Greetings and welcome to the Powell Industries' Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference over to your host Zach Vaughan of Dennard Lascar Investor Relations. Thank you. You may begin.

Thank you operator and good morning everyone. We appreciate you joining us for the Powell Industries' conference call today to review fiscal year 2019 fourth 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 available via webcast by going to the company's webcast powellind.com or a telephonic replay will be available until Decrease 12. 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 December 5, 2019 and therefore, you're 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 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. Now I'll turn the call over to Powell's CEO, Brett Cope. Brett?

Thank you, Zach and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2019 fourth quarter results. I will make a few comments and then I will turn the call over to Mike for more financial commentary before we take your questions. We are pleased to report another quarter of solid progress with both strong revenue and net income growth. Revenues increased to $149 million or 10% sequentially and net income improved to $6.5 million, a 29% improvement from our third quarter. We are also pleased to report fourth quarter improvements in both gross profit and free cash flow. Mike will provide more details on these metrics in his prepared remarks. These increases were the result of the sustained momentum we experienced throughout 2019, including the following highlights. Projects and pricing discipline combined with operational execution, improving backlog quality, optimization of resource planning around our people and facilities and our sustained focus on cash flow. Our new orders totaled $162 million in the fourth quarter and $676 million for the full fiscal year 2019. This is compared to $78 million in the fiscal fourth quarter of the prior year and $459 million for the full-year fiscal 2018. Backlog at September 30, 2019 was $419 million, a 61% increase from the $261 million at September 30, 2018. Throughout fourth quarter and for much of our fiscal 2019, we've experienced increased demand primarily from customers in our core oil, gas and petrochemical markets. Along with these improved market conditions, we have continued to work through lower-margin projects that were booked in late fiscal 2018 and into early 2019. Combined, these trends have resulted in the positive growth, quality and mix of our backlog, which have helped to support improved operational contributions across most of our divisions. Powell's largest…

Thank you, Brett, and good morning, everyone. Let me first start with some highlights from our fourth quarter and then move to the full fiscal year results. Orders for the fourth quarter were $162 million, up 12% sequentially and higher by $84 million year-over-year. As Brett mentioned, we're benefiting from the industrial sector end-market demand, specifically within the downstream oil and gas space, which led to fourth quarter bookings activity. Our book-to-bill ratio finished the fourth quarter of fiscal 2019 at 1.1, flat sequentially, while our fourth quarter ending backlog remains strong at $419 million, $158 million higher than a year-ago and $12 million higher versus the prior quarter. Revenues for the quarter were $149 million, up 10% on a sequential basis and higher by $14 million or 10% versus the fourth quarter of fiscal 2018. The strong top line growth was generated primarily in the domestic industrial sector. Specific to geographic revenue segmentation, domestic revenues for the quarter were higher by 4% or $5 million to $114 million versus the prior year and were up by 10% sequentially. International revenues from both our foreign operations as well as export shipments from our domestic facilities increased by 34% or $9 million year-over-year to $34 million versus the fourth quarter of fiscal 2018 as the international market activity continues to improve. From a market sector standpoint, revenue generated from the industrial sector increased by 21% sequentially to $120 million in the fourth quarter of fiscal 2019 and was higher by $20 million or 20% compared to the prior year. The downstream oil and gas sector driven by natural gas supply and related pricing continues to generate strong inquiry activity and petrochemical expansions and upgrades. Revenues generated from our utility sector decreased by 12% or $3 million to $19 million in the…

Thank you. [Operator Instructions] Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Good morning, gentlemen. Thank you for taking my questions and very nice quarter.

Thank you, Jon.

Thanks, Jon.

Let me just start with the orders have averaged about $170 million in the past four quarters. Is it reasonable to assume that you're going to generate around that level of revenue over the next four? And kind of what are the puts and takes to the scheduling and the recognition liquidation of that from a quarterly perspective?

Yes. Jon, I think as you look at our trajectory on our backlog, roughly 80% of the current ending backlog we think is going to be convertible into 2020. So that's kind of how you do the math. It's clearly not going to be evenly split across the quarters, but that's how we're looking at that.

Okay, great. And in terms of the margin that you're receiving, you did a great job this quarter, 19%. Can you sustain that as you go into 2020 and beyond or were there some timing or other project specific benefits that you realize?

Yes. I mean look it was a very strong quarter from a gross profit perspective and we were very pleased with that. I would note that we experienced our first quarter in quite some time that most of our reporting segments, reported positive sequential productivity and mix, which was very good. This was really driven by our North American operations and spanned across most of our product lines. Overall, the largest contributor to the gross profit exit rate at 17% on the year and 19% in the quarter was really generated by the favorable mix in the backlog of our downstream oil and gas volume predominantly in our U.S. facilities.

Okay, got it. So I guess the question is, in your current backlog exiting Q3, does that margin look as favorable or is that more of a one-time thing?

What I would offer Jon is as we look forward into 2020 and our international operations ramp up, there are different dynamics in the U.K and Canada with respect to price and efficiencies, which could be a headwind -- a little bit of a headwind as we head into 2020. Secondly, as we work these large projects and as Brett and I have communicated previously, they’re in very competitive environments, and we may have a little price pressure on some of these larger projects.

Okay, great. Thank you. I'll jump back in queue.

[Operator Instructions] Our next question comes from the line of John Deysher with Pinnacle Capital Management. Please proceed with your question.

Good morning and nice quarter.

Good morning, John.

Thank you.

Just curious you mentioned R&D spending a couple of times up double-digits going into the new year. What is the budget for R&D in the coming year and what exactly are you spending that on?

John, we typically run 1%, 0.25% of revenues historically. We're going to look to increase that a little bit in the next year to two years and primarily around our Electrical Solutions Breakers, Switchgear, there's a few markets that we've had some success in over the last couple of years and there are some trends that we’re watching that we think it's the right time to ramp up some investments for those markets in the future. And you said it indicated it would be up at least mid double-digits, is that what I heard?

Yes. Greater than 10, but maybe less than 50, somewhere in there.

Okay. I don't think you've mentioned CapEx for -- fiscal 2020. What's that budget?

Yes, we're anticipating holding CapEx about flat maybe up a little bit as we look at some of the productivity initiatives we've got in the pipeline, but nothing drastic -- no drastic changes there, John.

Okay. Good. And finally the use of subcontractors, just curious what percentage of the year-end labor base is contractors and how do you oversee that? I know a lot of companies have difficulty managing external contractors. So I was curious, what's the percentage and then how do you manage that?

I don't really -- just struggle a bit with the actual percentage. I'm going to say it's probably less than -- probably somewhere between 5% and 8% of the workforce in the fourth quarter, but it varies John. The offshore facility that we have, we've always had good relationships with supply partners. We are able to leverage that right now in some of the other facilities, especially in the U.S. where we have tighter markets. We're seeing it creeping a little bit in the U.K., which traditionally we haven't. So we're working on solving that issue right now. Trying to figure out the right balance with long-term hires and contractors and get back to the model that we're comfortable with. Of course, balancing that against future needs as well.

And you feel the internal controls are adequate to keep that in line?

We do. Safety is always first and we work with our supplier partners through our supply chain group to go through the qualification process and the review process and we're in constant communication with that. So it does always create a different dynamic when you bring in, like I said offshore, we're more comfortable with that because typically the way we run the yard, the other facilities a little bit more diligence to watch it and make sure that we have good communication to manage it.

Very good. Thank you.

You bet.

Our next question is a follow-up question from the line of Jon Tanwanteng from CJS Securities. Please proceed with your question.

Mike, just on the fantastic cash flow in the quarter, do you get to keep all of that going forward, or was it just the timing thing that’s going to be reversal for any reason? And two, assuming you got to keep it, what is the only change to your capital allocation priorities?

Yes. So, yes, it was a great cash flow, free cash flow year and specifically in the quarter. As we look forward to 2020 and you kind of look at where we are sitting with receivables and payables etcetera, the way I would tend to view the year playing out is we could have an uptick early in the year and some of these larger projects -- if they materialize, if they were to materialize, you're going to use some working capital to ramp up on those. So probably kind of -- probably, I would estimate a wash. I wouldn't estimate anything -- a big ramp-up. And with respect to capital allocation, to Brett's point on the R&D, that's one of the reasons that we really want to leverage some of those capital to grow the business in our products and services.

Okay, great. And then just on the topic of large projects in your pipeline, what's the status of them potentially coming later this year? Number one. And number two, did you have any medium or large projects in your order book in the past quarter?

Second question first, Jon. Fourth quarter had two moderate projects in the $15 million to $25 million range both -- both from the core markets. Going forward, there are a number of large projects that are -- we talked about in the last couple of quarters as you know. Some of them are still more uncertain in terms of full funding, but the work continues on those. And then there are a couple that are funded and activity is very intense over the last -- really last couple of quarters and -- but the larger the project, the more uncertainty on timing. So, of course, you got to win it and even once you get it, there's always moving to the right once you get the project. So …

Got it. When you say activity is intense, is that on your end or just from -- in the industry pipeline?

Industry pipeline.

Got it. Okay. And the timing for you is still expected to be more towards the end of the year in terms of landing a potential order?

Yes. It's one of those things, you don't want to call, so you call it. There's just -- there's a lot of work, there is a lot of estimating and engineering support that we're providing on multiple projects and timings. They're very active and if they pull the trigger, hopefully we're at the table there in the final negotiation.

Got it. Understood. Thank you, guys.

Yes, thanks.

This concludes today's question-and-answer session. I'd like to hand the call back to management for closing remarks.

Thank you, Doug. Our fourth quarter delivered solid performance with sequential improvements in our top and bottom line. The strength of our backlog combined with the strength of our balance sheet provides solid momentum as we head into fiscal 2020. Powell's ability to meet the constant market challenges, while working to minimize the impact on both the business as well as our customers is a strength and a differentiator of our business model. Our employees have and continue to do a tremendous job delivering incremental efficiency gains in order to meet the changing needs of our customers and markets, which underscores our ability to secure future projects and drive new strategies to improve productivity and profitability. I would like to thank our valued customers and our supplier partners for their continued trust and support to Powell. And with that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.