Powell Industries Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Powell Industries Fiscal Third Quarter 20 24 Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman with Alpha IR. 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 Q3 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 August 7. The information on how to access the replay was provided in yesterday's earnings release.

Speaker 1

Please note that information reported in this call speaks only as of today, July 31, 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 future 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 now 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 2024 Q3 results. Before we get started, I'd like to take a moment to recognize the devastating effect that Hurricane Burrell has had on the Greater Houston area and most importantly the effect it has had on our Powell team members, many of whom were impacted by the storm's initial hit to the city as well as the well documented and lengthy impact power availability in the Houston region, which is home to our company and so many of our employees. Our concern for the safety and well-being of our employees is not only our number one priority, but also extends beyond the job site and the time they spend here at our facilities. They have shown incredible resolve dealing with the adversity of the past month and each of them have Powell's full support as the Houston area returns to normalcy.

Speaker 2

Operationally, our facilities here in Houston were without power for varied lengths of time. The longest impact was nearly 5 working days. We are working with our clients to minimize any subsequent impact on production schedules and do not expect a material impact on our revenue outlook for the fiscal Q4. With that, let's review our quarterly results. Our fiscal Q3 reflects the strong operational execution the Powell team continues to deliver and further validates our strategy as well as our unique market position as an integrator of complex engineered to order electrical solutions.

Speaker 2

Revenues in the quarter were 50% higher than the prior year as we saw strength across nearly all of the market sectors we serve. The revenue growth was driven by our core industrial end markets as oil and gas and petrochemical revenues grew 56% and 158%, respectively. Our utility sector also delivered a strong performance. Mike will provide further detail on our results by sector in a moment. We booked $356,000,000 of new orders in the highest quarterly total of fiscal 2024 and orders were spread broadly across our key end markets.

Speaker 2

We saw a significant increase driven by our electric utility sector further underscoring the strength we are seeing in that market. While we are we were also awarded a notable petrochemical order for a greenfield project to be located in North America. In addition to the higher revenues, our focus on project execution and operational efficiency continue to support improved gross margins. Our gross margin our gross profit in the quarter nearly doubled versus the same period in fiscal 2023, achieving a gross margin of 28.4 percent of revenue. This is an improvement of 6 20 basis points compared to the same period in fiscal 2023 and is the highest quarterly gross margin Powell has recorded in over a decade.

Speaker 2

Another encouraging dynamic we are observing is the improvement in gross margins across the whole of our business, including many of our non industrial markets. Historically, projects in these markets tend to carry a slightly lower average gross margin than highly complex electrical solutions. However, we are now seeing that gap narrow as the economics of these non industrial markets are improving and Powell becomes more effective in our manufacturing and delivery process. Our backlog was effectively unchanged sequentially at $1,300,000,000 and remains the highest in Powell's history. We continue to be very pleased with the overall composition of our backlog as well as the timelines and margin profile of the projects that constitute our order book.

Speaker 2

On the bottom line, we recorded net income of $46,200,000 or $3.79 per diluted share, which was more than double the $18,500,000 or $1.52 per share in the prior period. Our capacity initiatives continue to move along as planned to help further facilitate the execution of our current backlog as well as plan for modest volume growth going forward. Last year, we completed the expansion of our Houston facility on the Gulf Coast, which is providing us with incremental fabrication and integration support for large power control rooms, especially for projects that support delivery and transport by water access. The previously announced expansion of our electrical products factory in Houston is also progressing as planned. This $11,000,000 factory addition is expected to be completed in the middle of fiscal 2025 and coincides with our initiative to release new products support of our future growth across the customers and markets we serve.

Speaker 2

Most recently in early July, we acquired 9 acres of property neighboring our Houston headquarters location for a total consideration of $5,500,000 We are currently undertaking some minor remediation work to get the space prepared for productive use and we expect this additional property to contribute incremental revenue in fiscal 20 25. Year to date, our R and D spend is up 49% as we advance our innovation initiatives to develop new technologies and are confident that we have the right people in place to meet the demanding project schedules of our backlog. However, as we've stated before, a critical area of focus for Powell remains the acquisition of talent at all levels to support Powell's long term growth strategy along with opportunities we see across most of our key markets. Looking forward, expectations for project activity and new orders across our markets 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. Near term activity remains subdued as a result of the U. S. Department of Energy policy regarding LNG export permitting. However, we have not altered our long term planning for this market.

Speaker 2

The fundamentals for our oil and gas and petrochemical markets continue to support our expectation for continued strength for these sectors. This sector includes energy transition projects such as biofuels, carbon capture and hydrogen, areas where Powell has not historically participated, but where we are seeing a substantially higher volume of project activity. Activity within our commercial and other industrial market also remains attractive, which includes activity within the data center market. As we outlined on our 2nd quarter call, we believe the strong growth that we have seen so far in this market for Powell has a larger potential as we continue to qualify more of our products and services for the future of this important end market. Lastly, the outlook for our utility market remains very positive, supported by a recent return of new generation work in addition to Powell's leadership in utility distribution substations.

Speaker 2

We've been very pleased with both the volume of projects coming to market as well as our win rate on the orders we have booked thus far. Overall, we are very happy with our Q3 performance and we remain confident in the composition of our current backlog, the near and medium term outlook for our key end markets as well as our strong financial position. Altogether, we continue to expect a favorable operating environment for Powell as we focus on successfully delivering the projects in backlog to our customers and advancing our strategy. With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail.

Speaker 3

Thank you, Brett, and good morning, everyone. As Brett noted, our revenues for the Q3 of fiscal 2024 were 288,000,000 dollars compared to $192,000,000 or 50 percent higher versus the same period 1 year ago and higher sequentially by $33,000,000 New orders for the 3rd fiscal quarter were $356,000,000 $121,000,000 or 51% higher sequentially and $149,000,000 or 30 percent lower versus the same period 1 year ago and a challenging comparison as the prior year period contained 2 LNG mega project bookings. While there were no similar sized projects booked in the current quarter, there were a number of significant bookings in the 3rd fiscal quarter as we continue to experience strong demand across most of the end markets and geographies that we compete in. As our efforts to broaden our penetration into tangential markets outside of our core industrial end markets continues, we experienced order growth sequentially across all market sectors, but most notably in the utility and commercial and other industrial sectors, increasing 77% 63%, respectively. As a result of the sustained strength across all of our market sectors, we recognize a 1.2 times book to bill ratio in the Q3 of fiscal 2024, resulting in ending backlog of $1,300,000,000 which was flat versus 1 year ago and higher by $64,000,000 sequentially.

Speaker 3

Compared to the prior year, domestic revenues improved by 59% to $244,000,000 while international revenues were 14% higher driven by increased project volume across both of our international operations in Canada and the United Kingdom. In total, international revenues were up by $5,000,000 to $44,000,000 in the 3rd fiscal quarter. From a market sector perspective versus the Q3 of fiscal 2023, we experienced healthy growth across the majority of our market sectors. Revenues across our core industrial, oil and gas and petrochemical sectors sustained their positive momentum with the oil and gas sector higher by 56% and the petrochemical sector higher by 158% as we continue to benefit from the revenues exiting the backlog on the large petrochemical order that was booked in fiscal 2023. We also experienced solid growth in both the electric utility and the commercial and other industrial market sectors increasing by 30% 18% respectively, reflecting our focus on thoughtfully expanding our presence in these markets.

Speaker 3

The light rail traction power sector was lower by 25% as this continues to be a market sector that we demonstrate discipline and selectivity. Gross profit in the Q3 of fiscal 2024 increased by $39,000,000 to $82,000,000 versus the same period 1 year ago. Gross profit as a percentage of revenue increased by 6 20 basis points to 28.4% versus the same period a year ago and was 380 basis points higher sequentially. The current quarter margin rates all across our business benefited from a higher volume of project closeouts, strong project execution and operational leverage. We have also been steadily building a healthy order book in geographies and market sectors that historically carried lower margin rates, but today are adding to the overall margin story as they exit the backlog.

Speaker 3

Selling, general and administrative expenses were $22,000,000 in the current period, higher by $2,000,000 as we had higher spending on 260 basis points to 7.6% in the current fiscal quarter on the higher revenue base. In the Q3 of fiscal 2024, we reported net income of $46,200,000 generating $3.79 per diluted share compared to a net income of $18,500,000 or $1.52 per diluted share in the Q3 of fiscal 2023. During the Q3 of fiscal 2024, we generated $13,800,000 of operating cash flow driven by higher earnings generated in the quarter partially offset by an increase in working capital as we allocate capital to the projects in the order book. Investments in property, plant and equipment in the fiscal Q3 totaled $1,400,000 At June 30, 2024, we had cash and short term investments of $374,000,000 compared to $279,000,000 at September 30, 2023, and $365,000,000 dollars at March 31, 2024. The company does not hold any debt.

Speaker 3

Looking forward, we remain very encouraged with where Powell is positioned as we enter the last quarter of fiscal 2024. Commercial activity across most of our market sectors remain strong, providing a tailwind as we close out the Q4 of fiscal 2024 and prepare for fiscal 2025. Operationally, we are confident that we have the necessary infrastructure and resources to execute our growing backlog, while also continuing to progress our plans to thoughtfully expand our capabilities. Notwithstanding the typical challenges associated with a projects based business. Based upon the quality of our backlog and our liquidity position, we are well positioned to sustain the year to date financial performance through the Q4 of fiscal 2024, while also providing a strong entry point as we look forward to fiscal 2025.

Speaker 3

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

Operator

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

Speaker 4

Good morning, Brett and Mike, and congratulations on another stellar operating results in the quarter.

Speaker 2

Thanks, Jeff.

Speaker 4

I'd like to start with in the second quarter, you seem to suggest that you are at max capacity. However, revenue exceeded that threshold. How should we reset our expectations of what max capacity really is?

Speaker 2

So we are definitely coming up against limits. I mean, there are still capacity initiatives as we shared in the prepared comments today, John. And still, if you think back in time, some of the facility investments we did over a decade ago, provides a different profile when you kind of build the model looking back over time. But in Q3 being a projects business, there were some really healthy closeouts. There were some timing effects on given the wide breadth of project and the size of the backlog.

Speaker 2

There's always an element of buyout timing when we hit the POC accounting. So little choppiness, I think, in the Q3, it sort of hit on the top side.

Speaker 4

How much we have in project closeout revenue in the quarter?

Speaker 3

Yes, John, I would given this is a project space business to tag on to what Brett said, it's not unusual for us to experience choppiness across the quarterly landscape project closeouts, buyouts, things of that nature making their way through the system. And with this in mind, we exited the 3rd quarter on a year to date basis at 26.1 percent gross profit, which is probably the appropriate barometer as we calibrate what's exiting backlog. With respect to precisely the amount in the discrete 3Q that was accretive to that base margin rate, it's probably roughly 150 to 200 basis points.

Speaker 4

Got it. That's very helpful, Mike. And then regarding the gross margin, the new bookings, is it fair to assume that they are higher margin than bookings that you've taken in a year ago?

Speaker 2

I wouldn't say that. I'd say that coming out as we ramped up last year with the 2 big quarters and then sort of stabilized into the latter part of the calendar year and into this year from even previous quarters, it's continued to hold pretty constant, John, on the market pricing. And if anything, we've shifted our outlook to cracks in the story. And through this quarter and last quarter as we noted, haven't seen them, but we do have our radar up for changes in the markets where we are competing.

Speaker 4

Okay. Just it sounds like you're more constructive on the utility market than you were say 6 months ago. Can you talk a little bit about what's going on there and what's the opportunity profile as you see it?

Speaker 2

Yes. I did. You're absolutely spot on. I appreciate the question, John. Utility market, as you know, over the long haul, we've intentionally built a strategy, especially on the distribution side, with the infrastructure spend and hardening, if you will, and the resilience that the utilities are building in U.

Speaker 2

S, Canada and U. K. Specific, where we're really focused. There's some international there, but that's the bulk of our core market. More recently, we are seeing some new generation market.

Speaker 2

I won't say it sort of went away, but it's coming back a little stronger. And then our participation rate is stronger. And so thus in the prepared comments about our increased win percentage, there seems to be a little bit longer profile with some of the whether it's an IOU or public or co op outlook and how they're planning for the future. And it's kind of brought Powell back into the mix on some of these discussions and very healthy chats and we're pretty excited by the resurgence.

Speaker 4

Okay. And one last question, I'll get back into queue. It's hard to ignore how quickly cash is building. Historically, there was a use of cash during times of large project work, but it doesn't seem that the same magnitude is simply playing out in the current results. Can you talk a little bit about use of cash?

Speaker 4

How should we think about the cash flow going forward? Any additional color there would be really helpful. Thank you.

Speaker 2

Yes. I'll start there and I'll let Mike jump in. So on the cash, I mean, you raised a good point. We do expect the working capital part to grow and Mike will provide some color there. When we have a nice quarter like we did in Q3 with the bookings, the payment milestones will buoy that until that gets put to work in a later period.

Speaker 2

So that is sort of raising the overall profile of cash and certainly providing good free cash flow quarter over quarter. As we look forward, if you look at the capital side, it is ramping 2022 to 2023 to 24. I think when we get through Q4, you'll see the land that we just shared that we acquired that will hit. So capital spend along with equipment will continue to rise in the coming quarters. The R and D spend, I believe, is up 50% per my prepared remarks.

Speaker 2

That will continue to rise incrementally. And then, we talked a lot about last couple of years on the M and A side. That continues in earnest. And while there's nothing that we're announcing today, there's a number of active areas out in the world that we're looking at to figure out if and how fit into the portfolio and what that means for the future. So it's pretty active area and we're hopeful that in the next 12 to 24 months that will chew up some of that cash.

Speaker 2

And then also the continuing discussion on

Speaker 3

increasing the dividend. That's an active discussion every quarter with the Board. And to follow on, John, you are absolutely right. Traditionally, this business, as you win big projects, you've got a lot going on in the shop. We do chew up a lot of the cash with working capital, which is happening today.

Speaker 3

But as you see from our current discrete 3Q results of book to bill ratio of 1.2, we stay at that 1, 1 plus book to bill ratio. You kind of stay ahead of the curve from a cash inflow perspective. So and keep in mind that of the $374,000,000 of cash balance, roughly $175,000,000 of that, so just under half of it, will be deployed at some point in time to support the execution of these projects.

Speaker 4

Great. Thanks, Mike. Thanks, Brett. I'm getting back to queue.

Speaker 3

Thanks, John.

Operator

And the next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Speaker 5

Good morning, Brad.

Speaker 3

Good morning, Jon.

Speaker 5

Brad, you mentioned a couple of times in your commentary that your win rates are improving. And you compete against a lot of big guys. And I guess my question is specifically, what do you ascribe to that your win rates are getting better? You're taking share. What can you pinpoint that improved win rate too?

Speaker 2

Well, I'll go back to let's start with utility, John. The intentionality on the distribution side has been going for 10 years plus. As a lot of the infrastructure in the U. S, Canada and U. K.

Speaker 2

Has come up for renewal and they're looking at their longer term reliability. We've been there with the enclosed PCR power control room solution and of course Powell's breakers, the sweep of the PowerVac and the PowerVac as the core value proposition. And that's been working really well for 10 years, 12 years. The generation has historically been a very, very tough area to compete in. It became fewer and fewer engineering firms that were competing.

Speaker 2

Price point really changed. It does seem to have changed a little bit here. It isn't all just what I'll call traditional generation. As I look at the numbers, there's a little bit of new transitional. I'm not going to sit here and tell you we're going all out in battery energy storage systems, but I do see it in the numbers.

Speaker 2

We're winning through different channels as well. We're not maybe always going after the full power control, Ms. Powell. We're taking out the best part that makes sense for us and letting others do things in that market that are better than us. And so, we're winning the higher quality part that makes sense for the company and the shareholder.

Speaker 2

So there's a little bit of that mix in there as well. When I look at the other segments, as LNG came back post pandemic, yes, I think we did very well. I think it's sort of moderated now to more of a run rate on that market. And then our traditional customers, very big focus at Powell as I talk about executing and meeting our dates, just something that we can never take our eye off. It is one of the value differentiators of Powell versus other models that don't have the under one roof approach that Powell has.

Speaker 2

And when customers need something under critical time element, that's an area that we are I just I don't intend losing that argument. We're going to go hard at that and ensure that if the client needs it, when they say they need it, we're the best option in the market.

Speaker 5

Okay. All right. Thank you. And Mike, your backlog was flat year over year, but your rates, you had a book bill 1.2. Can you talk a little bit about your sort of your book to burn business during the quarter?

Speaker 5

I think we've in the past sort of thought it was sort of like $40,000,000 or $35,000,000 per quarter. It seems like it must be better than that. What can you tell us about that?

Speaker 3

No, that really roughly that hasn't changed substantially, aspect of the backlog. Last quarter, if you looked at the $1,300,000,000 of backlog, the convertibility over the next 12 months was in the mid-fifty percent range. This quarter, as you'll see in the Q when we publish it right after this call, that's up in the 60 percentage range. So we're getting a little bit more out of out the door from our backlog and that's helping elevate the revenue level as well.

Speaker 5

Okay. Okay. All right. And one final question. You've amped up your R and D spending.

Speaker 5

What can you tell me sort of like what might be in your R and D portfolio? And what might be the expectations of that investment in the next 2, 3 years? You give us an idea of what you're working on and the potential impact?

Speaker 2

So the first new development just rolled out this year, John, just to give you an example. It's a station breaker product. It's targeted to the utility renewable market. It's not new technology. There are many folks out there that make a station breaker.

Speaker 2

We think we've got some unique value proposition in what we've come up with. We've targeted the higher end of Powell strategy and 38 kV, so very robust design for the high end of the curve on the voltage. So if you then look at all the segments, that's kind of what we're looking at is, what's out there as a problem that needs to be solved. I think Marshall and his team are doing a great job on working with product management and sales and helping us figure out that roadmap. And so subsequent quarters and the next year, you'll see things that are very electrically centric on the switchgear side, product based, supporting not only in the projects business, but also supporting a product strategy through other channels into the market.

Speaker 2

So as I noted on some of the win rate stuff, where can we help all parts of the strategy of the business. So the market sectors as well as the channels to fulfill our goal of getting back to our electrical roots and being a go to supplier for solving that distribution needs.

Speaker 5

Okay. All right. Thank you much.

Speaker 4

Yes. And

Operator

our next question comes from John Franzreb with Sidoti and Company. Please go ahead.

Speaker 4

Thanks for taking the follow-up guys. I'm actually curious about the 9 acres of property that you purchased. We put it in terms of acreage. Is there a facility located on that you convert or is it a greenfield something? What's your intended use in capital outlay that you're thinking about in addition to the property purchase?

Speaker 2

Yes. So, that was an opportunity that came along. We were out in the market, John, looking at some warehousing options short term initially, really to house some of the material that comes into power, the engineered, especially the engineered equipment that we spec and acquire that goes into the integrated offering. And so it was just an opportunity that when it came open right behind our main facility, our largest facility of the 7 here in Houston, We looked at it, had good chats over the almost 2 quarters worth of back and forth and did it really make sense. And so as we look forward, it needs a little bit of work.

Speaker 2

It's quite a bit of land. There are several office buildings. There is some warehousing capability there that we'll use immediately where we can offload some of the 3rd party kit that's sitting in and around a couple of our factory locations in here. So that will give us the ability to free up and do some productive work in the existing facilities by just getting some of the clutter better organized. And then, yes, longer term, we have some ideation going on about expanded capacity and the lines we could move over there to build.

Speaker 2

You could move one of our gear lineups over there, start staffing it. It's about it's across the street, so it's not contiguous, but it is immediately behind the facility. And then as we think about the previous question from John, Bratz, what other else coming down the pipeline that we might be able to put there or even rationalize within other parts of our footprint.

Speaker 4

So no more equipment in the parking lot. Is that what you're telling me?

Speaker 2

Well, we're pretty full in the parking lot if you come here today, but we are definitely going to try that.

Speaker 4

Okay. You don't want to put a number on how much an additional CapEx it would take to get everything up the way you want it?

Speaker 2

I think less $1,000,000 I mean we spent a lot in diligence. It will come out in Q4. It will be a little higher than $5,500,000 And then to get it up and going productively, the warehousing side will be pretty quick. If we start to invest and actually add fabrication or say some assembly lineup material that would be something we'll share with you and the shareholders in the coming calls. But that would be a minor capital increase unless we actually go into fabrication and expand beyond mostly put it over there.

Speaker 4

Got it. Understood. Thank you for taking my follow-up. Congratulations again.

Speaker 3

Thanks.

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, David. Overall, it was a solid Q3 and I am very proud of every one of our 3,100 employees. You for your hard work and quality execution and for your exceptional commitment to the success of our customers. Our current backlog combined with the broad market activity we continue to experience across most of our market sectors provides us excellent momentum as we plan fiscal 2025. You all for your participation.

Speaker 2

We appreciate your continued interest in Powell and look forward to speaking with you next quarter.

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Key Takeaways

  • Revenues in Q3 were $288 million, up by 50% year-over-year, driven by broad strength in industrial end markets including oil & gas (+56%) and petrochemical (+158%).
  • The company booked $356 million of new orders—the highest quarterly total of fiscal 2024—with a 1.2x book-to-bill ratio and maintained a record backlog of $1.3 billion.
  • Gross margin improved to 28.4%—a 620 basis point increase year-over-year and the highest in over a decade—reflecting strong project execution and narrowing margins in non-industrial markets.
  • Net income more than doubled to $46.2 million or $3.79 per diluted share, while cash and short-term investments rose to $374 million and the company remains debt-free.
  • The company is investing in capacity and innovation, including an $11 million factory expansion in Houston slated for mid-2025, a $5.5 million land acquisition for future operations, and a 49% increase in R&D spend.
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Earnings Conference Call
Powell Industries Q3 2024
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