Good morning. And welcome to the Powell Industries' First Quarter Fiscal 2022 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Ryan Coleman. Please go ahead

Thank you, operator and good morning, everyone. Thank you for joining us for Powell Industries' conference call today to review fiscal year 2022 first quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the Company's website, powellind.com, or a telephonic replay will be available until February 16. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, February 9, 2022, and therefore you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the Company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those expressed in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials, and execution of business strategies. For more information, please refer to the Company's filings with the Securities and Exchange Commission. With that, I'll now turn the call over to Brett.

Thanks Ryan. And good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2022 first quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. It has been a short 60 days since we shared our 2020 one full year results in many respects not much has changed over the last several weeks. Our first quarter financial performance reflected the usual seasonality and holiday disruption we are accustomed to seeing at the start of our fiscal year. It also reflects the more challenging cost environment that has arisen over the past year as we navigate broad inflationary pressures and supply chain challenges. Nonetheless, we saw further growth in new orders, which marks three consecutive quarters of rising order activity. We continue to experience steady levels activity within our industrial markets. And while customers as a whole remain tentative and cautious with their capital expenditure plans, we are optimistic that this important market sector of Powell will continue to steady recovery that started midway through last year. New orders placed in the first quarter included $122 million of gross new orders, partially offset by a $14 million scope reduction on a previously booked project for a total of $108 million of net new orders. The customer requested scope adjustment is for a large industrial project previously booked in fiscal 2021. The $122 million of gross new orders is modestly higher than the prior quarter, and is an increase of 34% from the prior year. Meanwhile, the traction and utility markets in which we compete remain active and have been strong offsets these periods of lower industrial market activity. We expect to continue in fiscal 2022 our strategy of steady methodic growth in the…

Thank you, Brett and good morning, everyone. In the first quarter of fiscal 2022, we reported net revenue of $107 million flat versus the same period in the prior year. Gross new orders booked for the first fiscal quarter of 2022 was $122 million. Net new bookings for the first fiscal quarter was $108 million, $17 million higher versus the prior year, which reflected a current quarter reduction in net bookings due to a project re-scoping of roughly $14 million. As a result, our book-to-bill ratio based upon reported net orders was 1.0 in the period, with $416 million of backlog at the end of the first fiscal quarter, which was $49 million lower as compared to the same period a year ago. Compared to one year ago, domestic revenues were higher by 2% versus the prior year to $82 million, while international revenues were 6% lower compared to the prior year, driven by lower project volume in Asia Pacific. In total, international revenues were $24 million in the first fiscal quarter. From a market sector perspective, revenues across our oil and gas and petrochemical sectors were higher by 23% versus the prior year. While utility and traction sectors were lower by 24% and 15%, respectively, versus the first fiscal quarter of 2021. Gross profit decreased by $5 million to $13 million in the first fiscal quarter versus the same period one year ago. As a percentage of revenue, gross profit decreased by 450 basis points to 12.6% versus the same period a year ago, driven in large part by higher raw material costs, which added roughly $2.5 million of additional cost to the quarter, in addition to a substantially lower volume of project close outs from backlogs. Selling, general and administrative expenses were $16 million in the current quarter…

Thanks Mike. I would like to close out our first quarter prepared comments, recognizing Tom Powell’s upcoming retirement from our board and the legacy that Tom leaves not only at Powell, but across the industry. Tom began his career with the company in 1964 and will be retiring from the Board of Directors effective February 16. Tom’s legacy is firmly rooted in our core values by which we have and will continue to achieve success. Customers first, respect for our employees, I can’t do attitude, and the commitment towards continuous improvement will guide our company into the future. Tom, thank you for all of your contributions and support throughout my tenure with Powell. And on behalf of the Board of Directors, the senior leadership team and the 1,900 Powell employees globally, we wish you much health and happiness in your retirement. At this point we'll be happy to answer your questions.

[Operator Instructions] Our first question today comes from Jon Braatz with Kansas City Capital.

Good morning, Mike. Turning, going back to the gross margins, obviously, I don't think anybody is really anticipating spectacular margins in the quarter given the rising cost environment. But it seems like you in 2021, you were faced with rising costs. And it seems like something happened here in the first quarter that caused the margin pressure to be even greater. Could you go into a little bit more detail about the drop in margins from either you want to look at it from the fourth quarter or for the full year last year? It just seemed like it was -- there was something that occurred in the first quarter that might have put some additional pressure on it. And the other question is, I think, Mike, you mentioned there were $2.5 million in added cost. As you look forward, how do you see the recovery of those $2.5 million in cost?

Sure, Jon, so taking your first question on the degradation of the gross margin in the current quarter, really two primary variables. The first is the ongoing inflationary impact of our core input materials, copper and steel, you took a look at the price increase or cost increase for us, of those commodities, copper over the last 12 months has gone up about 30%. Steel up about 60% just over the last year, if you go back even further, it's a little more, it's a little higher than that. But if you think about the long lead nature of our projects, as those commodities are increasing, we are concurrently raising our pricing and our estimating tools, but there is a lag. So what we are exiting from our backlog today is really projects that we booked in late fiscal ‘21 first half of fiscal ‘21, which didn't have the benefit of that incremental price add from the commodity. So what we're seeing in this quarter, probably a little bit of bleed over into next quarter, as well as our projects at prior to any price elevations due to the commodity. So that was really the first headwind facing that gross profit gross margin scenario for the quarter. Secondly, again, if you think about the order cadence that we had, in late ‘20, early ‘21, the orders cadence was much lower than it has been over the last three quarters anyway, it continues to strengthen. But the number of project close outs, just due to the volume of orders that we booked back in late ‘20, early ‘21, much lower than what it is now. And that's exiting the backlog today. So where we had higher levels of projects, existing backlog prior quarters, we're now in a kind of a valley where we don't have that same volume. So that's really -- that really impacted gross margin percentages and those were the two things that impacted gross margin this quarter. On the $2.5 million, we can't control copper prices, we can't control steel prices. We do have mechanisms in place to help mitigate and manage those costs, but clearly our levers are, they're really price and an overhead costs in the plant. So that's what we're focused on. We're focused on things we can control and managing to the best that we can, the items that we can.

As you look currently at copper and steel, are you still seeing those costs increase? And then secondly, as you look at new projects coming on board, new orders, are you able now to given the inflationary environment sort of add the potential surcharge into the business into the orders to protect you a little bit better against the inflationary costs?

Yes, the first question copper has leveled off over the past probably six months it's stabilized into the mid £450 pound; steel, it has really gone quite high. And we use a lot of steel as you can imagine. It's softened a little bit. So I don't, I'm not a commodities trader, but I can't imagine steel would go to the extent -- increases to the extent that we saw previously. From a pricing standpoint, again, we've taken and incorporated the commodities increases in our estimating models. There is a lag just due to the lead time of our products. But yes, we are transitioning those costs into our estimating models.

Our next question will come from John Franzreb with Sidoti & Company.

Good morning, Brett and Mike, thanks for taking my questions. First, I'd say congratulations to Tom on his retirement, he was always fun to work with over the past whatever it is 15-16 years. Going back to the gross margin question, I guess two parts I want to follow up on. Firstly, talk a little bit about the competitive landscape, is everybody raising prices? Is it becoming easier to put those price increases through the bidding activity becoming a little more palined as far as the customers taking the price increases on the job is relative to what they're doing? Maybe say six months ago?

I'll take that first one, John, it's Brett, maybe a little bit. I think last quarter, last two quarters, we were asked about price. And we kind of indicated in the second half of the calendar year last year, we started to see increasing levels of price competition. I'm not, I can't say that has relented I think people because their recoveries still sort of slow and methodic on the industrial side, there is a fair amount of price competition still. But where we are seeing opportunity is on the logistic side. There are a rash of shortages, which is also a cost impact for Powell. But there is opportunity where under the things that we control our products that we manufacture. On the medium voltage side, especially in the substations, we are able to command a little better price on those things on our supply chain where we have control, we're still pretty competent in our abilities in the North American anti market and we are having some opportunity upside there.

Have you changed your buying patterns as far as buying steel locking in pricing earlier, as soon as you get the job, so they're not as exposed?

Yes, John, we are in fact we, you do see a little bit of cache usage in our inventory, as we lean forward and secure. Not only copper and steel, but some of the ancillary parts that are critical to our products, where we see shortages, the supply chain these shortages, we will lean forward and make sure we don't have a manufacturing disruption.

Okay. Less easy to work with is labor costs increases, how's that impacted the gross margin?

At present, really haven't had a material impact on margins with respect to labor, we are watching it closely, we do anticipate given the macro environment that will be a variable that we have to manage.

Yes, availability, as we noted in the prepared comments are it is something we watch, it is different location to location. We do see it and as I noted, we can working our way through it. So it's not without challenge but it has yet to become a program or factor we haven't been able to overcome but it is something we're watching closely.

Okay. So is it fair to assume that this is the low point in the gross margin profile since the one, the jobs are running through the ones you're kind of caught unawares of or do we still have another gross margin that may, should be below this one?

I mean, I don't, look, I think the commodities as we look at copper and steel, as I alluded to John Ross's question, if we buy forward we buy at the best price we can get. The pricing that we incorporated in our tools mid last year should be – we should start seeing that bleed through the system mid-year this year so we're positioned to as I said in my prepared comment, we are positioned to improve our financial performance. And that's what we would anticipate.

Okay. And on the revenue side, Brett, when you talking about improving incoming bookings profile, when you look out, say six months, where do you think the bookings profile will be the most favorable and way and most concerned about six months from now?

A lot in that question, John, I still think that we'll be talking about this methodic recovery, the industrial market, as you know, we saw it in our business mid last year, it has continued through the back half of ‘21. And no big change in last 60 days. The part that I'm probably still most concerned on industrials, are the large projects, when will we actually see the global economic demand drive, what appears to me, in improving economic situation for some really good investments in the States, especially in the Gulf Coast, but while we continue to actively work with our engineering partners, and end clients on those jobs, there's still uncertainty about what actually when the return gets to the point where they'll pull the trigger. So that uncertainty in the timing of those larger jobs that is probably my biggest concern six months out, I think. Meanwhile, utility distribution market that has been a pretty decent market for us in the US and Canada continues, traction become if we self-constrained traction just because there's just different contracting environment there with all the different levels of levels. And we continue to make progress on new market activity, in which we are seeing through new channel development OEM channels that we support out in the market so.

Alright. And one last question, and then I'll jump back into queue. You talk about as far as your strategic priorities when it comes expanding your services business. Can you kind of give us up to date where you are as far as how much is service revenue in the P&L and what you think is a reasonable target, say two years from now?

Well, so I'm not ready to kind of lay out a target yet because it's not a reportable segment. Our first goal is to get service into a true aftermarket reportable segment. It is, as you know, it's pretty closely attached to the equipment life 12-18 months after we install, we are working through our leadership team, services a whole when you include all of the other parts, which is parts business and other things that are kind of in that first 12 to 18 months, can be as much as 20% of our total revenue. But what we want to do is first establish in select markets, both in the industrial base, or in certain geographies where this engineered obsolescence is one area that you'll hear us talk about in the future, how can we and we've got some really good examples that have underpin this strategy where we go into a client that we know really well, and they want to extend for various reasons, their installed base, CapEx that they put in 20 - 30 years ago, the engineering strength of power, we should be able to leverage and build that where we can go in and design a custom breaker or a custom low voltage motor control bucket and put it in the existing infrastructure so they don't have to pull out and rip out all of that metal and wires they can get it to take advantage of new technology, new components and extend the life of that another 10 to 20 years so. It's those things that you’ll hear us talk more about in the coming quarters.

Next question comes from John Deysher with Pinnacle.

Good morning, everyone. Thanks for taking my questions. I was just curious for the three strategic initiatives. Were there any extra costs that are recognized there that perhaps weren't there a year ago? I notice R&D went up a bit. But could you tell us if there are additional costs that were not there a year ago for those strategic initiatives?

John, no, not in the most recent quarter. It is foreseeable that in the future, although it won't be in the next quarter or two that we think about raising that portion of the R&D spend to accomplish the strategic goal. We started on that path a couple of years ago. I came out early in the year and talked about target, we ran into a technical challenge and had to retool our plan there. We are working on that now. So when we get to that point, I'll definitely talk about it in advance of doing so. But not in the most recent quarter.

Okay, so none of the R&D increase was related to the strategic initiatives this quarter?

Not directly. I mean, there are, I alluded in last call in December, there are some things that we're doing on allocating just typical R&D money. But we've not taken a step that I can say is tied to that as of today that would be in the R&D line.

Yes. Fair enough. What level of revenue is the service have to get to for it to be a disclosable segment of the total revenue base? 10%, 15%.

I think that if we could sustain an aftermarket, again, not tied to the equipment life of the 12 to 18 months in excess of 10%, I think that will, it will be challenge not to make it reportable segment by our accounting team.

Okay. And I guess finally, what would you refer to project close as being less this quarter than a year ago? What exactly are you referring to?

Some of that is how Mike indicated earlier on in one of the questions. It's some of the timing of the size of projects that we were taking at the end of ‘20 and the first part of ‘21. And some of it is also a little bit mixed in there with mix and timing, just a logistical challenges not being able to close out certain jobs. So they're holding over an extra month or two for shortages or all the above economy challenges right now. So just not enough. We typically have a pretty steady cadence of close outs and when we're running a good mix of business and we just didn't see that in Q1.

At this time, there are no further questions. So this will conclude our question-and-answer session. I'd like to turn the conference back over to Brett Cope for any closing remarks.

Thank you, Gran. While the global economy remains challenged by lingering uncertainties brought on by the ongoing global pandemic, the subsequent significant rise in inflation and logistic challenges and the added burden of labor availability. Powell has weathered these conditions in the past and we are well positioned to persevere through these challenges and emerge stronger in the future. The strength of Powell is our people, an incredibly talented team who underpin our operational strength across all of our manufacturing facilities. We are supported by a healthy backlog, a strong balance sheet, and great relationships with our customers and suppliers. Additionally, we are focused on advancing our efforts in new and encouraging growth opportunities that will better diversify our backlog and project mix going forward. 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 all next quarter.

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