Natalie Hairston - IR, Dennard Lascar Brett Cope - CEO Don Madison - CFO Michael Metcalf - Incoming CFO

John Franzreb - Sidoti & Company Jonathan Tanwanteng - CJS Securities John Deysher - Pinnacle Capital Management Jon Braatz - Kansas City Capital

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

With me on the call are Brett Cope, Powell's CEO; Don Madison, Powell's Retiring CFO; and Mike Metcalf, Powell's incoming CFO. Before I turn the call over to management, I have the usual details to cover.

There will be a replay of today’s call and it will be available via webcast by going to the company's Web site powellind.com or a telephonic replay will be available until December 19. 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, December 12, 2018 and therefore, you are advised that any time sensitive information may no longer be accurate at the time of any 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 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 Securities and Exchange Commission. Now, I'll turn the call over the Powell's CEO, Brett Cope.

Brett?

Thank you, Natalie, and good morning, everyone. Before I begin my prepared remarks, I would like to formally introduce and welcome Mike Metcalf, our incoming CFO to the Powell family.

Mike will take the reins from Don as soon as we finish our financial reporting and associated filings for fiscal 2018. As you know, Don announced his retirement in May and the Board completed its comprehensive search for his replacement in October.

Mike brings over 27 years of experience with industrial companies that have an engineered to order, project based business similar to Powell. Mike has held roles in finance, accounting, supply chain and global operations.

On behalf of our entire company, we look forward to adding the benefits of Mike's leadership and expertise to our team. Mike, I think you wanted to say a few words.

Thank you, Brett, and hello, everyone. I am honored to join the Powell team and I just wanted to thank the Board and Brett for their confidence in me, and to thank Don for his support during the transition of duties.

After 20 plus years at GE, I started this adventure just over five weeks ago and I’m quickly learning about the intricacies of Powell's operations and the innovative solutions that we are developing for our clients. I have to say that I'm thoroughly impressed by our team and I strongly believe that we have a lot of opportunities ahead of us.

I look forward to working with the leadership team and meeting many of you in the coming months. With that, I will turn it back to Brett.

Thanks, Mike. I’m pleased to report solid fourth quarter revenues and net income on both a year-over-year and sequential basis.

Powell experienced increased customer spending activity from our core oil, gas and petrochemical markets, especially when compared to the previous year, particularly in the U.S and along the Gulf Coast. The strength from the U.S market let us to a fourth quarter revenue increase of 42% when compared to last year's fourth quarter and an 11% improvement sequentially.

We reported net income of $1.5 million or $0.13 per diluted share during the current quarter, up from a loss of $0.45 per share in last year's fourth quarter and $0.03 per diluted share in the third quarter of 2018. While our core markets in the United States have shown increased activity throughout 2018, our international operations in Canada and the United Kingdom have been challenged by local markets, which are experiencing a slower recovery, including weaker than expected orders, revenues and backlog.

However, as we previously shared, there are some underpinning pockets of activity emerging, particularly in Eastern Canada, and the Middle East. I should note that our fourth quarter orders of $78 million dropped below our run rate of the previous two quarters for a few reasons.

First, we had an abnormally high volume of new orders in our second and third quarters that were largely smaller based business awards ranging from $1 million to $3 million Brownfield and small Greenfield projects. Additionally, mid to large sized project awards have been notably absent throughout this past year.

And last, several expected orders slipped from the fourth quarter to the first quarter of fiscal 2019 due to adjustment of customer schedules and some clarifications of the conditions of sale. However in the first two months of our fiscal '19, we've been awarded over $100 million in new orders.

Looking forward, we believe the long-term prospects for the company are very bright. Fundamentals in our core markets in just about every geography that we compete are vastly improved from a year-ago.

We believe that the improved activity we started to experience in the U.S. market in 2018 will continue, and we do expect to see incremental improvements in the market that support both our Canadian and U.K.

operations as we progress through 2019. Our backlog throughout most of last year has lacked the anchor of large projects.

While we are mindful that the fluctuation of commodity prices over the next 12 to 24 months may still cause uncertainty around final funding decisions, there are an increasing number of new and sizable Greenfield projects progressing through more detailed design phases for new pipelines, petrochemical and LNG facilities. It is important to note that the quality of the overall business are significantly stronger than it was a year-ago at this time.

Additionally throughout the challenging market conditions over the last few years, we continued our focus on the efficiency of our operational teams. This included a number of initiatives to strengthen our teams and to leverage the investments made several years ago in processing systems, just as our core markets were turning down.

In the U.S., these efforts have strengthened our fourth quarter results. Timing of awards and timing of customer schedules will be our main challenge in 2019.

I will pause here to say thank you to all of the Powell employees who have continued to perform well and delivered solid, safe project execution across our company. With that, I will turn the call over to Don, one last time to talk in more detail about our financial results before we take your questions.

Thank you, Brett. Revenues increased by $40 million to $135 million in the fourth quarter of fiscal '18 compared to the fourth quarter of fiscal '17.

Compared to last year's fourth quarter, domestic revenues increased by $46 million to $109 million. While international revenues decreased by $6 million to $26 million.

As Brett noted, domestically we are benefiting from a stronger economy and increased customer spending activity, particularly along the Gulf Coast. Gross profit as a percentage of revenues increased 18% in the fourth quarter of fiscal '18 compared to 11% in the fourth quarter of fiscal '17.

Gross profit increased by $13 million to $24 million. This improvement in gross profit was primarily due to higher revenues, recovering market prices, and improved efficiencies and utilization of our domestic manufacturing facilities.

SG&A as a percentage of revenues decreased to 14% compared to 16% in last year's fourth quarter, due to higher revenues. Selling, general and administrative expenses increased by $3 million to $18 million.

And in the fourth quarter of fiscal '18 we had net income of $1.5 million or $0.13 per share compared to a net loss of $5.1 million or $0.45 per share in the fourth quarter of fiscal '17. New orders placed during the fourth quarter of fiscal '18 totaled $78 million compared to $139 million in the previous quarter and $112 million a year-ago.

Our order backlog at year-end totaled $261 million compared to a backlog of $316 million at the end of the third quarter and $250 million at the end of last year's fourth quarter. For the 12 months ended September 30, 2018, revenues increased 13% or $53 million to $449 million compared to fiscal '17.

Domestic revenues accounted for the $53 million increase in revenues. International revenues were unchanged from fiscal '17.

Gross profit as a percentage of revenues increased to 15% compared to 13% in fiscal '17 as a result of improved market conditions and efficiencies resulting from increased volume in our domestic manufacturing facilities. Additionally, in the first quarter of fiscal '18, we benefited from remediation efforts following Hurricane Harvey.

Selling, general and administrative expenses as a percentage of revenues decreased to 15% compared to 16% in fiscal '17, primarily due to higher revenues. SG&A expenses increased 9% or $5 million to $67 million, primarily due to performance-based compensation.

In fiscal '18, we incurred $787,000 of restructuring expenses related to an anticipated loss on a sublet of a Canadian facility. In fiscal '17, we incurred $1.3 million in separation cost as we continue to reduce our overall cost structure to better align operating costs with anticipated production requirements.

We recorded an income tax benefit of $547,000 in fiscal '18 compared to the income tax benefit of $7.4 million in fiscal '17. Effective tax rate was 7% compared to 44% last year.

The effective rate for fiscal '18 was negatively impacted by tax jurisdictions and our valuation allowance. In fiscal '18, we recorded a net loss of $7.1 million or $0.62 per share compared to a net loss of $9.5 million or $0.83 per share in fiscal '17.

The decrease in net loss in fiscal '18 is primarily due to increased revenues and gross profit as we experienced increased demand from U.S oil, gas and petrochemical customers. For fiscal '18, cash used in operating activities totaled $29 million.

Investments in property, plant and equipment was $4.5 million. At September 30, 2018, we had cash and short-term investments of $50 million compared to $95 million a year-ago.

Long-term debt including current maturities was $1.6 million. As we enter our fiscal '19, we expect to see improvements in terms of order volume and market price.

However, based on our fourth quarter bookings and backlog, we will likely have some challenging quarters ahead of us. We expect these first half headwinds to slowly begin to reverse in the second half of fiscal '19, and we also believe that customer activity will continue to gradually increase with improved project quality and will result in higher project margins as we progress through the year.

As a result, we expect full-year fiscal '19 revenues to modestly increase over '18, which also equates to a year-over-year improvement in backlog. We anticipate earnings to significantly improve to breakeven or better for the full fiscal year '19 and we remain cautiously optimistic that the gradual increase in customer activity throughout fiscal '19 will position Powell for an improved fiscal 2020.

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

Good morning, everybody. I guess, first off, I just want to say congratulations to Don.

It's been a pleasure working with you these past 14 or so years. Enjoy the coast.

Thank you, John.

Secondly, now the hard part. With revenues and backlog improving, why do you expect earnings to be around breakeven given the recent cadence you’ve had in the -- on a revenue and earnings profile?

The challenge that we're having today, John, is the profile of the revenue stream, our production plans in our facilities. Currently, we are within the window of having very little ability to impact our second quarter, starting here in the next couple of weeks and it is still significantly under loaded.

Our second quarter is going to be by far the toughest challenge that we see right now looking at our fiscal '19. The third and fourth quarter still have more work that we need to load.

You can estimate that based on the beginning backlog, but the activity we’re seeing through the beginning part of the first quarter and what we anticipate continuing to come in from an order stream and the second quarter we're hopeful that that will be able to load our -- at least to a stronger level in the second half of the year. So it's all based on factory loading.

Okay. So it sounds like the first quarter of the fiscal year is coming out are right, but the second quarter what you’re shipping through the door is going to be sizably weaker as things stand today in Q3 and Q4 or probably on the normal cadence.

Is that good, very bad, good again, is that how it look so how it looks, Don?

Basically I would agree with that. We are still having a little bit of challenge in our first quarter, but nowhere near the challenge that we're having in the second quarter from a production load standpoint.

Got it. And Brett, you talked about the first two months of the fiscal quarters.

Have all the orders that slipped out of Q4 have they didn’t book now in Q1, or is there still other jobs out there that you’re looking to catch up on that you didn’t capture at the end of the fiscal year?

Hey, John. No, they’re -- they all are in Q1.

Okay. And when you look at the customer quotation activity, is there anyone industry that is showing more strength relative to others that gives you better confidence?

So, two comments there. One, in the most recent quarter I think the pipeline market right now especially down here in the South has been -- I would say upside and we see that continuing -- last couple of quarters we talked about some these larger projects.

If I look at the activity and proposal in bidding has been very strong from last kind of three to four quarters. And as we hit the summer months, the bidding on large project estimations, early budgets started to come into that busy activity around the base business.

So those 1 to 3, I think the same amount of work. You got to go through all the same effort and drawings and quotes on the $1 million to $3 million orders, but as the bigger jobs are working through the design side, those started entering the summer and that’s where our comments last couple of quarters of hey, we are starting to track them and become more real as we hit here in '19 and into '20.

Got it. Got it.

Understood. Okay, guys.

Thanks for taking my questions. I'll get back to queue.

Thanks, John.

Good morning, guys and thank you for taking my questions and congratulations, Don. Enjoy your time.

Thank you.

You've been living of this Brownfield activity, Brett, I think you mentioned this, but does that cool off at any point? Was there kind of -- this pent up demand that has to be worked through and then it comes back in or do you see the activity continuing to be strong and kind of what are the reasons for that?

So, Q2, definitely looking back, I believe last year in '18 was definitely pent up demand and it's sort of this it's kind of normalizing and it is primarily it's still a U.S. driven event.

We are not seeing the same level of smaller base business at some of the other operations, I just think it's lagging those other markets. As we enter Q1, it's still there, but it's slightly lesser run rate than when you averaged Q2, Q3 together.

So still active, but we’re starting to see more activity around some of these larger projects in our stream.

Okay, great. And then you mentioned larger projects in the pipeline, I think you’ve talked a lot about them.

Given the crude is lower in the last month or so, how much does that impact the discussion with your customers and then funding decisions, if at all?

Well, I definitely think gas is a story of today in what I call the near to mid-term, there is a lot of gas driven projects in the chemical side being the feedstock for the polyethylene, polypropylene, there's a lot of activity in the Gulf bubbling around that area. The crude side and liquids is definitely pipeline.

Offshore continues to be very, very -- not a strong market for us in the near, mid-term and maybe even the long-term, there's -- I said before, I think there's some shifts in that market at least from a U.S. perspective.

We’ve seen BP take it to Korea, so I think on the crude side with exceptional refining if I go back to the downturn, the refining and the refiners that is a core submarket within oil and gas, that has come back in '18 and continues to be a market base businesswise that’s important to us and it appears to me it will continue throughout '19.

Okay, great. And then just concerning bid margins and margin in the backlog, are those still improving even with the lower run rate of orders that you saw?

Well, year-over-year they definitely improved. We talked about that before.

To say that they’re continuing to improve, here as we end Q4 and Q1, I think it's safe to say they’re pretty flat. So up off the bottom from a year-ago, much healthier than it was, but I don’t see the increments that we make Q2 to Q3 to Q4.

Okay, got it. And then just as a final, maybe higher level question.

Given what you’re seeing in the forecast and the outlook for the industry and yourselves over the next year or two, is this the kind of level of existence that you’re just satisfied with the profits and the -- just above I think you said breakeven to slightly above profitable or is there other things that you need to strategically to kind of improve the earnings as a company in the near to medium term?

Well, so around the company, I think during the tough couple of years here, I think our team has done an outstanding job getting our operation teams getting the people in place, first of all. We talk a lot about these systems and tools.

It really was an investment when you go back to '14 and '15 when we put in and we never really have the opportunity to run with it. So as the market comes back we need those large anchor projects.

So strategically if we can get those anchor projects in, larger volume and then work with smaller projects in and around them to maximize our utilization, I think we'll see a higher level of performance. So we need both.

That’s my comment about timing. We did all that together in all our geographies and I think there's some upside to be gleaned, but we need to get all these things together and given that we’re in long cycle, it's going to take a while for all that to synchronize together and get all the markets firing like we like.

Got it. And then the earliest one of these large projects can hit?

I think we will see some activity here in '19. We never tell on timing.

I still feel that some of the -- especially, big oil Tier 1, Tier 2 companies, they’re being very careful on their CapEx and making sure that before they pull final funding triggers, that what they’re going to build is really meeting their return needs. So we’re doing a lot of cost out exercises, have been for some time as they really get it down to what they really need to do.

But we’ve been doing this now for a couple of quarters and if history teaches us something we can kind of follow these in and still competitive, two by the way. These are -- we are still fighting -- fighting the other guys out there, but if we are successful I would expect to start to see some of these in '19.

Okay, great. Thank you very much, guys.

Hi. Good morning.

Thanks for taking my questions. Actually I’ve two questions.

One, the ABB acquisition of the GE Utility business, I think closed in the summer or early fall. And I'm just curious, if there's been any impact to your business from that either in terms of business won or lost or pieces of that that might become available on the M&A front?

So -- good morning, John. It's Brett.

Yes, that closed I believe in July, this past summer. And we’ve a team that works closely with the ABB folks that were previously the GE Industrial Solutions team, we do watch that very closely.

GE now ABB is a very important customer for Powell. And to date, I don’t think we can say we’ve seen any noticeable change.

Do I believe strategically, that the management at ABB are looking for opportunities to increase the return of their acquisition, sure. But today I can report no big changes in that relationship.

And relative to the ongoing GE business and where they’re at, we certainly talk about it. I wouldn’t say there's anything in the near-term.

We are still waiting to see how GE continues with their business, where they’re going to go strategically and how they manage to their near-term needs. So nothing in the near-term.

Okay. So there's been no circulation of any kind of books per pieces that they might be interested in selling?

No.

Okay. The other question, Brett, is there's -- haven't heard anything about the impact of tariffs and could you remind us again what the impact of existing tariffs might be and is there anything looming January 1st that might impact the business.

So I think a couple of quarters ago we talked about tariffs. We did see an impact, kind of early summer, late summer, if my timing serves me right, Don, could jump in here.

It cause us a little bit of headwind on the margin side. Not so much for being able to gift, especially carbon steel, that hit us a little bit kind of more what I call the floating effect, the way we receive our steels for our supply chain, there was some opportunities by folks to change a little bit of the price level.

And that did affect us a little bit. Again, the material side being: a, component and every job being unique.

That the cost impact really varies job to job, because we’re so engineered order whether you’re going to use a lot of steel, blast designs, use more steel versus, say commercial design which would have less steel requirements. Maybe a little bit of aluminum as well.

Some of our high voltage conductor products have some aluminum. But I think, generally supply chain teams done a pretty good job.

Mitigating it in the last quarter or so, no more deterioration that I’ve seen.

Basically, the initial impact was this past summer. And it's kind of level out at least from the visibility that we have today.

But It is something we continue to monitor and watch closely with our supply team? What would you guess would have been the intact in terms of gross margin percentage for the fiscal year that just ended?

Is it a point or two or …?

I would say we -- John, that you will be no more than a point. Again, it depends on the mix and not -- so it's a subjective answer I’m giving you.

The heavy structural steel was a bigger impact than in plate versus the lighter gate steels. So it does impact like Brett was saying whether it was a module or a blast rated building that we had to deal with.

But at this point in time, I can't see us having more than a 1% impact on gross margin, probably 1.1%, less than that.

Okay, good. And anything looming January 1st, that we should be aware of?

I don’t anticipate anything. Again, through supply chain, we talk pretty often with the operational teams as we do our checks and right now we don’t believe there will be an impact.

I would say there won't be, but we don’t see any behavior that will lead us to believe there will be another bump in the market that we have to be deal with.

Okay, great. Thanks a lot and good luck to you.

Thanks.

Morning everyone.

[Indiscernible]

Hey, Don, good luck in retirement to stay out of trouble.

I will do my best.

Going to the big projects. Obviously, about three months ago, it was announced LNG Canada is going to build a $30 billion LNG facility in Western Canada.

Does Powell -- could Powell have a role in that project?

Well, we sure would like one …

Okay.

… but to answer your question directly, Powell could have an opportunity -- every one of these projects as you get the end user requirements and approved lists, whether they’re all going to be -- shell in this case or they’re going to be blended with the other users that are contributing money as well as the engineering firms, these seems to have all -- each one of them has a life of their own and every vendor is trying to certainly position themselves, but right now being in Canada, it certainly could be something to watch.

Is that -- let's say that you were able to be successful in bidding out piece of that business. Is that a 2020 award or even later than that.

If you were successful when could you -- when would we hear something?

Okay. This is just completely subjective at this time.

Yes, yes I understand. They capital project in my experience globally -- this will take a little bit longer for that.

They did some work about 8, 9 years ago. There was a slate of EPC, that we’re doing early design.

They even moved dirt, 8, 9 years ago over Kitimat. They had the bulldozers on the ground, get ready for the work camps.

So depending how much they dust off and again go through their costs out on the CapEx side, just like we’re talking offshore a minute ago, they will go through a whole bunch days with their final engineering companies for execution and whether they go with the P&C model or just depending on how much EPC player. My guess is, long answer, it will probably be end of 2020 or 2o1o before they start doing a long lead time ordering for the big ticket items.

So the turbines, how they’re going to be generation on all point that leaves distribution where we would play. So once they’re generating the power, where would potentially have an opportunity.

Okay. We probably another year after that before you start seeing any revenue stream.

That’s from a booking standpoint, right.

Okay. And if I’m not mistaken was there's another Israel and the LNG project planned in Easter Canada.

I think when you look at the regulatory maps there's another one planned over there. That’s moving this way through all of the directions, but ultimately really will they pull the FID funding, that’s all -- once you get all the regulation, even long ago host some of those potential next wave.

I think the general agreement is that all are going to go forward. They’re going to going go forward.

We are [indiscernible] landed price and take off contracts where they’re going to spend all the shipments. So I think my own guess is there's going to be another wave, I don’t know for [indiscernible] big as production wise it's what’s already geared up.

Currently shipping and slated to ship in the next 12 to 24 months but the fundamentals or faith is going to support in other way between the Golf and possibly a second one in East Canada. Is there -- I’m sorry, is there inherently anything different with an ILN facility that, that makes it easier or more like for you to earn some number.

So in general, in the gas market, it is different. So liquids, the more dense percentage whatever the density is, it takes the guest to get to a combined stream.

What you get in the LNG side, where you’re putting all of energy in its compression side, it does become more interesting for Powell. But still have the same degree as to petrochemical or refining facility.

But the power generation of this future equipments are very attractive to us. It's hard to say it's the same rate of CapEx spending as you might fund liquid facility.

Okay, all right. Thank you.

And then secondly, Don, if you look at your base of business that you’re expecting for 2019? What would you anticipate your working capital needs might be to support that -- those projects?

Typically historically our working capital has ranged in the higher teens to the round 20% of revenues on a trailing 12 month basis, but you will have bumps in the road. I mean, what you do is we tend to get some upfront.

Funding on projects, milestone payment, but our biggest working capital demand is in that last 20%, 25% of the cycle of a project. So it is the time the issue is so to say it will jump up to 25%, at any point in time is very likely.

But all in all, it will average out probably around 20% or slightly less.

Okay. All right.

Thank you, Don.

Good. Just a quick one on the one-time charge in the quarter, that under $800,000.

Could you just walk through what that was and with any of the offsetting one-time gains that were -- at an operating level, that were included in the quarter. The one charge that we did take is that we have a sublet facility in Canada which was the building, least building that we assume to lease on when we acquired the business pack up in Canada at the beginning, it was a 15 year lease and we assume that we sublet it when we moved into our new manufacturing facility.

We got notice this past quarter. When the lease to current term for the sublet expires next summer, they do not plan to renew the lease.

We still have I think two and 2.5 years trailing years on that lease. We went out and got a market assessment on current market price and adjusted the value -- the cost of that based on what we recorded $800,000.

Long answer to your question, but that’s kind the process we went through.

No, perfect. Right makes it clarifies it completely done.

Thank you very much.

Thanks, Jon.

Thanks, Jon

Thank you, operator. Since this is Don Madison's last call as CFO of Powell industries.

I would like to acknowledge it on, and personally thank him for having serve the company for over 17 years. He has been am instrumental member of our leadership team and has contributed greatly to Powell success.

Don, on behalf of our employees, Tom Powell, and the entire Board of Directors. We thank you for your service and leadership.

We wish you all the best during your well earned retirement.

Thank you.

Thank you. That said, we appreciate your continued interest in Powell.

Mike and I look forward to speaking with our everyone that’s quarter.