Q4 2023 Powell Industries Inc Earnings Call
Participants
Ryan Coleman; IR; Alpha IR Group
Brett Cope; CEO; Powell Industries, Inc.
Michael Metcalf; CFO; Powell Industries, Inc.
John Franzreb; Analyst; Sidoti & Company, LLC
Jon Braatz; Analyst; Kansas City Capital Associates
Presentation
Operator
Welcome to the Powell Industries earnings conference call. At this time, all participants are in a listen only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star, then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ryan Coleman, Investor Relations. Thank you.
Ryan Coleman
You may begin Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2023 fourth quarter and full year results. With me on the call are Brett Cope, Powell's Chairman and CEO, and Michael 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. Powell IND. dot 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 the information reported on this call speaks only as of today, December 6, 2023. 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 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.
Brett Cope
Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2023 fourth quarter and full year results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.
We ended our fiscal year on a strong note as the power team delivered another great quarter to close out one of the best years in the Company's history. Sharp recovery of our industrial end markets led to 1.4 billion of orders in fiscal 2024. By far the most we have ever recorded in a 12-month period and twice that of the prior year. The demands that the sharp recovery have placed upon. Our team members continued to be significant, including tremendous front and effort from our sales and estimating teams as well as our project leadership teams as we ramp activity across all of our operating groups. I am incredibly proud of the entire Apollo team performed. It is in years like these have elevated project activity, delivering on time and on budget that we earn and build on our reputation with our customers as a reliable, trusted partner as we continue to differentiate ourselves from our competition.
Revenue in the fourth quarter grew 28% to $209 million, while revenue for the full year grew 31% to 699 million. Strength across our core industrial end markets, particularly within LNG as well as in our utility and commercial and other industrial market sectors drove the substantial growth compared to the prior year.
Mike will provide additional detail on our revenue growth by market sector in a moment, we reported 171 million of net new orders in the fourth quarter, which reflects our previously communicated expectation that order activity will remain healthy, but return to a more normalized trend compared to previous quarters.
We also delivered a gross margin in the fourth quarter of 24.9%, which is an increase of 430 basis points year over year. While our margins have certainly benefited from this higher volumes, our productivity initiatives as well as strong project execution and subsequent close-outs are all helping to support significantly improved margins compared to recent years. We are confident that these measures, combined with our quality backlog can support gross margins above our fiscal 2023 targets set in the high 10s and deliver margins consistent with total fiscal 2023 levels in the low 20s for fiscal 2024. On the bottom line, we recorded earnings per diluted share of $2.17 in the fourth quarter, roughly three times higher than the prior year. And $4.50 per diluted share for the full year, which was roughly four times higher than fiscal 2022. Our backlog remains incredibly strong at just under 1.3 billion. It was roughly unchanged sequentially but is more than double the 592 million from one year ago.
We continue to feel confident that our current backlog is comprised mainly of projects that speak to Pall's core competencies, both the nature and scope of the project mix and our backlog are core to what we do best. And we are confident that we can deliver every dollar of our backlog on time and on budget. We previously discussed some of the capital improvement projects that will facilitate both incremental capacity as well as improved production efficiency in several of our facilities. In the fiscal third quarter, we initiated an expansion of our Houston facility located along the Gulf Coast to support the rise of our backlog while also helping us remain competitive on our schedules for future business.
Work on the expansion largely concluded in November, and we are now productively using the expanded capacity as far as staffing levels are concerned, availability of quality labor, while always front of mind, is less of a headwind today than it was in recent quarters. This is in large part due to the hard work of our human resources team as they have developed creative personnel solutions and continue to ensure our many manufacturing floors remain adequately staffed the availability and cost of certain Engineered Components remains a challenge, though, overall, the inflationary environment and costs of most raw materials have certainly moderated the challenges that came with a period of lower project activity immediately after the pandemic, followed by the inflationary environment require that we prioritize execution and identify efficiencies across the organization.
Today, we are enjoying the benefits of those efforts while the largest markets we serve have enjoyed a strong recovery. Quoting activity remains robust across most market sectors. We continue to see favorable opportunities within LNG gas pipeline and the gas to chemical end markets. We've also been pleased with overall activity within the renewable markets of hydrogen, biodiesel and related biofuels, such as sustainable aviation fuel as well as carbon capture and sequestration. We envision these markets being larger contributors to our financial results going forward. Additionally, we continue to capitalize on opportunities within our commercial and other industrial sector.
Data centers have been and remain an active area of growth in this sector. Expanding our market breadth has been a focus across the business and our ability to leverage our products and expertise into a fast-growing market like data centers is a perfect example of these efforts. Critically, this is a market and secular growth that reduces the cyclicality of our order book. It is a perfect complement to our core industrial market. Our near and medium term priorities remain unchanged as we enter fiscal 2024, we are focused on growing our electrical automation platform, expanding our existing services franchise and diversifying our product portfolio, either through tangential applications that complement our existing offerings as well as expanding the scope of our product catalog into new electrical technologies. We expect our R&D spend to increase in 2024 as we work toward this end.
In summary, we are entering fiscal 2024 with roughly $1.3 billion of backlog, which provides durable and predictable project schedules to build upon. We continue to see healthy levels of project activity across our end markets and believe that the fundamentals supporting our core industrial markets remain favorable and robust. We've also taken successful steps to unlock operational efficiencies, improve staffing levels and optimize our procurement of raw materials, all of which have had a significant positive impact on our profitability. We are confident that our execution and our strategic initiatives, coupled with favorable industry dynamics, will support another successful year for Powell.
With that, I'll turn the call over to Mike to walk us through our financial results in greater detail.
Michael Metcalf
Thank you, Brett, and good morning, everyone. I will begin first with the fiscal fourth quarter business results and then move to the total year fiscal 2023 results. Revenues for the fourth fiscal quarter of 2023 increased by 28% to $209 million compared to the fiscal 2022 fourth quarter of $163 million and improved sequentially by 16 million, with strong growth across our core industrial oil and gas and petrochemical markets sectors. Net orders for the fourth fiscal quarter were $171 million, $87 million lower than the same period one year ago. On a challenging year-over-year comparison as we secured a large LNG order in the fourth quarter of fiscal 2022.
In general, the industrial end markets remain active, specifically within the LNG gas, the chemical and hydrogen end markets. We also continue to see sustained commercial activity across our utility as well as the commercial and other industrial market sectors. As a result of the strong revenue performance offset by healthy, but moderate orders cadence. Our book-to-bill ratio was 0.8 times in fiscal Q4. Reported backlog at the end of our fiscal fourth quarter was $1.3 billion, 701 million higher versus the end of fiscal 2022. The substantial increase in the order book was across the majority of our market sectors, oil and gas, petrochemical utility, as well as the commercial and other industrial end markets. Overall, we're very pleased with the total year orders performance across the business and the resulting backlog position as we enter our fiscal 2024 compared to the fourth quarter of fiscal 2022.
Domestic revenues of 171 million increased by 38 million or 28%, while international revenues also increased by 28% to $38 million on higher volume across all of our international locations from a market sector perspective, revenues from our oil and gas and petrochemical sectors grew 56%, largely driven by higher LNG and petrochemical revenues in the fourth quarter of fiscal 2023, the utility sector was higher by 8%, while the commercial and other industrial sector was higher by 13% versus prior year. This year-over-year growth was offset somewhat by the traction sector, which was lower by 52% as we successfully completed a large municipal project in Canada in the first half of fiscal 2023, combined with softer commercial order activity in this sector throughout fiscal 2023, we reported 52 million of gross profit in the fiscal fourth quarter of 2023, which was higher by 19 million or 55% versus the same period in the prior year.
Gross profit as a percentage of revenues increased by 430 basis points to 24.9% of revenues in the fourth fiscal quarter compared to one year ago. The higher margin rate is in large part, the result of favorable volume leverage and productivity initiatives strong project execution and subsequent close-outs as well as the pricing actions that have been aimed at offsetting inflationary pressures as we continue to navigate through a challenging supply chain landscape, albeit negligible. The margin rate also benefited from two order cancellations, which generated 1 million of gross profit or an incremental 35 basis points to the margin rate in the quarter.
Selling general and administrative expenses decreased by $1 million or 5% in the quarter versus the prior year, attributable to lower fiscal fourth quarter variable performance based compensation expense, SG&A expenses were 20 million in the fiscal fourth quarter or 9.8% of revenue compared to 13.2% of revenues a year ago on both volume leverage and lower expenses in the fourth fiscal quarter of 2023.
These results demonstrate our continued focus on cost management while also focusing on the critical resource requirements necessary to execute on the order book. In the fourth quarter of fiscal 2023, we reported net income of $26.4 million, generating $2.17 per diluted share compared to net income of $8.7 million or $0.73 per diluted share in the fourth quarter of fiscal 2022, we generated 77 million of operating cash flow in the fiscal fourth quarter, driven by early cycle advanced payments on the projects added to the order book over the past couple of quarters. In addition to generally strong working capital performance across the business through this period.
Capex spending during the quarter was 3.8 million with the capacity expansion at our offshore facility in Houston attributable to a large portion of the spending during the quarter.
Now recapping our total year fiscal 2023 revenues of $699 million increased by 167 million or 31% compared to fiscal 2022. Orders were 1.4 billion, nearly double fiscal 2022 orders of $718 million, led by the strength in oil and gas and petrochemical end markets, coupled with the sustained market activity in the utility sector, as well as the incremental growth in all of the other end markets.
Gross profit as a percent of revenues grew 510 basis points year over year to 21.1% or $148 million, demonstrating continued success in offsetting inflationary headwinds and supply chain challenges, while also leveraging higher volume and productivity initiatives throughout fiscal 2023. Considering these factors, in addition to the quality of our backlog. We do anticipate that we can maintain this profitability level on a total year basis in fiscal 2024, notwithstanding the lower volume and profitability impact resulting from seasonality in the first fiscal quarter of 2024, selling, general and administrative expenses were higher by 8 million versus the prior year.
Overall, net SG&A expenses as a percentage of revenues were lower versus the prior year by 200 basis points at 11.3% of revenues in fiscal 2023 versus 13.3% in the prior year, we reported net income of $54.5 million, or $4.50 per diluted share compared to $13.7 million or $1.15 per diluted share in the prior year. During fiscal 2023, we recognized $0.38 per diluted share of gains from unusual items, which include order cancellations and a non-cash tax credit resulting from the reversal of a valuation allowance previously established in our United Kingdom entity.
Total year fiscal 2023 operating cash flow generated was $183 million versus a cash usage of $4 million in the prior year. At the end of fiscal 2023, we had cash and short-term investments of 279 million, 163 million higher than our fiscal 2022 year-end position, reflecting the growth in our backlog and the associated advance payments for the large industrial projects combined with strong working capital management. As we navigate through the coming fiscal year, we anticipate that our cash balance will continue to build as a result of the large projects in backlog before cash levels plateau and ultimately recede somewhat towards the middle or the back half of fiscal 2024 as a direct result of increasing working capital requirements. In order to support project execution, the company holds zero long-term debt.
Finally, in October 2023, we entered into a third amendment of our credit facility with Bank of America and included Texas Capital Bank as an additional lender under this agreement. Combined, this amendment increased our facility capacity to $150 million from the previous ceiling of 125 million. As we utilized this facility solely for commercial letters of credit. We felt that this was a prudent action in order to ensure our continued success across our end markets. Looking forward, we remain optimistic that the commercial momentum across our core end markets will remain robust throughout fiscal 2024. We are also encouraged by the profitability resulting from the operating leverage as well as the commercial levers implemented over the past several quarters and will remain will remain acutely focused on executing our growing backlog as we navigate through fiscal 2024 as we continue to assess the impact of these levers and associated quality of our backlog.
Notwithstanding the typical project challenges of timing and mix we anticipate our total year margins for fiscal 2024 to be similar to what we experienced in fiscal 23 considering these variables, in addition to the strong commercial outlook across most of our end markets as well as our liquidity position and the strength of our balance sheet. We are confident that we can sustain the solid results that we've delivered in fiscal 2023 and continue this into fiscal 2024. At this point, we'll be happy to answer your questions.
Question and Answer Session
Operator
(Operator Instructions) John Franzreb, Sidoti & Company.
John Franzreb
Good morning, guys, and thanks for taking the questions and congratulations on a great quarter. I'd like to start with the booking profile. The in-quarter incoming order book of 471 million. If I compare it to the 10 years prior to fiscal 2023, you're roughly doing about 150 million of incoming order book, but we just came off two consecutive quarters of over 500 million of bookings. Can you kind of put into context what the opportunity profile looks like, what you'd expect the booking profile look like in the coming year?
Brett Cope
Well, good morning, John, and thanks for the comments and the question, it's Brett. Yes, I appreciate the lead-in on the question on the two previous quarters. A little bit of timing. Of course, in that Q3 what was going to book. And as we went into Q4, we were very pleased with the 171 net for the quarter. When I look at what made up in the sectors of the quarter, it was kind of on average with the core oil and gas, good strong utility content in the fourth quarter, along with the good contribution to the new sector that we're reporting out in the commercial light industrial market.
As I look forward, I think that the cadence continues there weren't any megaprojects in the Q4 given given the run we had in the previous three quarters to Q4. But that said, in my prepared comments, activity is still robust. There is in fact, you asked a question which I was thinking of how we were prepared for today. You asked me a question a call or two about our we'd have time or where we are relative to that. We don't want to my answer to that last call. It's there's there's still a lot out there. We're very engaged. Timing is a little bit more uncertain given the run we just went through over the last 12 to 18 months, but there's there's still a lot in front of us.
John Franzreb
And just to narrow it down. You mentioned also in the press release and in your prepared comments that we should be cognizant about the seasonality of Q1 versus Q4. And looking back again, pre-COVID, our normal seasonal revenue declines. I eyeball that to be around 15% or so in Q1 versus Q4, but we've had some real strong bookings. How should we think about the seasonality on a sequential basis this year versus historical norms?
Michael Metcalf
Good morning, John. This is Mike. I'll take that one, given where we are with our backlog, very healthy, healthy backlog as we talked about in the prepared comments, I would I kind of calibrate that a little more aggressive than the typical 15% that we've seen historically, probably somewhere in the 10% to 10% range on that this coming year.
John Franzreb
Got it. can I just ask one more question and I'll get back into queue how the gross margin profile has been outstanding? The last couple of quarters on, but you've kind of indicated that fiscal 24 should be more like the full year tally versus the full year tally. What's the primary counterweight that makes it tougher to hold the second half 2023 gross margin on a go-forward basis.
Brett Cope
Today, one is just timing quarter to quarter. So as we framed up the prepared comments that Mike shared in his remarks, the project business always timing. So even with the backlog that we have there, still challenges quarter-to-quarter on timing holds on projects changes. We're can we pull things in and move slots that that fundamental part of our model never changes even with the rise in the backlog. So Q4, looking back over the number of years that you that you profiled this morning. We do well given the timing of when our fiscal lays against the end of the calendar year of construction schedules and people getting things done and close outs, but Q1 definitely both on the factory side with productivity and some ramp-downs ramp-ups and then just timing of people in the office, getting things done, sign in the house as always, what's the challenge from the November to end of the year run.
Michael Metcalf
And if I can add, John, if you know, if we calibrate on our trailing 12 month rate of gross profit to 21.1% ex unusuals, 20.8%. That's kind of the range that we're looking at going into 2020 for the low the low 20s. That's what we're targeting the business.
John Franzreb
Okay. Thanks, guys. I'll get back into queue.
Operator
Jon Braatz, Kansas City Capital.
Jon Braatz
Mike brought more Mike Canetic. Brad, can you talk a little bit about the LNG landscape going forward? Are there still big projects being planned and maybe what about additional capacity are being added at current at existing facilities. And I read a lot about our new LNG facilities. It's like I guess sometimes I get a little confused. What's what's possible and what's not can you discuss a little bit about what the LNG opportunities remain?
Brett Cope
Yes. Thanks, Jon. Good morning. So as I mentioned a couple couple of times last throughout the last couple of calls, really really pleased with Paul's position and where we stand in the market on the domestic LNG landscape. I don't think there was a project last year that happened that we weren't involved with in some some capacity, including the ones of certainly that we brought home and booked as I look out, there are a number of LNG expansions and some greenfields that are still sitting out there in your comment earlier there to Mr. France around that, there's still some uncertain time in an FFID. circumstance around it.
But if I go back two years prior to the way that we started a year ago, last summer, the cost of the estimating that working with engineering firms very, very active on a lot of these two to size them up with the engineering partners and clients. And then you add into that the growing a business around hydrogen, we're seeing a number of those opportunities that are sizable. And then there's there's on the renewable side around batteries and how those are going to get applied to a very from utility scale all the way down to the EV drive and the IRE money. We're seeing a number of process plants as well as future so again, so kind of the same sort of comment around timing scope, what's right for Paul. But again, the activity is very broad, much more broad than it was just LNG. two years ago, but we feel pretty good about all three sectors looking forward.
Jon Braatz
But Brett, in your conversations with your clients in 2024 is going to be an election year. And I don't know who's going to win who's going to lose. But if we have a executive branch that's a little bit more friendly towards oil and gas would you see any significant change in the capital spending programs of your oil and gas clients come on under a new regime?
Brett Cope
And I don't I mean, it's I think long term, Jon, it certainly could have an impact as it does every administration, but there's always a time phasing to. And if I go back to the administration change that happened in the last election, there was more regulation put in place. I mean, there just simply was we saw projects go on hold the Renew environmental studies and reduce on the engineering side. We can see it all way down to the design and how they're going to power the facilities from having on-site turbines to putting all electric designs. So a lot of impact studies were done and it rework some projects. We are we are starting to see again that to whether you believe it's good or not, we are starting to see some projects with more of the IRA. credits leaking into some of the projects right now?.
So yes, I think clearly, if we have an administration change, it will have an effect if it if it turns parties from the current regime, I think it would have an impact on the core oil and gas stuff longer term for sure.
Jon Braatz
Okay. Thank you, Mike you talked a little bit about your cash flow and the cash balances are at $279 million, and you expect them to build a little bit here before fading in the second half. But when you look at the $279 million, how much of it, if I could say it is yours as opposed to a cash advances.
Brett Cope
John reflects spread. I mean, I just realized I missed the back part of your question capacity. We are looking at an additional expansion in '24. So we did the one in '23. We're looking at a production capacity of our facility '24, and we'll report on that in Q2.
Jon Braatz
Okay.
Michael Metcalf
Yes. And Jon, to address your question. This is kind of the rule of thumb for us. We typically earmark about 15 or so percent of revenues to working capital from this new facility that we just entered into that. I spoke about in the prepared comments that required us to hold $60 million of liquidity at any point in time. So you can kind of do that math and you get a number in the range of 200.
Jon Braatz
Okay. All right. Thank you very much.
Operator
John Franzreb, Sidoti & Company.
John Franzreb
Yes. I guess I guess just a little bit about the tax rate on a go-forward basis, what kind of tax rate should we be building into our models for fiscal 2024?
Michael Metcalf
Yes, we're building into a tier 24% on a global basis, John.
John Franzreb
Okay. And what's the CapEx budget? What was the final CapEx budget for 2023 and expect to end in 2024?
Michael Metcalf
We spent $7.8 million in 2023. A large portion of that, as I mentioned, was the offshore capacity expansion in 2024. As Brett mentioned, we are considering some other capacity initiatives that could move the move the number as we navigate through the early part of 24 and what should be a baseline number then excluding the expansion, maybe typically I would I would say probably four to $5 million would be your typical spend for per annum but then you have some of these some of these other anomalies that you have to you have to put on top of it.
John Franzreb
Okay. And I guess maybe just one more question about the cadence of record revenue recognition in 2024. On Italy, you typically have a fair amount of the book business flow through, but we talked about the seasonality the first quarter and the seasonality of the fourth quarter from Q to Q. three look similar or that or is there a improving profile as the year progresses?
Michael Metcalf
Yes, I think if you looked at the candidate trajectory of past fiscal years, I don't think we would see a different trajectory. First quarter will be softer than the other three and then it'll ramp up 2Q, 3Q and then 4Q is typically the strongest quarter of the year.
Brett Cope
I think we talked about that one might want to call to ask a question on spikes, John. I don't I don't I think it's pretty level laid out the way we kind of entered kind of finish up 23 and kind of did the planning pretty steady as it goes on just following the trends.
John Franzreb
And I guess one last question, if I may. Are you still seeing a fair amount of smaller book-and-turn jobs flow through the P&L or is this sort of project base work, you know, Atrenne, does that affect the margin profile one way or the other?
Brett Cope
We absolutely remind all of our operating units to take care of our customers. We have those small jobs and whether they're service led quick turns because there was an event at a facility that needs quick attention on the service side or gear only job one or two sections? Absolutely a week. We don't lose sight of those at all. And we're constantly reminding everybody to not just chase the big ones.
John Franzreb
Thank you for taking my follow-ups.
Brett Cope
Thanks, John.
Operator
This concludes our question-and-answer session. I would like to turn the conference over to Brett Cope for any closing remarks.
Brett Cope
Thank you, Dave. As you heard from both Mike and me this morning, we are very pleased with our fiscal 2023 and the fantastic financial performance that Apollo team delivered I'm extremely proud and appreciative of every one of our employees and how they are meeting the challenge the market has presented to our company based upon the markets that we serve we continue to believe that fiscal 2024 will be another strong year for Pall.
With that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking you with you next quarter.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
