Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenues in the quarter were 50% higher than the prior year, driven by strong performance across nearly all market sectors.
- Gross profit nearly doubled compared to the same period in fiscal 2023, achieving a gross margin of 28.4%, the highest in over a decade.
- The company booked $356 million of new orders in the quarter, the highest quarterly total of fiscal 2024.
- Backlog remains at $1.3 billion, the highest in Powell's history, indicating strong future revenue potential.
- Net income more than doubled to $46.2 million or $3.79 per diluted share, compared to $18.5 million or $1.52 per share in the prior period.
Negative Points
- Operational disruptions due to Hurricane Beryl impacted facilities in Houston, causing power outages for up to five working days.
- New orders for the third fiscal quarter were $149 million or 30% lower compared to the same period one year ago, due to a challenging comparison with the prior-year period.
- The light rail traction power sector saw a 25% decline, indicating challenges in this market segment.
- Increased SG&A expenses by $2 million due to higher spending on infrastructure improvements.
- The company is facing capacity constraints, which could limit future growth if not addressed.
Q & A Highlights
Q: In the second quarter, you suggested that you were at max capacity. However, revenue exceeded that threshold. How should we reset our expectations of what max capacity really is?
A: We are definitely coming up against limits. There are still capacity initiatives as we shared in the prepared comments today. In Q3, being a projects business, there were some really healthy closeouts and timing effects, given the wide breadth of project and the size of the backlog. There's always an element of buyout timing when we hit the POC accounting. So, a little choppiness in Q3 sort of hit on the top side. β Brett Cope, CEO
Q: How much do we have in project closeout revenue in the quarter?
A: Given this is a projects-based business, it's not unusual for us to experience choppiness across the quarterly landscape. With this in mind, we exited the third quarter on a year-to-date basis at 26.1% gross profit, which is probably the appropriate parameter as we calibrate what's exiting backlog. The amount in the discrete Q3 that was accretive to that base margin rate is roughly 150 to 200 basis points. β Michael Metcalf, CFO
Q: Regarding the gross margin, the new bookings, is it fair to assume that there are higher margins than bookings that you've taken in a year ago?
A: I wouldn't say that. Coming out as we ramped up last year with the two big quarters and then sort of stabilized in the latter part of the calendar year and into this year from even previous quarters, it's continued to hold pretty constant on the market pricing. β Brett Cope, CEO
Q: It sounds like you're more constructive on the utility market than you were six months ago. Can you talk a little bit about what's going on there?
A: The utility market, over the long haul, we've intentionally built a strategy, especially on the distribution side with the infrastructure spend and the hardening and resilience that the utilities are building in the US, Canada, and UK. More recently, we are seeing some new generation of market, and our participation rate is stronger. β Brett Cope, CEO
Q: Can you talk a little bit about use of cash? How should we think about the cash flow going forward?
A: We do expect the working capital part to grow. When we have a nice quarter like we did in Q3 with the bookings, the payment milestones will help buoy that until that gets put to work in a later period. Capital spend along with equipment will continue to rise in the coming quarters. The R&D spend is up 50% and will continue to rise incrementally. β Brett Cope, CEO and Michael Metcalf, CFO
Q: Your win rates are improving. What do you ascribe to that your win rates are getting better?
A: On the utility side, the intentionality on the distribution side has been going for 10 years plus. We've been there with the enclosed PCR power control room solution and Powell's breakers. More recently, we are seeing some new generation of market, and our participation rate is stronger. β Brett Cope, CEO
Q: Your backlog was flat year over year, but your rates, you had a book bill 1.2. Can you talk a little bit about your sort of your book-to-burn business during the quarter?
A: The convertibility aspect of our backlog has changed. Last quarter, the convertibility over the next 12 months was in the mid-50% range. This quarter, it's up in the 60 percentage range. So, we're getting a little bit more out the door from our backlog, and that's helping elevate the revenue level as well. β Michael Metcalf, CFO
Q: You've ramped up your R&D spending. What can you tell me about what might be in your R&D portfolio and the expectations of that investment in the next two, three years?
A: The first new development rolled out this year is a station breaker product targeted to the utility renewable market. We think we've got some unique value proposition in what we've come up with. Subsequent quarters in the next year, you'll see things that are very electrically centric on the switchgear side, product-based, supporting not only in the projects business but also supporting a product strategy through other channels into the market. β Brett Cope, CEO
Q: I'm curious about the 9 acres of property that you purchased. Is there a facility located on that you convert? Are you going to greenfield something?
A: It was an opportunity that came along. There are several office buildings and some warehousing capability there that we'll use immediately. Longer term, we have some ideation going on about expanded capacity and lines we could move over there to build. β Brett Cope, CEO
Q: You don't want to put a number on how much additional CapEx it would take to get everything up to the way you want it?
A: I think less than $1 million. We spent a lot in diligence. It will come out in Q4. If we start to invest and actually add fabrication or some assembly windup material, that would be something we'll share with you and the shareholders in the coming calls. β Brett Cope, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
