Karen Roan - Investor Relations Michael Lucas - President and Chief Executive Officer Don Madison - Executive Vice President and Chief Financial and Administrative Officer

Jon Tanwanteng - CJS Securities Noelle Dilts - Stifel Nicolaus Jon Braatz - Kansas City Capital Beth Lilly - GAMCO

Thank you, Camille, and good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review fiscal 2013 fourth quarter and full year results.

We would also like to welcome our Internet participants listening to the call simulcast live over the Internet. Before I turn over the call to management, I have the normal details to cover.

If you did not receive an e-mail of the news release issued yesterday afternoon and would like one, please call our offices and we will get one to you. That number is 713-529-6600.

Also if you want to be on the permanent e-mail distribution list for Powell news releases, please relay that information to us. There will be a replay of today's call and it will be available by webcast by going to the company's website at powellind.com or a recorded replay will be available until December 11, 2013, and 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, December 4, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. As you know, this conference call includes certain statements, including statements relating to the company's expectation 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 further information, please refer to the company's filings with the Securities and Exchange Commission. Now, with me this morning are, Mike Lucas, President and Chief Executive Officer; and Don Madison, Executive Vice President and Chief Financial and Administrative Officer.

I will now turn over the call to Mike.

Thank you, Karen. Good morning, everyone.

Thank you for joining us today to review our fiscal '13 fourth quarter results. I'd like to make a few opening comments, and then I'll turn the call over to Don to discuss the financial details.

We are pleased with our strong fiscal '13 finish, not only did we realize record level bookings, but we also posted our second best year ever for both, revenues and yearend backlog. This provides solid momentum going into 2014.

We also realized a number of other accomplishments this past year. We've completed our new 180,000 square foot facility in Edmonton, Canada, which became fully operational this past July.

We now have the only facility of its kind in Western Canada with the capability to manufacture switchgear and motor control, fabricate E-Houses and integrate all the electrical equipment, all at a single-site location. The oil sands development in Canada represents tremendous potential for us and we intend to play a significant role in this market.

We also completed a new 300,000 square foot facility here in Houston, which became fully operational in October. This provides not only much needed manufacturing and office space, but also increased capability and product design and development.

We completed construction and relocation into both of these facilities with no impact on our customer commitments. With these capacity additions, we are now very well suited to meet the expanding opportunities and needs of the North American market.

We've also continued investment into development and testing of new business systems and productivity tools, which we expect to have fully implemented this coming spring. Even with these extra demands on our teams, we were able to deliver solid financial results for the year.

I am very proud of all of our teams around the world for all their efforts, dedication and commitment. I'll now turn the call over to Don, to discuss the financial details.

Thank you, Mike. Revenues were $187 million in the fourth quarter compared to $184 million in the fourth quarter of fiscal '12.

Gross profit was $42.9 million or 22.9% of revenues in the fourth quarter compared to $41.5 million or 22.5% of revenues in the fourth quarter of last year. Both revenue and gross profit were favorably impacted by the recovery of $3.8 million, related to the claim on a large Canadian industrial project.

This project experienced significant delays and cost overruns in the first half of fiscal '12. Selling, general and administrative expenses decreased by $1.1 million to $19.6 million compared to the fourth quarter a year ago, primarily due to lower sales commissions and depreciation expense.

Research and development expenses were $2.2 million compared to $2.1 million a year ago. We incurred $2.2 million restructuring and relocation expenses in the fourth quarter of fiscal '13, related to our two new facilities.

These costs relate to the physical relocation of operations, a loss in our Canadian sublease and the abandonment of leasehold improvements. In the fourth quarter of fiscal '13, we recorded an income tax benefit of $208,000 primarily due to the release of the valuation allowance recorded to offset prior year's Canadian pre-tax loss.

Net income for the fourth quarter of fiscal '13 was $18.6 million or $1.54 per share. Adjusted for the Canadian project claim recovery, restructuring and relocation expenses and the release of our tax valuation allowance, net income in the fourth quarter of fiscal '13 was $10.3 million or $0.86 per share.

A non-GAAP net income reconciliation was included in our earnings release. For the 12 months ended September 30, 2013, revenues were $675 million compared to last year's record revenues of $717 million.

Domestic revenues decreased by 2% to $405 million and international revenues decreased $35 million or 11%. Gross profit increased by $6.9 million on lower revenues.

Gross profit as a percentage of revenue was 21.8% in fiscal '13 compared to 19.5% of revenues in fiscal '12. Excluding the favorable impacts from the recovery on our Canadian project claim discussed earlier, gross profit as a percentage of revenues was 21.3% in fiscal '13.

This increase in gross profit is primarily due to the margins associated with the mix of projects in process during the year as well as the increased focus on cost savings activity. Selling, general and administrative expenses increased $2.2 million to $83.5 million in fiscal '13.

This increase is primarily related to personnel cost and long-term incentive compensations, resulting from higher levels of operating performance, partially offset by the lower depreciation and the capitalization of certain personnel were temporarily reassigned for the development and implementation of our new business system. Amortization of intangible assets decreased to $1.7 million in fiscal '13 compared to $2.6 million in fiscal '12, as certain intangible assets have become fully amortized.

Our provision for income taxes reflects an effective tax rate on earnings before income tax of 17.1% in fiscal '13 compared to 38.5% in fiscal '12. Our effective tax rate was favorably impacted by the release of a $7 million valuation allowance recorded as an offset to prior year's Canadian pre-tax loss.

We believe that is more likely than not that market conditions and our operating results going forward will allow us to realize the deferred tax assets associated with prior year losses in Canada. The rate for fiscal '13 was also favorably impacted by the federal research and development tax credit and the utilization of certain foreign tax credits.

For fiscal '14, we anticipate an effective tax rate of approximately 34%. For the 12 months ended September 30, 2013, net income was $42.1 million or $3.51 per share.

Excluding certain fourth quarter items discussed earlier and a settlement received in the second quarter, net income for fiscal '13 was $33.8 million or $2.82 per share compared to $29.7 million or $2.49 per share last year. We generated new orders in the fourth quarter of $207 million, resulting in a strong yearend backlog of $517 million compared to $496 million at the end of the third quarter and $437 million a year ago.

For the 12 months ended September 30, 2013, cash provided by operating activities was $92 million. Investments in property, plants and equipments totaled $74 million.

At September 30, 2013, we had cash of $108 million compared to $90 million at September 30, 2012. A long-term debt and capital lease obligations, including current maturities, totaled $4 million.

Looking ahead, based on our backlog and business conditions, we expect full year fiscal '14 revenues to range between $700 million and $750 and full year earnings to range between $2.75 and $3.25 per share. Included in our outlook are incremental investments and product development, sales and marketing, support for Canadian growth and depreciation of our new business system.

In total we anticipate SG&A, including R&D, to increase by approximately $10 million year-over-year. In addition, we are planning for higher effective tax rate in fiscal '14.

Now, let me turn the call back to Mike for a few final comments.

Thank you, Don. It was just over one year ago that I first joined you for the fourth quarter conference call.

Now having been with the company for 15 months, I'm even more optimistic about our future. Powell is a solid company with unique capabilities and expertise to design and deliver complex custom engineered solutions with a sharp focus on the customer.

Our major facility investments are complete and we are quickly approaching the implementation of new business systems and productivity tools. Our core markets are healthy and expected to remain strong for the next few years.

We recently announced our first ever quarterly cash dividend. Over the past two years, we generated sufficient cash to complete substantial investments into these two new facilities, which will enhance our position for future growth.

All while maintaining a cash balance in excess of a $100 million. Our strong balance sheet provides adequate resources to support the quarterly dividend to our shareholders as well as to continue our growth plans.

We expect our core North American market to continue to grow and we are very well-positioned to support our customers' requirements. In the near-term, we see continued strength in oil and gas, specifically in Canada, U.S.

petrochemical, LNG terminal facilities and deepwater production platforms. As we look out mid-term, our focus will be on acceleration of product development, international growth, operating efficiencies and gross margin improvement.

To help drive these strategic areas, we announced the addition of Neil Dial to our leadership team as of December 1, as Senior Vice President and Chief Operating Officer. He brings over 30 years of management experience with particular expertise in manufacturing businesses and a background in electrical products.

Neil will help me and the rest of the leadership team to drive operational excellence, productivity improvements and margin expansion. We believe our core values of customer first, respect for employees, a can do attitude and a commitment to improve, clearly differentiate Powell from our competitors.

Our conviction to these values will be equally as critical in driving our future success. At this point, we'll be happy to take your questions.

Ex-items, results were still very strong. Can we expect a similar kind of run rate going forward, especially on the gross margins?

Clearly, our goal is to continue to try to expand our gross margin and built into our outlook is margin expansion year-over-year. This coming year, as we talked in the past, is that we will have some headwind as a result of the two new facilities and as we ramp up in Canada, and we work to fully utilize the airport facility here in Houston.

But even in spite of those headwinds, we do expect margin improvement year-over-year.

And then, obviously, you did really well on the SG&A, but you're forecasting about $10 million year-over-year in '14, that averages about $26 million a quarter, I guess if you include R&D. Does that mean that the performance for Q4 is just a one-off?

Well, Q4, it was strictly timing. I mean it was just the lumpiness of timing of expenses coming in.

First off, depreciation expenses, as it became fully depreciated and sales commissions is clearly a timing issue.

And then finally, now that the facilities are done, what's your expected use of cash, acquisitions, I mean you have a new dividend, are you thinking about buybacks at all?

At this point in time our focus is to support the dividend program that we've recently announced, as well as continue to work to grow the organization and the company.

And then, any traction at all in large Gulf Coast orders or are those larger projects are included in your fiscal '14 guidance at all?

We expect offshore to strengthen in the last half of the year, and there is some, but not any really big projects, but there are some decent size project plans in the second half of the year.

These will impact orders, more so than revenue. We anticipate those building our backlog predominantly driving revenues in '15.

First, kind of expanding on that last question. Orders are obviously very strong in the quarter.

Can you talk about if there were any large project orders or if it came mostly from small-to-medium sized projects?

There was one large order in there, which there was a press release on the Dulles project in our traction power business, it was about $40 million. The rest of it were all small-to-medium sized projects.

I don't think we had anything over $12 million to $15 million in there, just the $140 million, everything else was small and medium size.

And then, you've kind of sized the opportunity of some of the petrochemical activity in the past on the large project side, that's about 10-plus projects at $30 million or more a piece, is that still kind of what you're thinking?

It is, it's still very optimistic about that. We have pushed those expectations out a little bit, probably from the last couple of quarters.

We have won some small orders in that $5 million to $15 million range, not that really big ones yet, but we do expect to see some order activity on those late in the year now.

And then could you just give us update on the IEC market? In the past you've talked about seeing some increased competition.

Has there been any change there? Are you seeing pricing get competitive?

Are you thinking about taking any action in terms of restructuring this year, just some thoughts on that?

No. We're done with the restructuring there.

We have completed that now. We resized that business.

We exited some product lines that were not profitable. We have seen pricing stabilized now over the last quarter or so.

We have not seen additional pricing pressure. And we started to win some nice size jobs.

They were not in the fourth quarter numbers, which we just released, but already this first quarter, we won a couple of nice projects in the U.K. We've made a lot of operational improvements on the lead time and delivery and that's starting to payoff now for us.

So we think we'll be in the U.K. this year.

And then, you've talked about some under utilization in Canada and Houston as you ramp up these new facilities. I guess, when I first looked at your margin guidance, I thought it looked a little bit low for '14.

So is there anyway you can talk about sizing that headwind that you think you're facing in '14 as you ramp up those plans? I'm just trying to get a sense of some of the components going into your margin guidance?

Well, there is a couple of three components and all of them are variable. But when you're looking at, let's talk from individually, with Canada specifically, we're still of the opinion that with the market growth and the order growth that we're continuing to experience, that we'll have that facility operating at a practical capacity, a full first shift well into the second shift operation by the end of calendar year '14.

But during the year, we've got a long steady growth plan of ramping up the business. So you're going to be hiring people each and every month, you're going to be training people each and every month.

There is the ramp up inefficiency associated with hiring and training people at a fairly substantial clip in addition to the headwinds of just the more larger facility with more overhead. To quantify those numbers, we do know what the operating costs of the new facilities are, that is a sizeable number relative to small lease facilities that we had in the past.

It's a seven digit number, but with the inefficiencies associated with the ramp up of the organization, is more difficult when you get your hands around, so that one is a one that would be less more hesitant to quantify. The same thing with the airport facility there, we're looking a little bit more long-term.

I think we've talked about that. We will have the incremental cost there probably for the next two to three years.

Lot of that will depend on the ramp up of business along the Gulf Coast, as well as export IEC products, but there its basically just a change in our overall fixed cost based that we have factored into our guidance as well as.

And what would you say you're running in terms of capacity in the Canadian facility right now?

As far as the facility today, it's less than 50% -- probably a little less than 50%, very subjectively. We're looking at bringing on over a 100 people between now and the end of the fiscal year.

Couple of questions. Over the last couple of weeks we've seen some, I guess, you want to call production, and maybe even some drilling companies report some disappointing earnings and some disappointing outlooks and you had remarked about your offshore deepwater drilling activity, I mean, production activity being pretty strong.

Are you seeing any pushback or any stretching out of some anticipated projects that have been sort of on the drawing board? Are you seeing any stretching out at all?

Couple of questions. Over the last couple of weeks we've seen some, I guess, you want to call production, and maybe even some drilling companies report some disappointing earnings and some disappointing outlooks and you had remarked about your offshore deepwater drilling activity, I mean, production activity being pretty strong.

Are you seeing any pushback or any stretching out of some anticipated projects that have been sort of on the drawing board? Are you seeing any stretching out at all?

Probably not any different than what we have seen, Jon. It tends to be the bigger projects are the ones we see sliding to the right.

We've tried to take those estimates into consideration for our guidance for next year. So we do, as Don said, we expect some order activity to pick up in the second half of the year for offshore.

But we have not seen it any worse or better, the last couple of quarters than what we've been seeing.

As you look out ahead, could we see a change in the mix of the orders more, let's say, more oil and gas, more petrochemical. And if that's the case, is there any margin difference between the source of orders, the market served?

Is the margin pretty much the same across the board?

As you look out ahead, could we see a change in the mix of the orders more, let's say, more oil and gas, more petrochemical. And if that's the case, is there any margin difference between the source of orders, the market served?

Is the margin pretty much the same across the board?

Now, you're seeing between oil and gas? Is that what the question was?

Yes.

Yes.

Basically, when you're looking at margin, it really goes back into complexity. The complexity can be, I mean particularly if you're talking a large LNG terminal, it can be a very complex order, very similar that you would see in complexity to an offshore production platform, but yet when you're talking about pipeline, it's going to be much less complex and smaller in size.

What I would tend to, at that point, say is that the variability of complexity between the two markets are, you can see both simple as well as complex projects, but they tend to be as on average, larger in the oil side than they are in the gas side. Gas tends not use as much power in the processing as oil does.

And then lastly, Don, you're talking about the additional costs associated with two new facilities, what do you anticipate the level of D&A will be next year?

And then lastly, Don, you're talking about the additional costs associated with two new facilities, what do you anticipate the level of D&A will be next year?

Good question. Jon, let me come back to that in a second, because I don't have it off the top of my head.

I have several questions. So am I to interpret from the $2.9 million settlement in the quarter of that Canadian issue that that whole project that was plaguing you is now put to bed?

Basically all of the issues that we have talked over the last couple of years are now behind us.

And are you happy with the settlement that you've received?

And again, whenever you're into in any type of negotiated settlement, everybody walks out of the room unhappy.

So it's all put behind you and you've recovered some of your costs, but not probably as much as you bad wanted.

I'll take that as a fair picture, yes.

You talked about in your formal comments about focusing on margin expansion going forward, and historically in the past there was feeling, and this is probably predated, Mike, joining the company, but 22% gross margin. And I just wanted to get a sense now with addition of Neil, and just with the new facilities up and running, do you think that 22%, which is historically you've achieved can go higher?

And if so what's the number that you would be comfortable telling us?

Yes, I do think it can go higher. I probably wouldn't put the number out there just yet, but just let's go back to comparisons year-over-year '13 over last year.

So operationally if you exclude those one-time items we've talked about on this call, we are up about 180 basis points on gross margin, so somewhere between 1 and 2 points a gross margin improvement a year. Now, we've got some headwinds we've talked about, so we'll be at the lower end to that range, but I think some of the expectation, our goal, our plan would be to try to drive that gross margin 1 point plus a year.

And this is more of a qualitative question, which is you have benefited from tremendous spending in the international oil and gas market. But I am wondering about just what's your domestic customers are telling you and are you seeing more enquiries, are you seeing more request for proposals, on a qualitative levels, are you seeing a pick up in business?

I think it's relatively consistent, but its' healthy. For the last few quarters, it's been very healthy rate, the pipeline quotation activity is good.

It's all those small-and-medium-sized projects, which most of '13 was, we've not seen any change in rate or activity on that. It's still very healthy.

Could you say it's more healthy than it was a year ago?

I would say for the last two or three quarters, we've been pretty consistent.

But it's healthy, but you haven't seen a slowdown, but you haven't seen the noticeable pick up?

When you're looking at the North American side, let's just talk about that first, because that's where we're seeing most of the activity, I think that's the basis of your question. I think we have seen increased response as a result of the facilities that we built in Canada.

I don't think it's a market issue, I think it is a response to our positioning in that market that is benefiting us from an order perspective in Canada. When you're looking at the U.S., the Gulf Coast, I would say that the market activity is relatively consistent, but it fluctuates up and down in dollar, based on when the larger projects actually go into the bid phase, but when you're looking at the activity that we're seeing going on in the EPC firms as you hit the market, particularly the oil and gas, in general, I agree with what Mike has been saying is that the activity is not materially different than our picture of the activity in the last three four quarters.

And so the Canadian business is benefiting from the perception that you now have the capacity to meet the demand. Is that what you're saying?

It has been in the capability.

Yes, that's correct.

And then my last question has to do with the addition of Neil Dial, and can you just spend a few more minutes and talk about what's his capability is and what he brings to the organization that Powell doesn't have?

Well, I think it's the supplemental what we have first of all. It's just to help me and to help our businesses continue to accelerate some of our operational improvements.

Lead time, cycle times, lean activities, productivity improvements, gross margin expansion, supply chain design and development, so it's a lot around operating efficiencies and those kinds of activities. He has got a lot of strength there.

We had some of the background in his press release, but coming from manufacturing-based companies, lot of international experience. So he will be working with me and the entire leadership team on those kinds of activities.

I just want to go back, I want to add one more comment to your gross margin question. Just as a reminder for everyone as you're working on your models.

So we do have that goal of significantly improving our gross margins, but project mix can sometimes drive that significantly too. So mix remains consistent.

Our goal is certainly to improve that gross margin, but mix can change that as well project mix.

And as the projects get bigger, does that mean margins are higher or do you earn a better margin on the smaller projects?

As Don said, and what we've relatively consistently seen, is the more complex the projects, the more the margins tend to be better. It's more market mix between utility transit, oil and gas.

It's kind of market mix of those projects.

Before we take the next question, let me follow-up on the one that Jon had here a second ago. This past year we closed out D&A of around $10 million.

Next year, we're looking at a neighborhood of $14 million, about a $4 million increase in depreciation and amortization year-over-year, all of this basically coming from the new business systems and the two new facilities that we've been talking about.

Mike, I think you alluded to some of these actions that you're looking at taking, when you were discussing bringing me on, but you mentioned in your comments that you're looking at cost saving and productivity actions that you will have in place by the spring. Could you just expand on that?

Talk about some of the things that you're doing and where you see some of the low-hanging fruit in the business?

Well, the comment I made about having things ready in the spring was more about tools and software packages. So in the spring we anticipate doing a business system upgrade, and around that are several different packages and tools we'll implement in manufacturing, engineering, project management, really with the intent of driving productivity of our teams.

Core productivity, more output with the same number of resources, so we do anticipate as revenues grow, we won't have to grow SG&A as fast with these productivity tools. So a lot of those tools will be implemented and will go live this spring.

Beyond just the tools, the focus areas are, and there are several, just execution of projects, material containment actions, design of supply chain, lean activities and other productivity tools in our sharpen operations. Those are the kinds of focus areas, we got great traction this year on those, and we've got a lot of that built into the plan again this year, and we think we can keep that going for a while.

So we want to just continue to drive those operating efficiencies.

Well, just want to say thank you everyone for joining us today. We look forward to talking to you next quarter and we really appreciate your interest in Powell Industries.

Good bye, everyone.