Powell Industries Inc

NASDAQ:POWL

Earnings Call Analysis

Upbeat Earnings and Cautious Future Outlook

The company experienced a solid first fiscal quarter, incurring only modest overtime as it navigated capacity utilization. No significant growth in overtime is anticipated. Uncertainty looms around LNG projects due to potential government decisions, yet executives remain optimistic, citing a current slight slowdown rather than a derailment. LNG-related backlog comprises 25-30% of total backlog. CapEx expansion is approaching with a planned $10-11 million facility expansion in Houston, albeit with some timing uncertainty due to the permitting process. Additionally, a one-time favorable tax item boosted this quarter, with a target effective tax rate (ETR) of 24% moving forward. Despite increased uncertainty in order bookings due to timing and market conditions, company management remains positive about near-term prospects but signals caution for the midterm.

Strong Start to Fiscal Year with Robust Order Book and Revenue Growth

This fiscal year began on a high note with a continuation of robust trends from the previous quarter. Despite the expected seasonal slowdown, the company secured $198 million in new orders, marking a 15% sequential increase, signaling healthy demand for its projects. Moreover, revenue saw a monumental 53% upsurge from the previous year, attributed to strong performance across sectors such as petrochemicals, oil and gas, utilities, and industrial markets. This broad-based growth has been instrumental in driving profitability.

Significant Improvement in Gross Margin and Net Income

With a keen focus on project execution and operational efficiency, the company's gross margin reached an impressive 24.8%, evidencing a remarkable 950 basis points enhancement from the previous year. This figure represents the highest first-quarter gross margin since fiscal 2010 and reflects the company's ability to improve profitability significantly. Furthermore, net income skyrocketed to $24 million or $1.98 per diluted share, a substantial spike from the previous year's $1.2 million or $0.10 per diluted share, demonstrating the company's strong earnings capability.

Consistent Backlog, Expanded Facilities, and Competency Focus

The company's backlog remains robust at $1.3 billion, signaling a steady stream of future work, mainly aligned with the company's core competencies. Strategic investments, such as the completed capacity expansion of the Houston Gulf Coast facility, are in place to support large power control room projects with water access. An additional $11 million expansion is underway to enhance the electrical products factory in Houston, with an 18-month estimated completion time. This expansion aligns with the roll-out of new products and is anticipated to catalyze growth across various customer segments and markets.

Strategic Maneuvering Amidst Macro Challenges

Despite the positivity, the company remains cautious of the ambiguity in macro factors that might affect project timings. The actions by the U.S. administration are expected to introduce some delays, although the long-term outlook for natural gas markets in the U.S. is still seen as favorable. Moreover, the company is actively monitoring and successfully managing fluctuations in material prices and availability of engineered components, essential in achieving their operational targets.

Financial Strength and Dividend Increase Demonstrating Shareholder Value

Financially, the company is in a strong position with $355 million in cash and short-term investments, a healthy increase from the prior quarter's $279 million, maintaining a debt-free status. In reflection of their success and confidence in the company's prospects, the board has announced a 1% increase in the common stock dividend, marking the second consecutive year of such increases. By taking a cautious approach towards shareholder returns, the company ensures it has the liquidity necessary to fulfill working capital needs and fund growth activities.

Ongoing Capital Expenditures and Future Investments

Capital expenditures are managed carefully, with a normal rate of $4 million to $5 million and a planned expansion at one of the Houston facilities for an additional $10 million to $11 million. The company has commenced the initiation process but faces some uncertainty regarding the timing due to the permitting process. Once permits are in place, ramping up the expansion is expected to take a year from late summer. Meanwhile, the company maintains a 24% effective tax rate (ETR) target, despite a one-time favorable tax item in the first quarter that reduced the ETR, which was connected to the appreciation of stock value and stock-based compensation activities.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the Powell Industries Fiscal First Quarter 2024 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Alpha IR, Investor Relations. Please go ahead.

[Ryan Coleman]

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2024 first 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 made available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 8. The information on how to access the replay was provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, January 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. With that, I'll now turn the call over to Brett.

[Brett Cope, executive]

Thanks, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2024 first quarter 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 delivered a strong start to our fiscal year, as our first quarter was very much a continuation of the trends and strong results we saw in the prior quarter. Despite what is typically a seasonally slow period, we recorded $198 million of new orders, which was sequentially higher by 15%, and in line with our expectations for a more normalized but still strong cadence of project bookings. We also delivered revenue growth of 53% compared to the prior year, as we saw a broad strength across our petrochemical, oil and gas, utility and commercial and other industrial sectors. Mike may provide additional detail on our revenue growth by market sector in a moment.

Our strong revenue growth, coupled with maintaining our focus on both project execution and operational efficiency, are all working together to help deliver significantly improved profitability. Our gross margin in the quarter was 24.8%, an improvement of 950 basis points compared to last year, and the best first quarter gross margin performance since fiscal 2010. It also puts us comfortably on track to deliver on our previously communicated guidance of gross margin in the low 20s in fiscal 2024. On the bottom line, we recorded net income of $24 million, or $1.98 per diluted share, which was significantly above net income of $1.2 million, or $0.10 per diluted share, in the year ago period.

Our backlog remains very strong and was roughly unchanged sequentially at $1.3 billion. We continue to feel confident that our current backlog is comprised mainly of projects that speak to Powell's core competencies. The capacity expansion of our Houston facility on the Gulf Coast is effectively completed as we noted last quarter. This investment was planned last year to give us expanded fabrication and integration support for large power control rooms, especially for projects that support delivery and transport by water access. Also, as we noted last quarter, we expect to launch a more modest expansion of our electrical products factory based in Houston. This $11 million expansion will take approximately 18 months to complete. The investment coincides with our development plans to release new products in support of our initiatives, helping facilitate future growth across the customers and markets we serve.

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 of our current backlog. Our teams also continue to successfully manage price fluctuations of key materials as well as the general availability of select engineered components. We continue to see encouraging levels of project activity within our oil, gas, and petrochemical markets. As we have noted for some time, we believe the fundamentals of the U.S. natural gas market remain favorable for our core markets to support many global economic and environmental goals over the long-term horizon. Recent and oddly timed actions by the current U.S. administration will most likely serve to slightly slow the pace of project schedules, creating a bit more uncertainty around project timing over the near term.

We also continue to see healthy activity across the other markets where we compete. We enjoyed solid contributions to the order book in our first quarter. In our newer sector of commercial and other industrial sectors, we experienced solid activity during the quarter for markets such as data centers but would also note increased uncertainty in lithium related projects that support a future electric vehicle demand and large-scale battery storage. Energy transition projects that have been in process for some time, including hydrogen, biofuels, and carbon capture and sequestration continue to be active and will be larger contributors to our financial results in fiscal 2024 and 2025. Our near and median-term priorities remain unchanged in fiscal 2024. We are focused on growing our electrical automation platform, expanding our existing services franchise, and diversifying and expanding our electrical products and solutions portfolio.

In summary, our fiscal 2024 is off to a strong start with another quarter of nearly $200 million of booked orders and significantly improved profitability compared to the prior year. Our backlog remains strong with a healthy mix of projects that we believe will sustain our profitability through fiscal 2024 and into 2025. The markets we serve continues to exhibit encouraging levels of project activity and remain favorable, and we continue to monitor recent developments in select markets for their effect on the timing of future projects. We are highly confident that our financial position, commitment to execution and continued progress against our strategic initiatives will support another successful year for Powell. With that, I'll turn the call over to Mike to walk us through more of our financial results in greater detail.

[Michael Metcalf, executive]

Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2024, we reported net revenue of $194 million, compared to $127 million, or 53% higher versus the same period in fiscal 2023. New orders booked in the first fiscal quarter of 2024 were $198 million, which was 7% lower than the same period 1 year ago, as the prior period included a large LNG project booking. As our continued effort on end market diversification continues, new bookings and utilities, as well as commercial and other industrial markets improved in the current quarter compared with the first quarter of fiscal 2023.

Our book-to-bill ratio was 1.0x in the current period, maintaining the fiscal first quarter ending backlog at $1.3 billion, $620 million(sic) [ $680 million ] higher versus 1 year ago, and flat sequentially. Compared to the first quarter of fiscal 2023, domestic revenues improved by 60% to $160 million, while international revenues were 28% higher, driven by increased project volume across our U.K. and Canadian facilities. In total, international revenues were up by $7 million to $34 million in the first fiscal quarter.

From a market sector perspective versus the first quarter of fiscal 2023, revenues across our industrial end markets maintained the positive momentum. Our petrochemical sector was higher by 26%, while oil and gas sector nearly doubled higher by 92%. Additionally, we experienced notable increases in both the utility, and the commercial and other industrial market sectors, increasing by 43% and 45%, respectively, reflecting our strategic focus on continued market diversification. The traction sector was lower by 39% as this market sector remains soft.

Gross profit increased by $29 million to $48 million in the first fiscal quarter versus the same period 1 year ago. Gross profit as a percentage of revenue increased by 950 basis points to 24.8% versus the same period a year ago and roughly flat sequentially. The margin rates exiting the backlog were driven largely by favorable volume leverage, operational enhancements across most of our manufacturing facilities, as well as our strong project execution. We do anticipate, based on the quality of our backlog and the trend of the margin rates over the past 2 to 3 quarters, that we will sustain our margin levels in the low to mid-20s throughout fiscal 2024.

Selling, general and administrative expenses were $20 million in the current period, higher by $3.5 million on increased variable performance-based compensation versus the same period 1 year ago. SG&A as a percentage of revenue decreased by 280 basis points to 10.5% in the current fiscal quarter on the higher revenue base.

In the first quarter of fiscal 2024, we reported net income of $24.1 million, generating $1.98 per diluted share compared to a net income of $1.2 million, or $0.10 per diluted share, in the first quarter of fiscal 2023. During the first quarter of fiscal 2024, we generated $84 million of operating cash flow as we continue to build our cash balance, resulting from advanced project payments and working capital efficiencies, a portion of which will be allocated to fund the projects in the order book as we execute our backlog. Investments in property, plant and equipment totaled $1.2 million as we continue to target productivity enhancements across the business. At December 31, 2023, we had cash and short-term investments of $355 million compared to $279 million at September 30, 2023, and the company does not hold any debt.

And finally, yesterday, we announced a 1% increase to our common stock dividend. This is the second consecutive year that the Board has taken this action. Albeit modest, this increase demonstrates our prudent approach to improve shareholder returns while also ensuring sufficient liquidity to fund our growing working capital requirements and growth aspirations. Looking forward, we remain encouraged by the commercial activity across most of our end markets and are optimistic that this will continue throughout fiscal 2024. We do, however, recognize some of the recent uncertainties in the macro environment that could have a timing impact on near-term market activity. Considering these factors and combined with both the quality and level of our backlog, we are well-positioned to sustain the solid financial results that we delivered exiting fiscal 2023 and anticipate that this momentum will continue throughout fiscal 2024. At this point, we'll be happy to answer your questions.

[Operator]

[Operator instructions] The first question is from John Franzreb with Sidoti & Company.

[John Franzreb, analyst]

Congratulations on another great quarter. I'd like to start with the gross margin profile in the first quarter. I'm curious, was there any unusual items in there that kept it at an elevated level in a seasonally weak period. Can you just talk about that? And that -- first and foremost.

[Michael Metcalf, executive]

Yes, this is Mike. I'll take that one. First, no, there were no unusual nonrecurring events in the quarter. We've been very pleased with the margin rates as we exited the last 2 to 3 quarters, and the margin expansion that we've seen resulting from a lot of the work that the team has done over the last 18 to 24 months. It's really being driven by the volume and the operating leverage across the business. Really every division has got very, very healthy backlog, and we're seeing really, really good project execution. So, considering these variables, in addition to the size and quality of the backlog, we have more confidence that we'll be able to sustain these margin rates in the low 20 -- low to mid-20s throughout the rest of the fiscal year.

[John Franzreb, analyst]

It's excellent results on the gross margin profile. But why -- could you take a step up in the gross margin profile considering -- I assumed you had some downtime in the first quarter? Why couldn't it improve beyond this threshold on a go-forward basis?

[Brett Cope, executive]

Yes. Right now, we are -- from a capacity standpoint, we're -- like I said, every division is quite loaded, and we're seeing very, very good volume leverage across almost every division in the business. Given that volume leverage on our fixed base, we feel pretty comfortable that our range in the low 20s to mid-20s is probably a good range to target.

[John Franzreb, analyst]

Okay. Fair enough, and you have a lot of cash on the books. Can you talk a little bit about when you start to draw down on that cash for working capital needs? How should we think about that on a go-forward basis? How do you think about it on a go-forward basis?

[Brett Cope, executive]

Sure. As I mentioned in the last earnings call as well, we were $279 million last quarter, and I did mention that we think it will plateau sometime early to mid-fiscal 2024. I think we're close to that level, and as we begin to execute these much larger projects in the backlog, we'll begin to draw down that cash level probably midyear fiscal 2024.

[John Franzreb, analyst]

Any sense of how much cash should be drawn down, Mike?

[Michael Metcalf, executive]

Yes. Typically, we earmark roughly 15% of the volume level, the revenue level, to working capital. So, when you think about our backlog at $1.3 billion, roughly 15% of that is going to be deployed for working capital. That's roughly half of the cash. So, we would expect to see a lot of that cash draw down, considering no other new big projects coming in to fill the till, but a lot of that cash drawdown will occur in mid- to late fiscal '24.

[John Franzreb, analyst]

Great. That's very helpful. And maybe, Brett, you could touch in on this. Any thoughts about the administration's freeze on new LNG plants. Does that impact you? Yes or no? Can you just maybe talk about that a bit?

[Brett Cope, executive]

I mean, look, John, per my prepared comment, I wrestle a lot with what word to put in there. It is just for me personally, and as the CEO of Powell, very oddly timed and early [ tea leaves ] from our customers, kind of the same thing. Do I really think it will -- I mean, stop projects, I don't think so, but it clearly is going to create a little bit more near-term uncertainty on timing, given what they've explained how the -- not much -- I don't see much yet as to why they did what they did. Looking at the other folks in this marketplace, along with our clients, I think everybody is kind of scratching their head, but they did it, and I think we'll just work together and get our way through as quick as we can.

[Operator]

The next question is from Jon Braatz with Kansas City Capital.

[Jon Braatz, analyst]

On the gross margin front, Mike, are you incurring, or would you expect to incur as you go forward this year, any overtime charges or expenses in terms of labor?

[Michael Metcalf, executive]

Yes. Most of the divisions, given my comments on the utilization capacity levels across the business, are incurring modest levels of OT as we execute the backlog.

[Jon Braatz, analyst]

Okay. Well, would you anticipate growing levels of OT going forward throughout the year?

[Michael Metcalf, executive]

No, there's a point of diminishing returns and the operating teams are on that quite strongly. So no, I wouldn't anticipate that.

[Jon Braatz, analyst]

Yes. Brett, on the big picture front in terms of what the administration has done in terms of -- obviously, it's a political decision to lay in these LNG expansions and new facilities. Is there any thought within the industry that maybe the administration not only will delay it, but they will nix these projects for climate change reasons and so on? Is there any consideration of that amongst the industry?

[Brett Cope, executive]

I mean, it would be hard to say that, that more severe outcome isn't on the thoughts and minds of -- certainly the owners as they're trying to work their way through their project process and interacting with the government. I wouldn't say that's the case right now. I think everybody feels at least early on here that this is a slight slowdown and things will get back on track. It really doesn't seem to be a lot of practical reasons, and if anything, it seems to be -- again, not to be a political person here, but it certainly, from where I sit, hurts the states and the global outlook for what we're trying to do around the world. So, I got to believe that's being echoed with folks with much bigger positions in this [ knot ] than myself, and the interactions we’ve had with our clients and our engineering partners, would seem to indicate that’s sort of the tenor at the moment.

[Operator]

The next question is from John Deysher with Pinnacle.

[John Deysher, analyst]

On the LNG front, I realize that we're not going to be canceling any existing projects or expansions. But can you give us an idea of, in the backlog, how much of that backlog is LNG related at this point, on a percentage basis, roughly?

[Brett Cope, executive]

Thinking back to -- so we started at the end of '22 sharing updates in the market. We never really quantified any one job. We really can't, John. But it is -- given the size and depth and breadth of what you've experienced with Powell over the years, it's about 25-30%-ish, kind of in that range.

[John Deysher, analyst]

25% to 30%, okay, is LNG related? That's helpful. Okay. Good. The other question is, you talked about the CapEx expansion of $11 million, I think, for one of the facilities. What is the CapEx budget for fiscal '24 at this point?

[Michael Metcalf, executive]

Yes, John, this is Mike. Typically, our normal burn rate CapEx is roughly $4 million to $5 million. And as Brett mentioned, we are initiating an expansion at one of our facilities here in Houston that is roughly $10 million - $11 million.

[Brett Cope, executive]

A little suspect on the timing when that would actually report out, John, just because the permitting process, like always, is -- kind of like the other conversation we've had today, whenever you get the government involved, you get a lot of h***. So, we're working through that now. We're excited by it and get the prospect of where we're going with the things we've shared in the calls the last 2 years about getting some new products out in the market and what the R&D teams have been delivering for us.

[John Deysher, analyst]

Okay. When do you expect that $11 million expansion to start? And how long would it take to complete?

[Brett Cope, executive]

Yes. We started the process. We've got a prime contractor. I think in the next 3 to 4 months, we'll probably go a little slower just as we kind of get through all the permits, and we'll use that time to hone in all our final construction costs. So, I think in earnest, sort of mid-/late summer. And once we get going, the build time isn't too long -- quite frankly, it's tilt-wall building over there. Today, at the factory, and the team came up with a really nice plan to cut off the backside of the building to put into really a nice base, adding the room we need for the future. So pretty excited to get going, but we'll just have to get through that permitting process, and then sometime mid-fiscal next year, we ought to be up and going.

[John Deysher, analyst]

Okay. So, it sounds like you won't break ground until late summer, and then probably a year or so to complete it?

[Brett Cope, executive]

That's correct. I hope we can move the permitting process. If that's the case, we are absolutely ready to move quicker. We just have to get through the first 3 or 4 months.

[Operator]

The next question is a follow-up from John Franzreb with Sidoti & Company.

[John Franzreb, analyst]

I was just curious about the tax rate. It's a little bit lower than expected in the quarter. Anything going on there that we should be cognizant of?

[Michael Metcalf, executive]

Yes, John, the lower effective tax rate relative to the U.S. statutory rate, it was driven by a onetime favorable tax item relative to stock-based compensation. So, just to explain that a little further: as you know, our stock value has appreciated considerably throughout 2023. And as such, the vesting price is significantly higher than the original grant price. That difference, when they actually vested, generated a favorable tax benefit, reducing the ETR percent. So that was kind of a onetime item that was a benefit from a tax perspective in 1Q.

[John Franzreb, analyst]

So, how should the tax number look on a go-forward basis, Mike?

[Michael Metcalf, executive]

We are still targeting 24% ETR as we navigate through the remainder of the year.

[John Franzreb, analyst]

Okay. Great, and Brett, I've asked you this, I think, 2 quarters ago, and I want to revisit the question. What [ it-ing ] do you put the order booking rate at, let's revisit it now, especially in light of how good the most recent quarter was at $198 million?

[Brett Cope, executive]

Yes. On the gas-related comments I made in the prepared remarks, John, I still feel good. I mean, clearly, the uncertainty on timing has ticked up a little bit over the last few weeks. So, I anticipate it may draw out a little further, but when I look at the other things that are going on in the energy transition, there's still a lot of activity. Are the uncertainties slowly increasing? Yes, that was the reason for the comment also on the lithium side. The commercial -- the industrial has been a great new market as we kind of build new channels and build out the Powell since the post-pandemic. But what we're just experience is how quick it could spin down as well. So, there's still a lot of activity in that segment. We feel good about it in the near term, but maybe slightly more uncertainty as we go out midterm.

[Operator]

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

[Brett Cope, executive]

Thank you, Gary. As you've heard from Mike and me, we are pleased with our first quarter results and the momentum it provides through the balance of fiscal 2024 and to our incredible employees, well done. I am fortunate and proud to be a part of a group of talented individuals, what Powell can do on full display and demonstrating a laser focus on the success of our customers. With that, thank you for joining us this morning. We appreciate your continued interest in Powell and look forward to updating everyone next quarter.

[Operator]

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