Ken Dennard - IR Brett Cope - CEO Don Madison - CFO

Pete Lucas - CJS Securities John Franzreb - Sidoti & Company Lawrence Creatura - PRSPCTV Capital Richard Leader - First Houston Capital John Deysher - Pinnacle Capital Management

Thank you and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal year 2018 second quarter results.

With me on the call today are Brett Cope, Powell's Chief Executive Officer and Don Madison, Chief Financial Officer. Before I turn the call over to management, I have the usual housekeeping details to run through.

If you did not receive an e-mail of the news release issued yesterday and you would like one, call our offices at Dennard-Lascar and we will get you one at number 713-529-6600. Also, if you’d like to be on e-mail distribution for press releases for Powell, please relay that information to us.

There will be a replay of today's call and it will available via webcast by going to the company's website powellind.com or there will be telephonic replay will be available until May 16. And the information on how to access these replay features is provided in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, May 09, 2018 and therefore, you are advised that any time sensitive information may no longer be accurate at the time of replay listening or transcript reading. As you know, this conference call includes certain statements related to the company's expectations of its future operating results that may be deemed to be 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 the 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 SEC. Now, I’d like to turn the call over to Brett.

Brett?

Thank you, Ken and good morning everyone. Thank you for joining us today to review our fiscal 2018 second quarter results.

I will make a few comments and then I will turn the call over to Don for more financial commentary before we take your questions. The second quarter of fiscal 2018 was highlighted by significant increase in orders when compared to the run rate of new bookings over the last few quarters.

The increase was largely driven by improvement in our base business and primarily from the U.S. domestic market.

The quarter included two projects over 5 million and one larger project over 10 million order to pile from the power generation market. Also during the quarter, our aftermarket services group experienced strong bookings and revenue growth.

Over the past few quarters demand for services, parts and brownfield project support that largely declined during the downturn has continued to show increased activity across our businesses. Bid activity remains robust.

We've begun to see increased inquiry levels across a variety of end markets including ongoing strength from the utility distribution, commercial and municipal sectors. We've also seen a slight pickup in smaller infrastructure upgrade projects in the downstream oil and gas refineries, as well as petrochemical manufacturers including fertilizer and ammonia plants.

In our core oil, gas and petrochemical markets, the U.S. and Middle East continue to be our most active geographical areas, while Canadian and offshore activity levels have yet to see a return to historic levels.

In terms of project size, we are now starting to see planning for projects of increased scope and scale that we have not seen since the decline of our markets several years ago. We are supporting several larger scale projects with engineering designs and cost estimates.

We are tracking the final investment decisions by our customers on these projects and any future awards will likely be later this calendar year or into 2019. Operationally, we have started to add to our workforce in the U.S.

to meet increased demand, while our operations in Canada and U.K. remain stable.

All of our teams continue a strong focus and attention on providing a safe workplace for our employees, customers and supplier partners. Continuous learning and promoting best practices across the organization are even more critical as several of our operations have started to increase manufacturing activity.

We have and continue to leverage investments we have made in process and systems to increase the utilization of our resources and also maximize production capacities. Utilizing a common process and tool set allows us to continue to move complex substations, our lineup of switch gear between engineering teams to ensure we are able to meet customer need by dates.

These same tools also give Powell an increased flexibility to share capacity across multiple facilities. This increased capability is a strategic advantage to our model in North America and we will continue to leverage and benefit from this unique capability as the market improves.

As we move into the second half of 2018, our focus continues to be on cost control and project execution as we start to incrementally scale up our labor force in advance of the impending increase of business activity. In addition, our commitment to research and development coupled with proactive investments in property, plant and equipment continue to enhance service and product quality, production efficiency and safety and we continue to advance strategic opportunities to add value.

For example, several quarters ago and in advance of improved market activity we announced the consolidation of our service organization under a common leadership team. Our teams have begun to renew our existing U.S.

and international service center capabilities to determine how additional service centers located in key geographic regions will improve our response time to provide critical electrical repairs in our customer's facilities. As a result, we have opened a new service center in the U.S.

during the second quarter and started selective hiring to correlate with the increasing order flow. In summary, we believe the challenges we had faced in the past and the preemptive efforts put forth to respond to those challenges will position us well as market demand improves.

We have the most talented employees in the business. They are motivated in good times and bad and continue to be committed to our customers.

We appreciate their support for Powell’s future success. With that, I'll turn the call over to Don.

Thank you, Brett. Revenues decreased by 3% or $3 million to $102 million in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017 but we’re up 13% or $11 million over the first quarter of fiscal 2018.

Here's some comparisons to last year second quarter. Domestic revenues decreased by 5% or $4 million to $72 million.

International revenues increased by 3% or $1 million to $30 million. Our international revenues include both revenues generated from our international operations, as well as export revenues from our domestic operations.

The increase in international revenues resulted from an increase in export projects. Gross profit as a percentage of revenues decreased to 12% in the second quarter of fiscal 2018 compared to 15% in the second quarter of fiscal 2017.

Gross profit decreased about $3 million to $12 million. Selling, general and administrative expenses were $16 million unchanged from last year's second quarter.

However SG&A as a percentage of revenues increased slightly from 15% to 16% due to lower revenues. We recorded a benefit for income taxes at $1.8 million in the second quarter.

In the second quarter fiscal 2018, we recorded a net loss of $3.3 million or $0.29 per share compared to a loss of $800,000 or $0.07 per share in the second quarter of fiscal 2017. New orders placed in the second quarter of fiscal 2018 were $142 million compared to $100 million in the first quarter resulting in a backlog of $300 million compared to a backlog of $260 million at the end of the first quarter and $228 million a year ago.

For the six months ended March 31, 2018 revenues decreased 11% or $23 million to $192 million compared to the same period a year ago primarily due to a reduced project backlog at the beginning of the current fiscal year. Gross profit as a percentage of revenues decreased to 12% compared to 14% in the first six months of fiscal 2017.

Gross profit and margins continue to be negatively impacted by reduced volume resulting in under absorption of our manufacturing facility cost and the continued effect of competitive price pressures. Gross profit and margins were also negatively impacted by cost incurred on oil and gas project for which change orders have not been finalized.

Selling, general and administrative expenses were $32 million unchanged from a year ago. SG&A expenses as a percentage of revenues increased from 15% to 17% due to lower revenues.

We recorded an income tax benefit of $2.8 million for the first six months of fiscal 2018. For the six months ended March 31, 2018 we reported a loss of $9 million or $0.78 per share.

For the six months ended March 31, 2018 cash used for operating activities was $11 million. Investments in property, plant and equipment totaled $2.8 million.

At March 31, 2018 we had cash and short-term investments of $69 million compared to $95 million at September 30, 2017. Long-term debt including current maturities was $1.6 million.

Looking forward, we continue to expect a net loss in fiscal 2018. However, we anticipate our second half results to show improvement over the first half as new customer orders has strengthened as anticipated.

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

It’s Pete Lucas for Jon. I think in your prepared comments you mentioned that you’re still seeing weakness in offshore.

Any sense when the majors might be ready to build new offshore rigs or getting any sense of what it looks like, looking after the future?

So we just had OTC here in Houston recently, the big Offshore Technology Conference it was one of the lowest attended shows in a while. The weekend before, the Houston Chronicle ran an article, and I'm sorry, I can’t remember the author.

But I thought it all summed up. The theme of the article was offshore is ready when shale gas falters.

I don’t know if that answer your question. We’re certainly engaged with the majors kind of watching what they are doing.

If you look at the Gulf, couple of these folks are looking at big investments some have gone tie back versus sort of the top side piece. So hard to say, I don’t think it’s in the near term at least 12 months for a lack of better answer and I just continue to see weakness in the near to midterm.

And when looking at margins, you mentioned under a little bit of pressure from underutilization and competitive pricing. But given all the cost cutting that you’ve done, how we should we think about incremental margins on a dollar revenue going forward?

If you look at we’ve shown some growth in our gross margins over the last two or three quarters it’s been slow. It will continue to improve based on our current outlook.

So when you're looking at the mix of projects in our backlog, there is a wide variety of price levels that we’re seeing. So it’s going to be as anyone that’s following Powell a little bit bumpy as we continue forward.

There is going to be some quarters that we will show progress and then could be some that we actually call back stuff. So it’s really - it’s much on the price side as it is on the cost side right now.

And last one from me, you went over a few of the orders you saw in Q2, two I believe you said over 5 million one over 10 million. Any sense what the overall average size was and were they all brownfield or maintenance type projects.

The majority of the orders what I would call peak base business sort of the - I always kind of say 1 to 3 but maybe in the second quarter a few more of the 4s up into the 5s, a healthy mix what I'll call new - call it greenfield or expansions but also something we didn’t see last couple of years in the downturn was that brownfield business that sometimes you notionally expect it started coming on last fall during the start of our first fiscal and came stronger in the second quarter. So it did make up a good portion of that increase.

Just to talk a little bit more about that order number. Could you talk a little bit of timing deliveries, are they all scheduled?

You talk - last quarter everything was with shorter cycle, is this going to be delivered in fiscal 2018 or are you spilling into the first half of 2019?

I don’t have exact percentage but they are spilling over into 2019. There are lot of short cycle orders, be it smaller nature.

We've been talking last couple of quarters about the function and overall size of the job we're pursuing. The second quarter is sort of an epitome of that.

A lot of small project work, very happy have it, also creates a lot of challenge for the operation teams because you don’t get the same leverage as you did when you have a larger project. So lot of work to do for the teams, a fair amount helps to fill in some of the gaps as we see Q4 but definitely booking into Q1 and Q2 deliveries for next year, over next year.

Then given the longer delivery times, is there any concern about commodity costs or you adequately protected in the contracts on those longer delivery of jobs?

Well we’ve been talking a lot about it and sort of watching what’s happening and more active conservation supply chain and doing what we can to protect on inflationary causes into the contracts and making sure that we understand our cost when the contract comes in to when we actually are going to do materials buy. So actively spending more time as a team looking at that.

And Brett in your prepared remarks, you talked about scaling up the labor force. I just want to make sure I understand properly is that just on the service side - in any service centers or you actually any personnel and specific lines.

And if so, could you just talk a little bit about that also?

So in the second quarter John my comments were really more tailored to the manufacturing side. The service center I mentioned is new.

We’re preparing to hire as we kind of worked that strategy but the ads in the second quarter really more of the manufacturing facilities. So it's a mix of some additional fixed cost folks in the factory, full time folks as well as some contract work to handle the short-term increase on the assembly side within our factories.

Any particular product line?

No.

Most of the ads John were here in Houston and focused on our media voltage product lines.

Media voltage, okay thank you, Don. Thank you, guys.

Quick question regarding your prepared comment, regarding large projects and you said you were beginning to have some visibility on possible awards later in 2018 or 2019. Could you talk a little bit about how large product rollouts have affected your orders and your backlogs historically.

And if you expected it to be any different in this cycle looking forward? Thank you.

So, we watch them very closely because they can have an impact of course on the whole delivery cycle. If you look at the second quarter, we’ve taken a lot of smaller projects and we committed deliveries and then the big projects comes in to roll on it and what seems to happen all along is big projects is though they’ll come along and if we're fortunate a win, there's always a phase of consolidation on delivery schedule.

So from a scheduling standpoint they can impact the company dramatically and it’s critical that we keep them on the radar in terms of our funnel meetings. None of the - really over the last couple of quarters it starts with budgetary estimates and companies do the refinements in the engineering firms, as well as the owner doing their own refinements, but the returns going to be on the project.

So you know in the last six months it's kind of wanted to and now we're picking you more to do the estimates on. None of them are officially funded but the amount of work sometimes leads to -- okay it’s getting more real and from that look out it's looking like late this year and next year that we've really got to be cognizant of when these might be funded and balance our chances of success and the award and how we plan our production capacities.

Just as a follow-up, when you say large project what is a large project, what size is and what’s the margin structure like for those projects compared to the work you're doing now?

So historically in our peak times, I would tell you a large project would be in excess of 20 million 20 million to 25 million maybe upwards as high as 50 million. During the last couple of years in the downturn, largely what we would call large project has shrunk to kind of more of that $10 million to $15 million level.

The really large mega-projects after the LNG wave, which came after the petrochem wave of 14 and 15. Those are all just in our core markets disappeared as well as the offshore market which was the earlier question.

As far as the margin structure, the larger projects tend to be more complex. They do fit our model better because we have a very strong advantage with our engineering capability.

So sometimes these projects have a little bit of work to do and that is where Powell shines because of our ability to aid the engineering house of the end user and getting the project over the goal line for final design and implementation. So they tend to be a little more competitive, but they also tend to be a little bit more complex and then fine, and again that's fits pretty well.

Couple of big picture events have been happening over the last year or so. One is there's been some consolidation announcements of deals in the refining and in the chemical industries, most recently Marathon looking to buy the old Tesoro.

And I wonder if that along with changes in the rules at the EPA have had any or do you envision them having a positive effect on your end markets going forward either the consolidation industries or the EPA rules?

Yes, we’ve been watching the consolidations very familiar with both Marathon and Tesoro and the example you cited both know Powell. We’ve done work at throughout their - both of their corporations.

I don't know if the consolidation presents any sort of new opportunity. Some of the work that's been going for the last of couple quarters again that we didn't really see on that core refining market for Powell was that infrastructure upgrade.

That has come back not in spades, we're not back to where we'd like to be or where the market was historically at its peak but that definitely has come back last couple of quarters. And so, it would be interesting to see what happens on the consolidations and how they manage the different feedstocks that they produce and will that take certain strengths in or out?

How will that affect the pipeline of distribution markets. I mean some of that will be interesting to watch.

One of the growth aspirations by some of these folks, Motiva is another one here in the Gulf Coast that just had separation with Aramco and Shell, there's a new set of folks kind of driving that strategy. So it is very - it's something we do watch and talk about it.

Those gyrations can have effect on our planning. As far as the EPA rules, any time the government comes out, there was a big desulfurization, there has been a couple of those over the last 10 years, anytime that comes out that requires quite a bit of power on the distribution side within the facility and those can have an upside effect in our markets.

ABB was scheduled to close on the purchase of GE's equipment business I think sometime in May or June of this year. I was just curious if that has actually occurred and if you're hearing anything about possible properties that might be coming for - might come up for sale after that deal closes?

So we're tracking that of course. It's a big consolidation on the supply side of our competition.

I do not believe and I certainly don't know sitting here today the official word but we're still doing business with both as independent entities ABB and GE separately. I think it's next month or so is sort of rumor in the history, is a kind of progress and I'm just exciting, what I think I hear from the field.

So pretty sure that’s not closed as of the today.

John clearly we're watching whenever there is a merger acquisition like this. There is the opportunity for businesses that would be duplicate where we're not fit with the new owners strategy but at this point in time until maybe we actually have that control of asset, there is not any official word as to what they maybe wanting to do with some of the GE assets.

But it is something we're watching and something that we will try to stay close to.

But you still - do they still anticipate closing in June as far as you know?

That is a rumor but we're not a part of the process. So I don't know whether there's any changes to that or not.

Thank you, Operator. The second quarter presented some encouraging signs for Powell by way of increased bookings.

As we enter into the second half of this year, we will continue to invest in our workforce, our facilities and our research and development programs as we prepare for the uptick in project activity over the coming quarters. Powell’s financial position remains strong.

We look forward to an exciting future for the company emerging from this downturn and leading Powell into a period of higher level operational performance. Thank you for your interest in Powell and we look forward to speaking with everyone next quarter.