Good morning. And welcome to the Powell Industries Fiscal Fourth Quarter 2022 Results Conference Call. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries Conference Call today to review Fiscal Year 2022 fourth quarter and full year 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 December 13. 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 6, 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 actual future 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. With that I’ll now turn the call over to Brett.

Thank you, Ryan. And good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2022 fourth quarter and full year results. We’ll make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a very strong fourth quarter to close out our fiscal year. Our deliberate and strategic efforts are yielding tangible results that are creating a more resilient, diversified and less cyclical future Powell that will lead to stronger growth across the economic cycle. I'm also incredibly proud of how our team has performed since the onset of the pandemic and its adverse effects on our business. After a challenging period of lower industrial activity throughout fiscal 2021 and into early fiscal 2022, we now enter our fiscal 2023 with the highest backlog in Powell’s history. And across all the business, we are on an extremely strong financial footing while macro-economic factors such as elevated costs and the global supply chain certainly remain headwinds, we are in a very solid position to continue to execute our strategic initiatives and deliver improved profitability. Total revenue in the fourth quarter was $163 million, which was 26% above the prior year and higher by 20% sequentially. By market sector revenue from our oil and gas markets totaled $60 million and grew 24% compared to the prior year, while our utility revenue grew to 42% to over $40 million. Traction saw a modest decline of $3 million to just under $14 million. And petrochemical revenue fell 37% to $15 million. Revenue for the full year increased 13% to $533 million led by 15% growth in oil and gas, 13% growth in petrochemical, 10% utility, partially offset by a 24% decline in traction revenue for the year. I'd like…

Thank you, Brett. And good morning, everyone. I'll begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2022 results. Revenues for the fourth fiscal quarter of 2022 increased by 26% to $163 million, compared to last year's fourth quarter of $130 million. And were higher sequentially by $27 million as revenues increased across all of our market sectors on a sequential basis. Notably, we successfully executed a number of projects in the commercial and other industrial market sector this quarter, making accretive gains in markets where Powell has not historically focused. As Brett mentioned, as a result of the increasing activity across commercial and other industrial applications, we determine that it is appropriate to add an additional sector to our reporting. As such a commercial and other industrial sector has been added to our traditionally reported sectors, which will encompass applications such as data centers, pulp and paper and mining applications among others. Growth in these markets is a core component of our strategic initiative. Net orders for the fourth fiscal quarter were $259 million, a $138 million higher than the same period one year ago, and strong demand spanning across most of our core end markets. Our industrial end markets remain very active specifically within the gas market, evidenced by securing a large LNG project in the quarter. Complementing the positive recovery of our core industrial end markets. we also continue to see positive commercial activity across all of our end markets. As a result of the strong orders in the quarter, our fourth quarter book to bill ratio was 1.6x. Reported backlog at the end of our fiscal fourth quarter was a record high $592 million. $177 million higher versus the end of fiscal 2021. The substantial increase in the…

[Operator Instructions] Our first question here will come from John Franzreb with Sidoti & Company.

Good morning, Brett and Mike. And thanks for taking the questions and congratulations on a great quarter. I guess I want to start with some prepared remarks. Brett, you kind of talked about the $0.80 of onetime items kind of suggests that we should use as a starting point of $0.35 for fiscal 2022 as the number going into 2023. Is that how we should look at it? And if so, you've mentioned the seasonality in the business in the press release, has a seasonality playing in Q1 versus Q4.

Thanks John. Yes, absolutely. That's how I would look at it underlying gross margins are still where our operational focus has been, always is and will continue to be even more so heading into next year with the backlog and sure we can continue to make incremental growth on those margins and improve the overall profitability of the base business. The seasonality it is, it always hits us first quarter, we fight the two holiday periods, just from a spin down spin up time and managing through. So there'll be some of that as we kind of plough into the fiscal year. But then, at this point, we expect to recover in the Q2 and on throughout the rest of the fiscal year.

Okay, and it seems like the services business was a sizable contributor to the profitability in the quarter. Can you talk a little bit about why that was the case? What percentage of revenue, it wasn't a quarter, maybe relative to the third? Any kind of context there would be helpful.

It was a very significant contributor to the year. I think two general themes. One as we come out of the pandemic, just sort of the pent-up demand in aftermarket brownfield work that was not being done in ’20 and ‘21. There was certainly some of that, that's the short cycle comments that both Mike and I alluded to. And then there is the element of the strategic side where the team did a nice job taking a risk approach to other projects out there to expand our services both on the front end of the project as well as the back end of site services to prudently look at the jobs and make commercial tenders into these markets to test our strategies and to build capability into the team, and we're successful throughout the year, these jobs tend to be a little quicker on the cycle than a long run capital project. Not always some of the service jobs that are larger, they are a little longer but definitely contributed to the success of the financial year.

Okay, and I hate to put you on the spot, but looks like the adjusted gross margin this quarter was about 19.3%. You have record backlog. I remember a time when 19%, 20% gross margin was eminently achievable. Is this a run rate that you can maintain for the full year or there? I can think of headwinds, but are there enough headwinds that kind of prevents that from materializing?

Yes, no, I wouldn't sit here today and say it's a full year. I'll call it a gold. But we're, today, Powell that sits versus those years past is that theme of we got a lot more mouths to feed on our footprint than what we had 10 or 15 years ago. We do have a sizable backlog. And it is across all divisions, which is nice power to have heading into the year. But our goal would be to increment from the underlying operational gross margin coming out of the year without the one time. Mike, you had anything.

Yes, I think, Brett, you hit it right on the head, the mix that we're experiencing over the last year and looking into fiscal ‘23 is substantially different than you refer to prior periods back in when gas was really going to a little different mix heading into ‘23.

Our next question will come from Jon Braatz with Kansas City Capital.

Good morning, Brett. Good morning, Mike. Can -- I was wondering if you could add a little color to the LNG award. How big it might be? Bigger than a breadbasket. And then maybe also maybe the sequencing of revenue and cash flows that might be associated with that project, and also maybe the margin profile of the LNG award.

So first comment I'd make is, as we've kind of mentioned, all of last year into the fall in the spring, the activity continued to pick up this is a greenfield award, it is in line with what we classically would call a mega project. So back in the days, when the offshore market was screaming, we usually used to call that kind of in the $30 million to $50 million range. This is on the north side of that. And so it's a very complex project with a lot of challenges to it, which is where we're well built, the burn rate on this will go two plus years. There's a lot of when they get difficult, there's usually a lot of uncertainty in the back end of the project, it has a little bit starting off, but it's a job, we know very well, high complexity, and we're pretty excited to have it. On the margin side, just general pricing comment I'd make is it is still competitive, but I think we've made some progress on price in the market throughout the entire fiscal year. But still cognizant that it's a competitive world, and generally, the larger the job, it draws more attention competitively. So there's a little bit that woven into this one as well.

Okay. You've done LNG work before, is this the aspect of this project different than what you've done before?

No, I'd call it a meat and potatoes, but just a general statement. It's just the complexity of how the electrical distribution, not just the electrical design, but the mechanical designs, these LNG facilities, they're being squeezed in the small footprints there on the coastal area, which had a lot of challenges mechanically on the building side. So when you combine the two together, John, it's just the engineering side of it. It is constant throughout the entire project. And given that our, we carry 10% of our employees are engineers and designers, there's a lot of changes that happen and we just do it really well, really fast and efficiently. And I don't think you're going to be piling that model.

Okay. Good. And then lastly, can you talk a little bit about maybe the, if you're seeing or the prospects I should say, for improving on the international front? Obviously, that's been geographically a weaker area. Might we see some improvements in 2023?

Yes, Mike noted in his comments about their sort of the winding down of a couple of projects in Asia. I think we, the end 2021 there was sort of a pause in market activity in terms of where we participate. There are some projects, I just did some touring this fall traveling around in mostly in Asia. And then I've got a trip planned for the Middle East in the next year. So we see some things starting to spin back up. And I do think that we'll come back mid to late next year.

Our next question will come from John Deysher with Pinnacle.

Good morning. Thanks for taking my question. Following up on the LNG question, have you worked with that customer before?

Yes, we have.

Okay, so you've done projects with them and you understand how each side works. That's good. What, I don't know if you can answer this, but looking out to fiscal ’23. what percentage of capacity do you think you might be operating at? Now your sales were close to a record and I know you do some capacity; you sold some operations. But what percentage of capacity do you think you might be operating at in fiscal ‘23?

John, the first question, firstly, I'd respond your question is the growth and the record backlog that we shared on the call today, as a result of Q4, you're right to look at it but it is much broader based. And maybe what we've seen in the past run up when we saw these sorts of levels. So if you think about ‘12, and ‘13, as we were building Canada, Canada's participating so and then the UK business, so everybody is spread more evenly. And not just the US Gulf Coast oil and gas. Remember, that market just started coming back really last couple quarters, even though the bidding activity was strong, it's nice to see it come back, because we were sharing on previous calls that it was getting close, and it's good to see it get over the edge. Overall capacity, a little bit timing dependent, because these large projects tend to move around in the schedule. On average, I'd say we're somewhere in the 60% to 75% range. But we are watching the curves, we are thoughtfully thinking about where we could push that up if we needed to. So I'm pretty confident that with what we have today. And with what we're looking at in the funnel, we're well positioned to take the top side of that in the next couple years.

Okay, so you've got enough manpower and infrastructure and material sourcing to handle all of this business.

We do. I mean, if it continues to grow in the pace, it's at, I wouldn't say that we're -- we'll continue to have manpower challenges. But I think some of the changes in the macro side, the consumer side is slowed down this past summer, I've seen some indications from our operations, we've done a little bit better when we go out into the market and bring in different skill sets, whether it's in the factory leadership, or even on the engineering side we're doing I think, a little better overall there. So as I look out if we're successful at the same pace into the next two years, wouldn't be without its challenges, but I think we're well positioned to overcome it and really capitalize it.

That's helpful. And I guess finally, the new segment, commercial and other industrial, does that replace the all-other segments that you segment out in the financials?

Yes, hi, John. This is Mike. It actually carves out from that bucket and segregates these new markets that we're seeing all this accretive growth and so yes, it is a subset of that traditionally reported other buckets.

Okay, good. So and the new segment will be basically everything that you talked about a year ago in terms of electrical automation, service expense, and all of that kind of thing.

It would be in there. This would be -- the other segment, a specific sort of the end market segment. We've always done work in pulp and paper. We've done work in data centers, although sporadically it just become more consistent over the last 18 months and started rising on the revenue side. So we felt it was prudent to carve it out in the segment.

And our next question will come from Tom Spiro with Spiro Capital.

Good morning. Fine. Congratulations on a strong fourth quarter and on getting that LNG business good for you. Just one little housekeeping, your utility business, what segment will that show up in utility? Is that going to be in the new business, a new segment or in an old segment? Where will that be reported?

That has been reported in its own sector, and it will continue to be reported in the utility sector. No changes there.

Okay, great. Thanks, R&D spending for the new year do you think it's going to change much?

So I think heading into the year flattish up, to up a little bit. But in line with what we've talked on our strategic plans and with adding to the team with Marshall and others, there's some work we've done this year to allocate that capital into longer term. Look at the market 5-10 years out, we've made some moves this year on investment. And I think as Marshall comes on, and the team spins up, I think in future years, we would anticipate increasing that but not quite yet into next year.

What is the background of the new VP of R&D? Where does he come from?

Most recently, S&C Electric, also had started his career with Eaton and Schneider in his background, so really well rounded on the primary and as well as the secondary side of switchgear, which fits us perfectly.

That's great. You're, I guess, coming to the end of that large LNG project you won a couple of years ago, I wonder number one, when you finish it up? And number two, how has it gone?

Number two, it's gone very well I think from all aspects, it hasn't been without its challenges. We knew heading into the project, I really give credit to the project team. And the commercial team that secured the bid, they've done a great job, from the outset of the securing the job, identifying the risks, managing those risks with the project. Certainly staying very close with our client, with the engineering partner and the end client. And I think I'm, all I can say is I'm very pleased with how it's executed. It still is somewhat ongoing, although it'll be tailing off as we get through the bulk of ’23 year.

I see. And earlier in this call, you had a little discussion of the impacts on gross margin of the changing mix of business, and I didn't really understand the point you were trying to make. Maybe you could take another go at it. As your mix changes, some of these new lines of business grow services and other technologies and stuff. How will that affect your margins?

Yes, Tom, this is Mike. When you look at our mix, the question that John brought up back five, seven years ago, when gross profits were in the high teens, that mix contained a lot of oil and gas work. As Brett alluded to the oil and gas sectors now, we're just beginning to recover. But what we're seeing that supplementing a lot of this volume is utility type of work, commercial and other industrial work, which typically doesn't carry the margins that the oil and gas work did back in back five, seven years ago. So that was my comment on the mix when you look versus prior years, right. Yes, the complexity of those jobs from what Powell is built for in our 75-year history. It's not to say they're easy, but they're just not as in depth or complex with a lot of changes on loads, because you don't have all of the process changes that happen on an industrial facility. So it's been a great build in our diversification last year. And we look to continue that both in the market side as well as the development side. And then the other part is the service bus, it did pick up this year, that also has a tendency to have a different phasing on the cycle. And it makes it complexities but it's been a really nice add to the story under pressure.

Do the margins on services tend to run higher or lower than your traditional oil and gas business?

Higher.

It's when you're putting, especially on the labor side, and you're bringing a lot of talented labor to bear on a project with on the design side or site services it tends to bring in a higher margin in some of the products.

Our next question will be a follow up from John Franzreb with Sidoti & Company.

Just a couple points here. I'm curious about the project that contributed $2.5 million to revenue. Was that a recent project, how old are the projects, is it older?

Yes, John, this is a project that we executed. We actually won I think in 2013 or ‘14 is executed over a number of years. And Powell incurred costs via change orders several years ago, and due to the uncertainty of recovering the timing and the recovery of those costs. The cost flow through the P&L, but the revenue was not recorded. Now in this last fourth -- fiscal fourth quarter, that project was finalized by the ultimate end user and the general contractor. And the amounts were defined and settled. And as a result, Powell recovered the majority of the cost that we had incurred several years ago. And that's a $2.5 million uplift in margins this quarter.

All right. And Brett you kind of referenced, your travel to Asia, your upcoming trip to the Middle East. I'm curious about the opportunity pipeline today versus, say three months ago? Is it still as robust? I mean, are we looking at exit backlog in fiscal 2023 that's similar the exit backlog in fiscal 2022. Just your thoughts about what's out there relative to what you were seeing, in order to capture it.

It's still pretty strong, John, hard to say what the exit backlog will be. I think the potential to have a strong backlog at the end of ‘23 is definitely there, the oil and gas side that has been building for the better part of 12 to 18 months. And as we shared certainly very appreciative to have received that award in Q4. But the oil and gas part continue. There isn't just one project, there's a number of things that are percolating in that core market that are ongoing, and we'll definitely continue to pursue them throughout ‘23 and probably into ‘24 at this point. So I think that will be an increasing return to that core market. On the broader, I don't expect any change in the utility cadence. We've talked about that for a number of years, five, six years, we continue to have a very strong strategic focus, especially in our home countries of the US, Canada, UK. So I expect to continue there, incrementally gaining share where we can continue to execute and it demonstrate utility customers that Powell is the best solution, and then the broader markets that have kind of come up last 12 to18 months, maybe a little bit more uncertainly in the latter part of the year. But as I sit here today, pretty robust activity. So I think, at least in the first half, it'll continue at a good clip. This concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks.

Thank you, Joe. Overall, we are pleased with our financial performance in the quarter and for the full year as our core end markets continue to improve. We are seeing the early success, the early successes of our growth initiatives and are entering fiscal 2023 with very encouraging momentum. I would like to thank our nearly 2,000 talented employees for their enthusiasm and exceptional service to our customers. Their strong focus on operational excellence, safety and a commitment to improve combined with a can-do spirit gives me great confidence that Powell 's future is very bright. With that thank you for your participation on today's call. We appreciate your continued interest in Powell. I 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 your lines.