,000 in the 2nd fiscal quarter versus the same period 1 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 the favorable volume leverage and solid operational execution across all of our manufacturing facilities. There is no change from our last update in our gross profit percentage projections in the low to mid-20s throughout fiscal 2024. Selling, general and administrative expenses were $21,000,000 in the current period, lower by $1,000,000 on a lower level of variable performance based compensation versus the same period 1 year ago.

Speaker 4

SG and A as a percentage of revenue decreased 4.50 basis points to 8.2% in the current fiscal quarter on the higher revenue base and diligent overhead management. In the Q2 of fiscal 2024, we reported net income of $33,500,000 generating $2.75 per diluted share compared to net income of $8,500,000 or $0.70 per diluted share in the Q2 of fiscal 2023. During the Q2 of fiscal 20 24, we generated $17,000,000 of operating cash flow driven by higher earnings generated in the 2nd quarter, partially offset by a in At March 31, 2024, we had cash and short term investments of $365,000,000 compared to $279,000,000 at September 30, 2023 $355,000,000 at December 31, 2023. The company does not hold any debt. 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.

Speaker 4

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 positions the business favorably to sustain the momentum that we experienced in the first half of fiscal twenty twenty four and continue our solid financial performance throughout the remainder of this fiscal year. At this point, we'll be happy to answer your questions.

Operator

Our first question comes from John Franzreb of Sidoti and Company. Please go ahead.

Speaker 5

Good morning, Brett and Mike, and congratulations on another stellar quarter.

Speaker 2

Good morning, John.

Speaker 5

I'd like to start, I guess, with the top line because that surprised me the most personally. Last quarter, you kind of referenced you were running at full capacity, but we're still able to generate 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? Is that a sustainable level?

Speaker 5

Can you just kind of walk us through how at full capacity can generate that kind of that size of revenue volume?

Speaker 2

John, it's Brett. I'll start and then I'll ask Mike to jump in here too. During the quarter, 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 there 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.

Speaker 2

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, it's 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.

Speaker 4

Yes. And John, this is Mike. Good morning. To follow on the Brett's comments, 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.

Speaker 4

And 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.

Speaker 5

Does that suggest that normal seasonality will be limited? We won't see the big bump maybe in revenue we typically see in the Q4 and maybe we should think about it a little bit flatter?

Speaker 4

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 4th quarter is usually a seasonally heavier quarter from a fiscal standpoint fiscal year standpoint as we profile the year.

Speaker 5

Understood. 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?

Speaker 2

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 as we're kind of butting up against capacities. There's eking out that leverage. We're kind of down to cost management and we've kind of echoed that throughout the organization on 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. But I think at this point forward, our best avenue forward is maintaining productivity and watching our cost side.

Speaker 5

Okay. I guess one last question, I'll get back in the queue. The cash build has been sizable. I mean historically when we had good revenues, it was working capital outflows. I haven't seen the cash flow statement yet, but it doesn't seem to be the case.

Speaker 5

Can you talk about how should we 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 4

Okay. Yes, John, I'll start and then Brett can chime in here. First, as we sit here today, the $365,000,000 of cash market securities, we feel has in large part plateaued. We consumed roughly $20,000,000 of capital to fund working capital this quarter. The offset to that was replenishment with the balance in new orders and the orders cadence in backlog and the associated advanced payments.

Speaker 4

So 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 2

And then on the uses of capital in future, John, in the prepared comments kind of made an update on the $11,000,000 expansion. 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 already got on the books for plans, but there are discussions about different facilities and what can we do, 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, that continues in earnest.

Speaker 2

Mike, I, the 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 has in store for us there.

Speaker 5

Great. Thanks Brett for the update. I'll get back in the queue.

Operator

Our next question comes from John Brets of Kansas City Capital. Please go ahead.

Speaker 3

Good morning, Brett. Good morning, Mike.

Speaker 4

Good

Speaker 3

morning. 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. But has that accelerated? Is that more than what is typically the case?

Speaker 4

That's been pretty static, John, over the past several quarters. And we typically run $30,000,000 to $40,000,000 a quarter of book to bill on top of the traditional backlog burn. So now that's been pretty stable.

Speaker 3

Okay. Okay, very good. And pricing, when we look at pricing throughout the quarter, any benefit from pricing?

Speaker 2

No, been pretty flat for a couple of 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 power, but the engineer components are still throttle most of what we compete on and we're out in the market and it's got it's improved. And so with that settled the pricing market a little bit. It's not eroded, but I don't think it's

Speaker 3

geographical standpoint in the U. S. Any anything you're seeing on the international front that suggests that we might see some stronger days ahead?

Speaker 2

Yes, that's good. We were just in the UK where we have the own factory, we compete 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 resurgence potential in the Middle East.

Speaker 2

It's been a little light there for a couple of years. So we see some potential growing for international and also some work in Africa that's pretty interesting to us. We have pretty good base of installed base from the North of Africa around mostly to the west side of Africa and we're seeing some brownfield work research that has got our interest. So, yes, I feel pretty good about that for next year.

Speaker 3

Okay. And then last, Brett, you spoke a little bit about the data center market and getting inside the 4 walls of a data center as opposed to outside. And can you talk a little bit about the process of getting into the 4 walls? What this opportunity size might be? What the potential might be?

Speaker 3

And where you see it going from here?

Speaker 2

Sure. So when you get inside the 4 walls, you're stepping down on the electrical one line into lower voltages. And we today could compete, but we're not optimized to compete in that. And it's of course 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 3 or 4 years, we're having very good substantive discussion about what are the designs, do they want a fixed mount breaker or a withdrawal breaker that dictates a little bit how we compete.

Speaker 2

But it also is giving us a lot of ideation and discussion about the R and D side, what can we do to our products to make them more competitive, to provide optionality to 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 ABL, the approved vendor list, but it's bidirectional. So we definitely have to do some things to improve the product. I think the service side of Powell is ready to go and 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.

Speaker 3

Is that where some of your a lot of your R and D spending is going in that area?

Speaker 2

Some of the more recent R and D. We have some projects that have been going on for years that are very targeted at the core industrials and utility. 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 solve the technical problem, we think we'll have a plus 1 differentiator.

Speaker 3

Okay. Thank you very much.

Speaker 5

You bet.

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.

Speaker 2

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. 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.

Speaker 2

We appreciate your continued trust in Powell. Thank you all for your participation today. We

Operator

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

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Key Takeaways

  • Robust Q2 performance: Powell reported revenue of $255 million (up 49% year-over-year), new orders of $235 million, net income of $33.5 million ($2.75 per diluted share), and maintained a backlog of $1.3 billion.
  • Improved margins: Gross profit rose 88% year-over-year to 24.6% of revenue, driven by a higher-margin mix of custom industrial projects and ongoing operational efficiencies from pandemic-era process improvements.
  • Capacity expansions underway: The Houston fabrication facility expansion is complete, and an $11 million electrical products factory expansion is on track for mid-fiscal 2025 to support new product launches and growing project volumes.
  • Positive market outlook: Strong fundamentals persist in oil & gas, petrochemical, utility and commercial markets (including data centers), though U.S. LNG export permit delays may modestly shift project timing.
  • Strategic priorities and balance sheet strength: Powell is focused on growing its electrical automation platform, expanding services, diversifying its product portfolio, and benefits from a cash-rich balance sheet ($365 million and no debt).
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Earnings Conference Call
Powell Industries Q2 2024
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