Powell Industries, Inc. (NASDAQ:POWL) Q1 2025 Earnings Call Transcript

Powell Industries, Inc. (NASDAQ:POWL) Q1 2025 Earnings Call Transcript February 7, 2025

Operator: Good day, and welcome to the Powell Industries Fiscal First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touch-tone phone. To withdraw your question, please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman with Alpha IR. Please go ahead.

Ryan Coleman: Thank you, operator, and good morning, everyone. Thank you for joining us for Powell Industries’ conference call today to review fiscal year 2025 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 14th. 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, February 7th, 2025. 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, which 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 future results may differ materially from those projected in these 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.

Brett Cope: Thanks, Ryan, and good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2025 first-quarter results. We will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell recorded a strong start to the fiscal year highlighted by revenue growth of 24%, and new order growth of 36% compared to the prior year. Revenue increased in every one of our major market sectors, as revenue from the oil and gas sector increased 14%, while the electric utility and commercial and other industrial sectors grew 26% and 80% respectively. Our order total of $269 million also saw broad strength, led by an award this quarter for a large domestic LNG project to be located along the U.S. Gulf Coast.

New project activity continues to be balanced across our industrial, utility, and commercial sectors. Our strategy in the utility market continues to be a bright spot as the sector once again accounted for nearly one-third of our backlog. We Gross margin was roughly unchanged from the prior year, but lower sequentially. This was in line with our expectations. Given the seasonal challenges we typically see in the first quarter, as well as the benefit of project closeouts we experienced in the fourth quarter of 2024. On the bottom line, we recorded net income of $35 million in the first quarter or $2.86 per diluted share, which was 44% higher than the prior year. Our backlog of $1.3 billion increased by $48 million compared to the prior year, and by $14 million sequentially.

We remain very encouraged by the overall composition and project schedules of our backlog which is well balanced across both the markets and geographies in which we compete, and provides revenue visibility into fiscal 2027. We are making good progress with our capacity initiatives, which are advancing as planned to help facilitate the execution of our current backlog as well as provide room for modest buying growth going forward. Remediation work at the nine acres we purchased last July continues to progress on schedule and has already freed up important capacity at our largest manufacturing facility based in Houston. We expect this incremental capacity to contribute revenue in fiscal 2025. The expansion and improvement of our electrical products factory in Houston also remain on schedule and are expected to be completed by mid-fiscal 2025.

The incremental space will be focused on supporting organic development of new products to better position Powell in our key markets. We continue to invest in our R&D function to support those efforts. As our R&D spend was up 26% versus one year ago to $2.5 million in the first quarter. We continue to attract and strengthen our talented workforce and are confident that we are adequately positioned to execute our backlog. Last quarter, we detailed the opening of an engineering satellite office on the far west side of Houston allowing us to better engage and hire from a wider population of qualified engineers. Efforts like these are critical as we plan over the medium term allowing us to attract the talent to fuel each of our three strategic growth initiatives.

Looking ahead, we have every reason to expect another solid performance for Powell in fiscal 2025. We are in an incredibly strong financial position and maintain a $1.3 billion order book comprised of projects that are central to what Powell does best. Fundamentals for our oil and gas and petrochemical markets support our expectation for continued strength for these sectors. Specific to the fundamentals of the U.S. natural gas market, price spreads across global markets remain favorable and conducive to U.S. export activity. Activity within our commercial and other industrial market also remains healthy and includes activity within the data center market. We continue our efforts to further penetrate the data center market and expand the total content opportunity for Powell, within this market sector.

Specifically, we are working to qualify more of our products and services for this important end market as we also work to build relationships with both new customers and new channels to position Powell to succeed in this market. Last, the outlook for our utility market remains very healthy. The overall volume of projects coming to market is materially higher than in past years. And while we have increased our win rate, we continue to drive towards higher levels of success. Expanding our presence in this market has been the result of a deliberate and concerted effort going back more than a decade. Throughout the years, when power demand was flat or falling in the U.S., and new generation projects stalled, we invested considerable time and resources to position ourselves as a market leader and valued partner to utility customers.

Today, as electricity demand is rising and new generation capacity must now work to catch up we are in a prime position to leverage our relationships and capabilities to help power this new era of investment in our energy infrastructure. As a proud Texas-based company, with a storied history that stretches back more than seven decades, we believe that the renaissance in building and strengthening America’s electrical infrastructure is best served by American manufacturing jobs, and companies based right here in the United States. Here at Powell, we are excited to continue to play a leading role in powering our nation’s future. With that, I’d like to turn the call over to Mike to walk us through our financial results in greater detail.

Mike Metcalf: Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2025, we reported net revenue of $241 million compared to $194 million or 24% higher versus the same period in fiscal 2024. New orders booked in the first fiscal quarter of 2025 were $269 million which was 36% higher than the same period one year ago and included a large domestic liquefied natural gas project order during the quarter. Notwithstanding this mega LNG order, the orders cadence across most of our reported market sectors continues to be active. As a result, our book-to-bill ratio in the period was 1.1 times, with a backlog of $1.3 billion as we exited our first fiscal quarter, which was $48 million higher than one year ago and $14 million higher sequentially.

Compared to the first fiscal quarter of 2024, domestic revenues improved by 24% or $38 million to $198 million while international revenues were 28% or $10 million higher to $44 million in the current fiscal quarter. The increase in our international revenues was driven predominantly by an increase in project volume across our Canadian operations. From a market sector perspective, revenues across our petrochemical, oil and gas, utility, commercial, and other industrial end markets continued their positive momentum from fiscal 2024. Compared with the first fiscal quarter of 2024, our revenues from the petrochemical sector were higher by 17% while revenues from the oil and gas sector increased by 14% in the current fiscal quarter. Additionally, we achieved substantial growth in the electric utility and commercial and other industrial market sectors, with increases of 26% and 80% respectively.

These results reflect our continued strategic focus on diversifying and expanding into markets outside of our core industrial end markets. Albeit a small percentage of the total revenues, the light rail traction power market also experienced an increase of 89% on a modest revenue base. Gross profit in the current period increased by $11 million to $60 million in the first fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue was roughly flat compared to the same period one year ago at 24.7% of revenues, and lower sequentially by 460 basis points in the absence of the strong project closeouts that we experienced in the fourth fiscal combined with the seasonally lower first quarter shop activity. As we noted in our fourth quarter release, we anticipated a challenging sequential comparison considering that our first fiscal quarter is historically the softest quarter across our fiscal year.

Selling, general, and administrative expenses were $21.5 million in the current period and were higher by $1.1 million on increased compensation expenses across the business versus the same period a year ago. SG&A as a percentage of revenue decreased by 160 basis points to 8.9% in the current fiscal quarter on the higher revenue base versus the same period one year ago. In the first fiscal quarter of 2025, we reported net income of $34.8 million generating $2.86 per diluted share. This represents a 44% increase compared to net income of $24.1 million or $1.98 per diluted share in the same period of fiscal 2024. During the first quarter of fiscal 2025, we generated $37 million in operating cash flow on favorable income through the period. Investments in property, plant, and equipment totaled $2.2 million as we continue to fund the large facility expansion and improvement project at our breaker facility in Houston.

As of December 31, 2024, we had cash and short-term investments of $373 million compared to $358 million at September 30, 2024. Finally, earlier this week, we announced an annualized $0.01 per share increase to our common stock dividend. This is the third consecutive year that the Board has taken this action. This action demonstrates our commitment to continually improving shareholder returns while also ensuring sufficient liquidity to fund our CapEx, and working capital requirements in addition to the growth aspirations for the business. As we look ahead to the remainder of fiscal 2025, we are encouraged by the sustained commercial momentum across our end markets through the first fiscal quarter of 2025. This momentum has allowed us to maintain both the quality and the quantity of our backlog.

Combined with our ongoing focus and optimization of margin levers, in addition to the strength of our balance sheet, Powell is well positioned to deliver robust revenue and earnings throughout the rest of fiscal 2025. At this point, we’ll be happy to answer your questions.

Q&A Session

Operator: To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, you would like to withdraw your question. Please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Chip Moore with Roth. Please go ahead.

Chip Moore: Hey, good morning. Thanks for taking the questions. Thank you. Brett, Mike, maybe we could start on the project pipeline you’re seeing here in the new year post-elections. I guess, what you’re seeing on LNG and any more color on that order you won this quarter?

Brett Cope: Morning, Chip. It’s Brett. Yeah, nice award in the first quarter. Roughly $75 million, give or take. Of the first quarter booking number. I think I noted last quarter that the funnel activity in the market started to pick up, I think in anticipation of the change in administration. Nice to see that they started the permitting process again at least. As the new DOE secretary has gotten in there, I’d say that in line with that, from the end of the year until this Q1, activity has picked up that much more. So we are very encouraged by the outlook for that particular market.

Chip Moore: Great. And if I could ask on margins, obviously, you’re aware of seasonally weaker quarters with shutdowns on holidays and things like that. Can you talk a little bit more? Are you seeing any competitive pressures out there or anything like that? And then going forward, should we be thinking about potential margin expansion this year? I know Q2 last year was sort of flattish over quarter. Anything to call out there, and then any impact on tariffs or any thoughts on tariffs?

Mike Metcalf: Yeah. Hi, Chip. This is Mike. I’ll start off by addressing your question on margins. First, as we noted in the prepared comments, our first fiscal quarter historically is softer versus the remainder of the fiscal year due to the under-recovery resulting from the holiday seasonal period. We see it, really, every year. And it results in a much lower operating leverage number compared to 2Q, 3Q, and 4Q. So as we look forward, the right barometer, I think, to use is if you look at trailing twelve months of margins, that we’re exiting backlog. Excluding those strong project closeouts that we saw in the second half of fiscal 2024, which on an annualized basis probably contributes 100 basis points of lift in margins. That’s probably the right parameter to align on a margin basis.

I’ll comment quickly on tariffs and have Mike jump back in. Watching it really closely, I’d remind everybody that we don’t direct source anything out of the Far East, China specifically. Relative to North America, Mexico, and Canada, there is some intercompany—not a significant part as we operate under one roof philosophy with commodities in and product out at all factory locations. So a little bit of intercompany. It would really be more of any indirect impact, what we saw years ago when some of this went on was logistic challenges sort of backup or indirect effect. And so that’s kind of what we’re watching. We do have some aluminum every now and then, specific to a certain couple of products that could get impacted, but we feel pretty good with our sourcing strategies that we can go to other areas and acquire it.

So it’s really that indirect effect that probably would have us most concerned. And anything direct, we feel like we could handle pretty well in the model. Yeah. And just to follow up there, Chip, I mean, we are staying very close to both the imported material costs as well as any foreign currency fluctuations, as it may result from the threat of tariffs that may or may not materialize. Fortunately, as Brett mentioned, the majority of our products are sourced domestically in each one of our geographies that we operate in. And in the event that we do encounter tariff cost headwinds, these will be passed along in the form of price through our pricing models. So, you know, we’re staying very close to it.

Chip Moore: Got it. Very helpful. If I could ask one more, I guess, on, commercial for the data center. It sounded like I think you said 80% so very strong. Is that mostly still cable bus out of Chicago and then, in terms of new channels to market and new relationships there, new customers, maybe expand on that. You know, that opportunity. Where that’s at.

Brett Cope: Yeah. No. Also very encouraged. You know, we are still early in the total impact on our total revenue number, but within the quarter-to-quarter growth and activity and opportunity. We continue to build the channels and direct client relationships. As we continue to make our way into that market. We are beyond the cable bus product. We are supplying gear through different channels into that market. There were some nice wins within the quarter bookings. And so I feel good about where we’re headed in that market. It’s a huge opportunity. Notwithstanding global macro things that have happened over the last couple of weeks, I think this market is gonna be good for Powell over the mid to long term.

Chip Moore: Very good. I’ll hop back in queue. Thank you.

Operator: The next question comes from John Franzreb with Sidoti. Please go ahead.

John Franzreb: Good morning, Brett and Mike. And congratulations on another great quarter.

Brett Cope: Good morning, John.

John Franzreb: I’d like to hear your thoughts about the capacity expansion, maybe a little bit of an update. I know it’s largely geared towards new product development. But is there any it’s about expanding overall production capacity, and if so, can you kind of quantify that?

Brett Cope: Yep. Good question, John. Yeah. The product factory, as we noted in prepared comments, last two quarters, is on track. So mid-fiscal 2025, which will be another couple of months. The building is up, roofs are on, cranes are in. So just over there a couple of days ago, checking it out. Looks great. So these products roll out organically R&D. Including the nine acres that we bought in June of last year, for other capacity options, Powell can quickly spin up. There’s about half that space has other potential. We are currently doing some soil sampling for that to maybe consider pivoting for optionality. And then in addition to that, so that’s about half of that nine acres. And then if you look elsewhere in Powell, the offshore channel, and even at the product factory, we have another twenty acres.

All in all, about thirty acres that we can convert and move especially on substation opportunities that we needed to move say, to be able to take more opportunity there, move more outside of the one roof, and create up the gear. So kind of alluded to that a little bit in Q1. Back in December that we are looking at the footprint, continue to do it, as well as maybe other inorganic opportunities more mid-term. So it is more active, and we’re watching it very closely. And understanding how quick and, you know, how much CapEx and just matching that to the market so we can if we do pull the trigger, we can maximize the return.

John Franzreb: That’s great to hear. Can you talk a little bit about the pricing environment? The demand profile is so high. Are you able to implement higher prices on the projects?

Brett Cope: Yes and no. You know, when you look at the capital side of the gear in the substations, that has been pretty consistent over the last well over a year. They’re not we’ve talked before about watching any erosion in that market. It is something we watch closely. Seems to be holding overall. We’re looking for value-add opportunities right now. Expanding the service side of the equation and the strategy around the OpEx side. Starting to get some good momentum built there. And then on the automation front, which to bring in heavy calories. We are quietly growing that business as well within the company. And so we’re looking for the value additions into the model there where we can go in and around a capital job and then extend it to the Brownfield side.

But no real it would be tough, I think, at this point to say we could see any more upside on the big capital jobs. They’re kinda holding, which is good. We’re kinda more watching if there’s any threat to the downside.

John Franzreb: Oh, really? Okay. Fair enough. And it’s hard to ignore the fact that the cash is up nearly fourfold since the first quarter of 2024. What are your thoughts about cash?

Brett Cope: Kind of last quarter, yes on the M&A. I took off the long-term, kinda more bracketed, more near to mid-term. I’d hold those comments. Mike and I started that work years ago and talking with yourself I think you followed the story. We’ve expanded within the team— the folks that are involved with us in that. And the activity across that team has picked up. So I think that would be we’ve identified some pretty good opportunities and working hard to figure out if we can go. And, John, I would also note that it’s prudent to understand given our $1.3 billion backlog and our ability to execute. Roughly half of that, probably a little less than half probably $175 million or so will be at some point deployed to working capital. So that’s a good chunk of the cash that we’ll deploy to working capital.

John Franzreb: So about half the cash gets drawn down as you execute on new projects. So really what’s available is roughly half of that. Okay. Fair enough. And Brett, would you care to frame the size of acquisitions you’re kind of looking at? Is it niche? Is it any way you could qualify it?

Brett Cope: Well, I’ll go back to the strategy to start with. We’re always looking for opportunities on the product side. We’re certainly up on the R&D spend organically. I think Q1 you’re still running a percent of revenue, but as the business has grown, the absolute dollar has grown. The automation space, there’s some things there that we feel could be additive in the model. When I look at the total potential with the board, it’s in the $50 to $75 million range right now. We could lever up higher if we really found something that was that attractive. But in terms of accretion and look at what’s affordable out there, and what really helps our strategy take a step forward that’s currently the area that I’d say is most attractive to us.

John Franzreb: Thanks for the clarity. I’ll get back into queue.

Brett Cope: Okay. Thanks, John.

Operator: The next question comes from John Braatz with Kansas City Capital. Please go ahead.

John Braatz: Good morning, Brett, Mike.

Brett Cope: Morning, John.

John Braatz: Brett, just, you know, there’s been a lot of noise in the LNG sector. And just want to make sure the $75 million award in this quarter has all the necessary permits, requirements, and so on and so forth to move forward, and that there’s nothing that they’re waiting for.

Brett Cope: Yeah. No. This one has all the permits. It is a full go. It is just one that historically was out there for years. Paused for different reasons other than permitting, and but their permit’s always been good.

John Braatz: Okay. And then secondly, again, as we think about the LNG prospects ahead, you know, the DOE issued a report in December that wasn’t too flattering for LNG, although they didn’t say that they were against it. And as I understand it, the administration has to come up with a rebuttal, so to speak, but when you speak to your LNG clients, how optimistic are they that they indeed will be able to move forward maybe in March, April, and so on, with some of their proposals? And not be hit with some lawsuits that put a snag into everything. Are they thinking about that?

Brett Cope: Yeah. So we are talking with a lot of those folks at the senior levels to understand all the puts and takes that you’re sharing within the question. I’d say what I could share is there is absolutely, in the last sixty days, a heightened renewed encouragement within the sector. It’s not to say timing as we’ve kind of indicated overlapped the last twelve months isn’t gonna be somewhat more suspect than that big wave that hit us back in 2022, and 2023 all at once. I think there’s still that question of timing and dotting i’s and crossing t’s to get through it, but I think Mike and I, from the engagements we’ve had with our clients and the sectors, we kind of look out what people are planning to do. And we look at the activity we’re being asked to support for that planning process.

It’s definitely taken a step up towards, you know, getting going in a much more encouraging way over the next couple of years. Not to say timing won’t be an issue. I can’t sit here today and know the ones that we are tracking to say exactly when FID and permitting, everything gets full clear for your first question. But the activity level is very optimistic.

John Braatz: Okay. Yeah. You know, obviously, you guys are a player at the table now. And should the floodgates open up, would you have to say no to some projects?

Brett Cope: I hope not. And that’s kind of for John Franzreb’s earlier question, it’s the reason we put renewed energy into the acreage that we own here in Houston. And how quick can we just if you look at the last capital expansion, we did it offshore. The team came up with a great idea of how to not just minimize the capital, but deploy the capital so that we could maximize the laydown area, unlike previous expansions we’ve done out there. We’ve gone deeper with more engineered soil. We came up with a way to kind of only go a foot and a half down as opposed to a three-foot dig that historically has done over the years out there. That supports the need for the weight displacement that we require. And so we’ve got some really good supplier folks, contractors, and good quality time in the quarry materials.

So putting all that together, you know, we’re kind of refreshing that and doing what we can really do the next wave and make sure that we’re know. You look at the engineering process, and when you get through the drawing process, we have the area to lay down the sub. If that and when that wave were to kind of pile up on each other, that we can maximize.

John Braatz: So when you look back at the slew of projects that you were awarded back in 2022, 2023, you know, when you look at it in aggregate, and the opportunities are out there, would you see it being materially larger than what you saw back a few years ago?

Brett Cope: Yes. My answer to that is yes. Although, like, it won’t come in one big wave. So I think I shared in the last couple of calls, intermittently in my comments, that I believe the amount that’s out there in front of us is definitely bigger than the wave you just noted. Just think the timing of that will be is uncertain, but there is definitely more planned over I’ll say, maybe more mid-term versus, say, you know, all gonna happen in the next two years, but there’s a lot of potential that we’re tracking.

John Braatz: Okay. Brett, thank you very much.

Brett Cope: You bet. Thanks, John.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks.

Brett Cope: Thank you, Betsy. I would like to thank our valued customers, and our supplier partners for their continued trust and support of Powell, and to our employees. Thank you for your incredible energy and commitment as we have risen together to meet opportunity with open minds and a healthy dose of Powell can-do spirit. We are very pleased with our first quarter and expect another strong year for Powell. Thank you for joining this morning. Mike and I look forward to updating you all next quarter.

Operator: This concludes our conference call. Thank you for attending today’s presentation. You may now disconnect.