Powell Industries, Inc. (NASDAQ:POWL) Q4 2022 Earnings Call Transcript

Powell Industries, Inc. (NASDAQ:POWL) Q4 2022 Earnings Call Transcript December 6, 2022

Operator: Good morning. And welcome to the Powell Industries Fiscal Fourth Quarter 2022 Results Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead, sir.

Ryan Coleman: Thank you, and good morning, everyone. Thank you for joining us for Powell Industries Conference Call today to review Fiscal Year 2022 fourth quarter and full year 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 December 13. The information on how to access the replay was provided in yesterday’s earnings release. Please note that the information reported on this call speaks only as of today, December 6, 2022, 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. With that I’ll now turn the call over to Brett.

Brett Cope : Thank you, Ryan. And good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2022 fourth quarter and full year results. I’ll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a very strong fourth quarter to close out our fiscal year. Our deliberate and strategic efforts are yielding tangible results that are creating a more resilient, diversified and less cyclical future Powell that will lead to stronger growth across the economic cycle. I’m also incredibly proud of how our team has performed since the onset of the pandemic and its adverse effects on our business. After a challenging period of lower industrial activity throughout fiscal 2021 and into early fiscal 2022, we now enter our fiscal 2023 with the highest backlog in Powell’s history.

And across all the business, we are on an extremely strong financial footing while macro-economic factors such as elevated costs and the global supply chain certainly remain headwinds, we are in a very solid position to continue to execute our strategic initiatives and deliver improved profitability. Total revenue in the fourth quarter was $163 million, which was 26% above the prior year and higher by 20% sequentially. By market sector revenue from our oil and gas markets totaled $60 million and grew 24% compared to the prior year, while our utility revenue grew to 42% to over $40 million. Traction saw a modest decline of $3 million to just under $14 million. And petrochemical revenue fell 37% to $15 million. Revenue for the full year increased 13% to $533 million led by 15% growth in oil and gas, 13% growth in petrochemical, 10% utility, partially offset by a 24% decline in traction revenue for the year.

I’d like to take a moment to note that beginning this quarter, we are breaking out in a new market sector which we are calling commercial and other industrial. The sector consists mainly of markets where Powell has not historically had a strong focus. It includes applications for our products and datacenters, automation and cryptocurrency mining among others. For the full year, our revenue in this market sector more than doubled to over $56 million, which notably was higher than our revenue from our traction market. Order activity in the quarter was strong as we secured $259 million in new bookings. That figure is the highest quarterly totals since our second quarter of fiscal 2020 and is the sixth consecutive quarter of rising new gross order activity.

Our book to bill ratio in the quarter of 1.6 x was equally strong, and was the fourth straight quarter with a book to bill over one. As we highlighted on prior calls activity in our core oil and gas markets has lagged the overall recovery of the broader market activity. I am pleased to share that Powell was awarded a large industrial order to support the production of liquefied natural gas which we located on the US Gulf Coast. This significant award in our fourth quarter was complemented by continued robust activity, small to mid-sized project orders that spanned across all of our end markets. For the full year, new orders totaled $719 million, an increase of 78% compared to fiscal 2021. Our team’s delivered a gross margin in the quarter of 20.6%.

This was a sequential improvement of 650 basis points and 320 basis points higher than the prior year. We did benefit from a non-recurring event driven by a positive recovery of project related costs on a municipal project from a prior year, which contributed 130 basis points to the fiscal fourth quarter. After adjusting for that one-time benefit, strong project execution. favorable services mix and positive close outs helped to deliver the underlying margin growth. Michael will explain these effects in greater detail shortly. Moving to the bottom line, we reported net income of $8.7 million in the quarter or $0.73 per share, compared to $3.3 million, or $0.28 per share in the prior year. The net income line benefited from the aforementioned cost recovery, which contributed $2 million, or $0.17 per diluted share.

Full year net income was $13.7 million, or $1.15 per diluted share. During fiscal 2022, the company had three non-recurring events that when combined, contributed $0.80 er diluted share. Lastly, we ended the year with a total backlog of $592 million. This is the highest backlog in Powell’s history and represents sequential growth of 18%. And is 43% higher than the end of fiscal 2021. Our project backlog is well balanced across the markets we serve with the utility, commercial and other industrial sectors comprising a growing share of the backlog. Overall, from a commercial standpoint, the fourth quarter was another step in the right direction and marked the continued return of our key end markets. Turning to our operational performance, we continue working diligently to mitigate the effects of a higher cost environment.

While the prices for key commodities such as copper and steel have improved compared to previous levels, the price and availability of key engineered components remain material headwinds. Our teams are working hard to identify and address these price increases early enough to factor them into our bidding process and ensure they do not create significant cost overruns on current and future project activity. We continue to have an extremely strong focus on productivity and strong project closeout to protect our margins. We are also implementing pressing initiatives to align projects to the current cost environment where and when possible. We continue to closely monitor the cost of labor and our level of staffing across the business as we work to support the growth and timing of execution of our improved backlog.

While not a major headwind currently, we certainly appreciate the difficult nature of finding and retaining qualified employees as well as the rising costs of labor across the economy. Our human resources team has been working extremely hard over the last several quarters. We have an incredibly talented and resourceful group across the company that I am very proud of their tenacity, dedication and creativity have helped Powell effectively navigate the difficult labor environment thus far. I’d like to conclude with a quick recap of our strategic initiatives and where our attention has been focused throughout fiscal 2022. It was on this call one year ago that we formally introduce our three areas of focus for Powell. One year later I am very pleased with the progress we have made around each of these areas.

Powell continues to develop and expand our established and reputable line of electrical automation solutions. This past year, we released several digital products that will help our customers safely and reliably control the operation of the breaker. Additionally, we recently released a new and innovative product to measure and control the operation of switchgear, the Powell’s first digital current measurement sensor. And we have taken our first steps to offer secure subscription-based service contracts, helping our customers protect, monitor and control their high value assets and ensure peak performance. Our Global Services team is delivering strong results in line with our strategy. I’d like to take a moment to congratulate and thank all of our teams and our service business.

Their performance in the fourth quarter and for the entire year has been very strong. While there remains more work to be done, we have taken significant steps to expand Powell ‘s value proposition beyond installation and commissioning of our electrical products and solutions. This past year, we have demonstrated our ability to offer increased value to our customers providing value add engineering earlier in the project during the development phase of the power network solution. And we have demonstrated our ability to take an expanded scope of site services to help our clients more efficiently and cost effectively to meet their schedule and project requirements around the modification or repair of their electrical distribution systems. I’m confident that our service strategy will continue to build on these initial successes and be a true differentiator for Powell and for our customers going forward as we expand our portfolio of value-added services.

And finally, in addition to our digital products, our research and development teams have made good progress in our low and medium voltage product offerings. This past year, we have further expanded our Low Voltage FlexGear product with additional Low Voltage Breaker offerings. Powell’ FlexGear is the only ansi offering that provides a common platform, allowing our customers to use any commercially available low voltage air circuit breaker. Also notable this past year, our medium and high voltage bus team in Chicago led the adoption of our bus solutions to commercial markets. This is one of the contributing factors that led to Powell introducing the new commercial and other industrial sector noted earlier in my comments. And last, we welcome a new Vice President of Research and Development, joined Powell this past fall.

Marshall brings a proven track record of over 30 years successfully mapping and developing products and solutions that help customers improve their operations. Dennis Thonsgard who has contributed an impressive 50 years of service at Powell is transitioning from the R&D leadership role, a position he led for over 12 years to helping me further develop our organic and inorganic roadmaps in support of our growth strategies. Dennis is an invaluable part of Powell success. He has held roles in operations, and he led the development of what today is Powell global service organization. Overall, I am very excited about the path we are on and where Powell is positioned within the broader electrical distribution and management ecosystem. Our status as a leader in engineer to order value added solutions for complex electrical distribution applications is ideally suited for a growing number of electrification requirements across the globe that is driving increased demand for Powell often with new applications.

With that, I’ll turn the call over to Mike to provide more detail around our financial results.

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Mike Metcalf : Thank you, Brett. And good morning, everyone. I’ll begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2022 results. Revenues for the fourth fiscal quarter of 2022 increased by 26% to $163 million, compared to last year’s fourth quarter of $130 million. And were higher sequentially by $27 million as revenues increased across all of our market sectors on a sequential basis. Notably, we successfully executed a number of projects in the commercial and other industrial market sector this quarter, making accretive gains in markets where Powell has not historically focused. As Brett mentioned, as a result of the increasing activity across commercial and other industrial applications, we determine that it is appropriate to add an additional sector to our reporting.

As such a commercial and other industrial sector has been added to our traditionally reported sectors, which will encompass applications such as data centers, pulp and paper and mining applications among others. Growth in these markets is a core component of our strategic initiative. Net orders for the fourth fiscal quarter were $259 million, a $138 million higher than the same period one year ago, and strong demand spanning across most of our core end markets. Our industrial end markets remain very active specifically within the gas market, evidenced by securing a large LNG project in the quarter. Complementing the positive recovery of our core industrial end markets. we also continue to see positive commercial activity across all of our end markets.

As a result of the strong orders in the quarter, our fourth quarter book to bill ratio was 1.6x. Reported backlog at the end of our fiscal fourth quarter was a record high $592 million. $177 million higher versus the end of fiscal 2021. The substantial increase in the order book was driven primarily by the strength across our oil and gas, utility and commercial and other industrial end markets. Overall, we were very pleased with the orders performance across all sectors in the quarter and the resulting backlog position as we enter our fiscal 2023. Compared to the fourth quarter of fiscal 2021, domestic revenues of $133 million increased by $38 million or 41%, while international revenues decreased by 15% to $30 million on the winding down of large customer projects in the Middle East and Asia.

From a sector perspective, revenues from our core industrial sector increased by 4%. The utility sector was higher by 42%. While the commercial and other industrial sector was higher by nearly 3x versus the same period one year ago. These sector increases were offset somewhat by traction, which was lower by 18% versus the same period a year ago, as we successfully wind down a large municipal project in Canada. With respect to the year-over-year volume increase across our core industrial sector, this was driven by a 24% increase in oil and gas revenues while petrochemical sector was lower by 37% versus the same period a year ago. We reported $33 million of gross profit in the fiscal fourth quarter of 2022, which was higher by $11 million, or 49%, versus the same period in the prior year.

Gross profit as a percentage of revenues increased by 320 basis points to 20.6% of revenues in the fourth fiscal quarter compared to one year ago. The higher margin rate was driven by an increase in services volume across the business, coupled with a favorable mix of faster and service work in the quarter, as well as broad based project productivity and associated project close outs. Notably, the margin rate also benefited from the favorable closure of a long-standing prior year claim related to costs associated with a US based municipal project, which generated $2.5 million of gross profit or an incremental 130 basis points to the margin rate in the quarter. Selling, general and administrative expenses increased by $4.5 million or 27% in the quarter versus the prior year, attributable mainly to variable performance-based compensation.

SG&A expenses were $21 million in the fiscal fourth quarter or 13.2% of revenue, compared to 13.1% of revenues a year ago, and the higher volume in fiscal 2022. Overall, the team remains diligent managing overhead costs while continuing to focus on addressing the critical resource requirements necessary to fulfill the order book. On a net reported basis, fiscal fourth quarter net income was $8.7 million, or $0.73 per diluted share, which included $2 million of nonoperational income attributable to the previously mentioned prior year municipal project cost recovery, generating $0.17 per diluted share. We generated $24 million of free cash flow in the fiscal fourth quarter driven by favorable project collections and strong working capital performance in the period.

CapEx spending during the quarter was $686,000. Now recapping our total year fiscal €˜22. Revenues of $533 million increased by $62 million, or 13% compared to the prior year. Orders were $719 million, 78% higher versus fiscal 2021 led by the sustained recovery of our oil and gas end market, coupled with the continued market penetration in the utility sector and the incremental growth in the commercial and other industrial end markets. Gross profit as a percentage of revenues was flat year-over-year at 16% successfully offsetting the inflationary headwinds and supply chain challenges that we encountered throughout most of fiscal 2022. Selling, general and administrative expenses were higher by $3.6 million versus the prior year. Overall, net SG&A expenses as a percentage of revenues were lower versus the prior year by 100 basis points and 13.3% of revenues in fiscal 2022 versus 14.3% in the prior year.

We reported net income of $13.7 million, or $1.15 per diluted share. During fiscal 2022, we had three non-recurring events, two previously noted in the third fiscal quarter earnings call, and the municipal cost claim recovery impacting the fourth fiscal quarter that when combined contributed to $0.80 per diluted share in fiscal 2022. Total fiscal year 2022 free cash flow was a usage of $6 million versus a cash usage of $33 million in the prior year. At the end of fiscal 2022, we had cash and short-term investments of $117 million, $17 million lower than our fiscal 2021 yearend position, the company holds zero long term debt. As we look forward to fiscal 2023, we’re encouraged with the current commercial momentum across our core end markets, and are optimistic that this will continue throughout fiscal 2023.

Based upon our fiscal year end order book at $592 million, coupled with the strong commercial activity that we’re presently experiencing, we anticipate solid revenue growth into fiscal 2023 versus the prior fiscal year. Additionally, as a result of the pricing actions and cost discipline initiated throughout the past 12 to 18 months, as well as the anticipated productivity that the operational teams are focused on, we expect continued improvement in project quality, resulting in increased profitability across the business in fiscal 2023. Based upon these dynamics and accounting for the typical seasonality that we will experience during the first fiscal quarter of 2023, we expect to significantly improve total year outlook in terms of revenue and earnings versus fiscal 2022, excluding the nonrecurring items that I mentioned previously.

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

Q&A Session

Operator: Our first question here will come from John Franzreb with Sidoti & Company.

John Franzreb: Good morning, Brett and Mike. And thanks for taking the questions and congratulations on a great quarter. I guess I want to start with some prepared remarks. Brett, you kind of talked about the $0.80 of onetime items kind of suggests that we should use as a starting point of $0.35 for fiscal 2022 as the number going into 2023. Is that how we should look at it? And if so, you’ve mentioned the season out in the business in the press release, has a seasonality playing in Q1 versus Q4.

Brett Cope: Thanks John. Yes, absolutely. That’s how I would look at it underlying gross margins are still where our operational focus has been, always is and will continue to be even more so heading into next year with the backlog and sure we can continue to make incremental growth on those margins and improve the overall profitability of the base business. The seasonality it is, it always hits us first quarter, we fight the two holiday periods, just from a spin down spin up time and managing through. So there’ll be some of that as we kind of plough into the fiscal year. But then, at this point, we expect to recover in the Q2 and on throughout the rest of the fiscal year.

John Franzreb: Okay, and it seems like the services business was a sizable contributor to the profitability in the quarter. Can you talk a little bit about why that was the case? What percentage of revenue, it wasn’t a quarter, maybe relative to the third? Any kind of context there would be helpful.

Brett Cope: It was a very significant contributor to the year. I think two general themes. One as we come out of the pandemic, just sort of the pent-up demand in aftermarket brownfield work that was not being done in ’20 and €˜21. There was certainly some of that, that’s the short cycle comments that both Mike and I alluded to. And then there is the element of the strategic side where the team did a nice job taking a risk approach to other projects out there to expand our services both on the front end of the project as well as the back end of site services to prudently look at the jobs and make commercial tenders into these markets to test our strategies and to build capability into the team, and we’re successful throughout the year, these jobs tend to be a little quicker on the cycle than a long run capital project. Not always some of the service jobs that are larger, they are a little longer but definitely contributed to the success of the financial year.

John Franzreb: Okay, and I hate to put you on the spot, but looks like the adjusted gross margin this quarter was about 19.3%. You have record backlog. I remember a time when 19%, 20% gross margin was eminently achievable. Is this a run rate that you can maintain for the full year or there? I can think of headwinds, but are there enough headwinds that kind of prevents that from materializing?

Brett Cope: Yes, no, I wouldn’t sit here today and say it’s a full year. I’ll call it a gold. But we’re, today, Powell that sits versus those years past is that theme of we got a lot more mouths to feed on our footprint than what we had 10 or 15 years ago. We do have a sizable backlog. And it is across all divisions, which is nice power to have heading into the year. But our goal would be to increment from the underlying operational gross margin coming out of the year without the one time. Mike, you had anything.

Mike Metcalf : Yes, I think, Brett, you hit it right on the head, the mix that we’re experiencing over the last year and looking into fiscal €˜23 is substantially different than you refer to prior periods back in when gas was really going to a little different mix heading into €˜23.

Operator: Our next question will come from Jon Braatz with Kansas City Capital.

Jon Braatz: Good morning, Brett. Good morning, Mike. Can — I was wondering if you could add a little color to the LNG award. How big it might be? Bigger than a breadbasket. And then maybe also maybe the sequencing of revenue and cash flows that might be associated with that project, and also maybe the margin profile of the LNG award.

Brett Cope: So first comment I’d make is, as we’ve kind of mentioned, all of last year into the fall in the spring, the activity continued to pick up this is a greenfield award, it is in line with what we classically would call a mega project. So back in the days, when the offshore market was screaming, we usually used to call that kind of in the $30 million to $50 million range. This is on the north side of that. And so it’s a very complex project with a lot of challenges to it, which is where we’re well built, the burn rate on this will go two plus years. There’s a lot of when they get difficult, there’s usually a lot of uncertainty in the back end of the project, it has a little bit starting off, but it’s a job, we know very well, high complexity, and we’re pretty excited to have it.

On the margin side, just general pricing comment I’d make is it is still competitive, but I think we’ve made some progress on price in the market throughout the entire fiscal year. But still cognizant that it’s a competitive world, and generally, the larger the job, it draws more attention competitively. So there’s a little bit that woven into this one as well.