Participants

Ryan Coleman; IR; Powell Industries Inc

Brett Cope; President, Chief Executive Officer, Director; Powell Industries Inc

Michael Metcalf; Chief Financial Officer, Executive Vice President, Treasurer, Secretary; Powell Industries Inc

Presentation

Operator

Welcome to the Powell Industries earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ryan Coleman, Investor relations. Thank you. You may begin.

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 Second 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 Powellin.com, or a telephonic replay will be available until May 14. 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, May 7, 2025, and therefore you were 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 for 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 2025 second 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.
Our second quarter marked another solid performance. The team across Powell delivered gross profit dollar growth of 33% on revenue growth of 9%, which translated into record earnings per diluted share of $3.81 in the quarter.
The electric utility and commercial and industrial sectors remain growing bright spots for Powell as compared to the prior year, they grew by 48% and 16% respectively. These two sectors have and will continue to become more meaningful contributors to our total results.
New orders in the quarter totaled $249 million an increase of 6% compared to the prior year. New project activity was driven by our commercial and other industrial markets as well as the oil and gas sector.
We booked two large projects in the quarter, one for a new greenfield LNG facility to be located along the US Gulf Coast. As we have shared on previous updates, the fundamentals and market outlook for this sector remain very encouraging.
The other significant award this past quarter is for a large mining project in Canada for the production of potash. This award underscores how our people and facilities are demonstrating the strength of Powell. Our investment in Canada has always been focused on building a diverse portfolio of customers across the sectors that we serve.
Each of these projects were approximately $50 million. Our gross margin in the quarter was 29.9%, which reflects discipline project execution, the benefit of closeouts, as well as continued operating efficiency across the business.
Mike will discuss our margin outlook for the second half of the year, but more broadly, we remain encouraged by our second quarter margin results.
On the bottom line, we recorded net income of $46 million in the second quarter, or $3.81 per diluted share, which was 38% higher than the prior year and a record quarterly earnings per diluted share for Powell. Our backlog remains strong at $1.3 billion. The overall composition, margin profile, and project schedules of our backlog remain very encouraging.
We have revenue visibility well into fiscal 2027, and our order book is well balanced across the sectors we serve. In addition to our strong financial results in the quarter, we continue to make important strategic progress to expand and diversify our product portfolio.
During the quarter, we commercially launched several new and innovative products. The first is a grounding switch. Widely used in international IEC switch gear designs, our new product will be the first to meet a new developing standard for the North American NC market.
This product is mainly focused on industrial markets such as oil and gas but is an enhancement that we will ultimately seek to commercialize into all three of our major sectors. We've also received orders for a new compact substation that our team have engineered and recently introduced to the market.
The Powell Control aisle substation provides optimized workspace along with environmental protection for utility and unit substations. This configured to order medium voltage substation reduces the installed cost of the substation while providing our customers with a safe environmentally protected aisle to service the switch gear.
Our initial awards for this are in support of battery energy storage projects being developed and installed to support the utility grid. We also showcased our first design of a low voltage switchgear product specifically designed for the data center and associated commercial market.
This product increases our ability to compete within the four walls of the data center where there are significant incremental content opportunities. We are also working towards adding the commercial infrastructure and the required sales channels necessary to better compete in this important vertical for all.
The launch of these latest products serves as continued validation of the increased R&D spend that we have undertaken over the past several quarters, and it monetizes intellectual property that has been on our balance sheet for nearly two years.
Most importantly, it furthers our aim of advancing our product centric strategy to improve the overall future mix of product versus project-based revenues. We have just completed and received our occupancy permits on the capacity expansion at our electrical products facility here in Houston.
I am pleased to share that this investment is on time and was finished on budget.
This incremental capacity will play a critical role in advancing our key strategic priority to commercialize new products through organic investment in our R&D function, positioning us to better compete and capture greater share in all three of our key market sectors.
Manufacturing of both the station breaker that we launched last summer, and our new power control aisle substation will start in the third fiscal quarter. We will begin to recognize revenue through the balance of this year with more modest accretive additions in fiscal 2026.
Looking ahead, the outlook for each of our end markets remains positive. The fundamentals for our oil, gas, and petrochemical markets support our expectation for continued strength in these sectors. Specific to the fundamentals of the US natural gas market, price spreads across global markets remain favorable and conducive to US export activity.
The funnel of LNG projects that we are tracking continues to support our expectation for a strong cycle of greenfield and brownfield activity with generally a higher volume of projects that are either in process or currently being evaluated compared to the prior cycle.
Activity within our commercial and other industrial market also remains healthy and includes activity within the data center market.
Over the past few months, we have not seen any change or slowdown in activity within the data center market and our efforts to further penetrate the data center market and expand the total content opportunity for Powell within this market sector are progressing well.
Lastly, the outlook for our electric utility market remains positive. We continue our sustained and decade-long effort to drive success for Powell in each of our three home geographies, the US, Canada, and the United Kingdom.
Overall, we are very pleased with our financial results in the first half of this fiscal year and confident in how we position Powell to grow in each of our three major sectors. Our volume expectation in each of these sectors remain a tailwind, and we expect continued strong performance for the remainder of fiscal 2025.
With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail.

Story Continues

Michael Metcalf

Thank you, Brett, and good morning, everyone.
In the second quarter of fiscal 2025, we reported total revenue of $279 million compared to $255 million or 9% higher versus the same period in fiscal 2024. New orders booked in the second fiscal quarter of 2025 were $249 million which was 6% higher than the same period one year ago.
As we continue to focus on diversifying the business across sectors outside of our core industrial, oil and gas, and petrochemical sectors, we continue to experience positive momentum across the utility and commercial and other industrial sectors, with backlog in these sectors at 29% and 13% respectively of the total business backlog.
With these end markets continuing to contribute to the solid order activity in addition to the sustained commercial activity across most of our other core end markets, this combined to result in a 0.9 times book to bill ratio in the current quarter.
As a result, we reported $1.3 billion of backlog at the end of the second fiscal quarter, $42 million higher versus one year ago and $29 million lower sequentially.
Compared to the second quarter of fiscal 2024, domestic revenues improved by 5% to $228 million while international revenues were 33% higher, driven by increased project volume across our Canadian operations, as well as an increase in activity in the Middle East and Africa. In total, international revenues were up by $13 million to $51 million in the second fiscal quarter.
From a market sector perspective versus the second quarter of fiscal 2024, revenues increased 48% and 16% in the electric utility sector and the commercial and other industrial sector, respectively, reflecting our ongoing strategic focus to expand our presence across these two end markets.
Additionally, the light rail traction power sector experienced a substantial increase versus the second fiscal quarter of 2024, growing by 122%, or $5 million albeit on a small revenue base as we continue to be very selective in this market sector.
Across our core industrial and markets, the petrochemical sector and the oil and gas sector were lower by 13% and 3% respectively versus the same period one year ago as we grow closer to completion of the large petrochemical and LNG mega projects that were booked in fiscal 2023.
Gross profit increased by $21 million to $83 million in the second fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue increased by 530 basis points to 29.9% of revenues versus the same period a year ago and with 520 basis points higher sequentially.
The margin rates exiting the backlog continue to benefit from the large projects nearing completion which have continued to generate strong project closeouts during the quarter, contributing roughly 275 basis points to gross profit as a percentage of revenue during the second fiscal quarter and approximately 125 basis points on a fiscal year-to-date basis.
Additionally, margins have also benefited from the strong volume leverage and exceptional operational execution across all of the manufacturing divisions globally.
Given these solid fundamentals and based upon margin levels in the order book, we anticipate that margin rates through the remainder of fiscal 2025 should align with the reported margin levels through the first six months of fiscal 2025, excluding the impact of the aforementioned project closeouts.
Selling general and administrative expenses were $22 million in the current period, higher by $1 million on a higher level of compensation expenses across the business versus the same period a year ago. SGNA as a percentage of revenue decreased 40 basis points to 7.8% in the current fiscal quarter on the higher revenue base and overhead management.
In the second quarter of fiscal 2025, we reported net income of $46.3 million generating $3.81 per diluted share compared to a net income of $33.5 million or $2.75 per diluted share in the second quarter of fiscal 2024.
During the second quarter of fiscal 2025, we generated $22 million of operating cash flow driven by higher earnings generated in the second quarter, partially offset by negative working capital impact as we allocate capital to fund projects in the order book.
Investments in property, plant, and equipment in the fiscal second quarter totaled $4.1 million driven in large part by the facility expansion at our electrical products facility in Houston. At, March 30, 2025, we had cash and short-term investments of $389 million compared to $358 million at September 30, 2024, and $373 million at December 31, 2024.
The company does not hold any debt. As we move into the second half of fiscal 2025, we anticipate continued strength operationally based upon current factory utilization levels, project execution, and backlog quality.
Notwithstanding the typical challenges of project timing and mix coupled with the current macroeconomic uncertainties, Powell is well positioned to continue delivering strong results both financially and operationally for our customers and shareholders alike.
At this point we'll be happy to answer your questions.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Bratz from Kansas City Capital. Please go ahead.

Morning, Bratt and Mike. A couple of questions on the LNG outlook. First of all, the LNG award in this quarter, did that have anything to do with Trump unpausing the pause, so to speak?

Brett Cope

I honestly don't know for certain, but I would say overall, if you look year over year, John, it absolutely is impacting the industry. It is the activity is up.

Okay, and, well, continuing on that theme and I'm not all that close to the LNG industry, but some of the things that I read, they talk about. Maybe some lower energy prices, tariffs adding to cost, and so on, and that, before it was sort of a regulatory risk with the Biden administration, now there seems to be some commercial risk on the on the returns or on the economics of LNG projects.
Is that really an issue at this point or do you see any commercial pause as the industry reacts to the tariffs and additional costs that may be faced, may be facing the industry.

Brett Cope

Yeah, that's a really good question, and like you, I read and I'm consuming as much information on the world trading economics, right?
There was one in the press here not too long ago about China and what they're doing on on cargoes, but they really, you can look historically haven't bought a lot of cargos, but When we meet with our clients about jobs that last quarter or even the future work where where are they at in their FID status and selling out.
A future capacity to hit their ID dates, I would say generally.
It's a very robust drive forward sort of discussions. So, whatever really is happening behind the scenes and their interaction with their customers would give me certainly an element of confidence that Mike and I and the management team are wanting to understand as much as you are in your question, and I would say today generally is very positive as we look forward.

Okay, any reason, given all the insight that you're getting with your clients and so on that some of the projects, let's say they still make sense, but they're going to be pushed a little bit to the right in terms of FID.

Brett Cope

Not sitting here today. It is a risk that's in the back of my mind because the tariffs and you think about, okay, what's going to happen on steel when I think about the things we don't build that they need to build on these large facilities that is part of the chat we have with the board and management team, but Really, I'm sure I'll get a question today on capital.
We're actually thinking about another phase of investment at offshore to prepare, frankly.

Okay, all right, thank you very much.

Brett Cope

Yeah.

Operator

Thank you. Your next question comes from John Friends rep from Sidoti and Company. Please go ahead.

Good morning guys, and thanks for taking the questions. I want to go back to Mike's statement about the gross margins benefiting from about 275 basis points of closeouts. I'm curious about two things. One, given the demand environment, why can't you be more aggressive in pricing for gross margins?
And two, what should we be thinking about as a normal? Close out contribution on a quarterly basis or annual basis for that matter, if you want to push it back further, just so that we can know, get a better feel for it.

Brett Cope

Morning, John. It's Brett. Let me try to address the first one and I'll turn over to Mike on the close out one. So, on the market demand side and pricing, we talk about this together. We certainly look for opportunities, but the market has, as we've kind of shared last couple of quarters, kind of hit a point where it's.
It's not getting any worse. It's not going backwards. It's kind of hit this area 1.5 years, 2 years ago, and sort of maintaining, and that seems to be still the case today.
Some of the capacities of our competitors have improved from where they were at the worst point, if you will, through the pandemic, and they sort of leveled out last couple of quarters. It has the, I think the potential to go back the other way. It could become more constrained.
A lot of uncertainty in the macro environment for some of the markets that are smaller for power, maybe bigger for them. If they start to go, I could see a scenario where that would go the other way, and we're watching that for opportunity, but right now it is more or less holding quarter over quarter.

Michael Metcalf

Yeah, and John, I'll add in there, as we've experienced over the last year or so, one was a seasonal low, as and we didn't see much in the way of project closeouts in one cuue, but the second half of fiscal '24 and this last quarter quarter that we reported. A very strong project closeouts that benefited the margin rate.
This is also coupled with strong project execution and operational leverage that I mentioned in my prepared comments. So, as we look forward for the remainder of fiscal '25, we anticipate a similar exit rate from a margin perspective from backlog, but X the X the elevated level of project closeout gains.
So, in the absence of any anomalies as we look forward to the remainder of the year, I think a reasonable barometer for the margin rates exiting backlog would approximate a normalized rate and the rate of 26% to 27% on a year-to-date basis.

Yeah, I guess, Mike, that's what I'm kind of getting at that project, should we ignore project closeout benefits is what I'm getting at because it seems to come up often enough that we shouldn't, we should kind of be thinking about at least in the aggregate.

Michael Metcalf

Yeah, I guess, just to calibrate on that, we are in a projects business. There are inherent risks in these long lead projects, and the project team has done just a phenomenal job retiring the risks on the risk register.
So, we have reaped the rewards of their hard work over the last year. If something goes the other way, and it is a projects business, it could, but we haven't seen that over the last year.

Okay, just a little bit on the capacity expansion, can you update us on, how much of incremental revenue you would expect in 2025 and maybe an annualized basis as you think about 2026, but.

Brett Cope

Yes, so super excited and pleased with the with the team's performance on getting that expansion done on time. We have orders hitting the floor here this quarter. It'll be pretty small through the balance of the year, John, if you think about percentage of completion, accounting, it's sort of double, low double-digit type of business, total orders hitting the floor, but from a percentage of completion it will ramp up engine, some engineering and early.
Build on the projects and then longer term, we think, I think I've shared this with the market before we anticipate next year sort of $20 million to $40 million dollar range creative as we launch projects and are successful in the market.
And then as I noted with John Broth in the earlier question. We know the cycle of improvement with the land that we hold in.
And reserve here in the Houston area we've got three different facilities with (acreage) and we are looking hard at Having chats with the board the next few months on deploying some capital there to make some further improvements.

Yeah, very interesting, I think you said offshore that's surprising and good news.

Brett Cope

Yeah, out there couple of improvements and this next one could be sizeable so.

Well, which I guess we'll just walk into the question, and I asked you last quarter, and maybe the quarter before that, I don't recall, but, you can't deny that the cash continues to swell, $325 million and even if half of it, is deployed, it still leaves you with a sizable number of relative to historic standards. What are the updated thoughts?

Brett Cope

Well, go back to your earlier question. As we launch the new products, if a couple of these, I mean, hopefully we do did really well in our design basis and understanding the market and start to catch fire. We would be out looking at the footprint opportunities because we'll outgrow the space we just built and so we understand what's out in the market, done a little work out there for existing buildings and crane usage.
These are the product crane capacities are lower than some of the heavier things that we've built traditionally here over the decades, but notwithstanding, we continue to look at the existing footprint and should we need to build, longer cycle to do that, heavier capital requirements, and so we hope the former will be the opportunity, but in the meantime for the things we do build on the substation side, especially, we all, we have the land here.
We've had it for, we picked up the additional 10 acres over at the products factory when we when we bought all that land, it's pretty clean and that's an option. But then the offshore yard we picked up also that 10 acres sitting out there. We did a small improvement a couple of years ago there, 150,000 square foot of lay down, but there's a lot more to go out there and that's the land that we're we're kind of circling our heads around right now for for fiscal Q3 to look at.

Got it. And just one question, other question. Now, has the board considered a stock split at all? I'm just curious of what the discussions are on that.

Brett Cope

I think it's come up. I think we talked more about, should we launch a buyback or, on the funnel side, is there an opportunity to use the equity side of the of the strength of the stock to do some things in the market for things that are in the funnel.
So, having more shares out there, I understand, what that means and the conversations that are going on, especially with some of the shareholders, but we want to thoughtfully do it right to get to get the right return long term, so.

Okay, thanks for taking my question, right, I'll get back in the queue.

Michael Metcalf

All right John, take care.

Operator

Thank you. The next question comes from Chip Moore from Roth Capital. Please go ahead.

Morning, hey, thanks for taking the question. Maybe I go back to another one on cash, guys, the, I guess. Position you're in, I get a lot of questions around, why not consider a buyback just given where the stock is, where it's at is you signaling, some of those organic things you see that you just talked about are just so compelling and then any updates on M&A potential as well.

Brett Cope

Yeah, hey, Chip, good morning, it's Brett. I'll start. Mike wants to jump in here. That is more or less the signal. I mean it's a healthy conversation with the board every quarter.
I certainly understand the map of the potential buyback, but the flow is pretty low. But when you compare that for me against the work, we've been hard at doing the last two years to three years out in the market on the, I'll note the inorganic, but of course we're ramping up the organic side and just the time it takes to bring these things to market.
Again, for the conversation and comment that (Franzre) just asked, if these products go, we've got a range of expectation for return in the market, we're going to need some capital to go to work and we know we've done some base work, to go pick up, say a light.
Light commercial space that would support rapid expansion over and rapid for us would be a couple of years but wouldn't be a three-year build on a new factory. We'll need to put the powder to work. So that was sort of the basis all along with some other things that are going on the M&A front and so to that point.
As I've noted last two quarters, we sort of took the longer term off the board on at the December report out, it came up last quarter and I would just tell you that the activity there continues to be very active. Mike and I and the and the team within the company are pretty heavily engaged now on a routine basis and I feel like it's moving along methodically very well.

Great, no, that makes perfect sense. If I could ask, just one or two more, I guess one, electric utility growth really stood out so maybe any more color on what you're seeing there, moving forward and then the, you talked about data center and showcasing that low voltage product, any more insight you can give us on. Potential there to get inside the four walls and have a think about time frames there. Thanks.

Brett Cope

So, on the utility side, I love this business. I love talking to our investors about it. I love pointing out the fact that today it is, 25% to 30% of our revenue and that we intentionally set out the strategy to get credit for our team at al that have been working hard at this, especially, in our home countries here, as I noted in my prepared comments and so we are out grabbing this.
We have a part of our organic development path on product development is targeted at increasing the share of wallet in that 0 to 38 k space, and we are amping up our efforts to build out our team members in in select geographies.
And when you look at how the utilities, they just take the US market between the IOUs and the large, com con eds and what we're doing there and how do we go to market. And so the conversations even with the clients are much more strategic today than I think.
Fair to say ever in Paul's history, and that's been a refreshing change for both sides and given us a line of sight into backing this desire to be a better supplier to them and develop solutions that are very specific to their needs in the future. So that has been a very positive momentum in the US and Canada and and also the UK on the data center market.
Again, I mean, we're still, it's a smaller part of our growth part, but it's it's been high growth in terms of its, percentage when you do the math calculation. Last quarter we had some really nice wins for good traditional pile gear.
With some nice name brand companies so the engagement for us is exciting and this fixed pattern breaker design that that we don't have that we now have been through all the testing last quarter we released it at a show quietly, if you will, just to get as you start the process of introducing the product to the market. It's exciting for us as an enabler to inside the four walls, but it doesn't, I don't want to take away from the efforts of things that are still going on.
We are building and winning in the market with what we already had to go to war within this market. And so, I think as we add. People capability and keep rounding out the products. I think you know our anticipation is to make this sticky, and I think we're going to succeed.

Great, that's very helpful, Brad, and maybe if I could sneak one last one in, just on tariffs, maybe a finer point, I guess one, any risk to margins just on passing on some things and then your sort of domestic positioning overall is that is that a strategic advantage.

Brett Cope

I think it is, when you look at Powell, when you and compared to our competition, at least. Based on my experience in the industry and knowing how we supply Powell from a first line supplier perspective, we should be de minimis compared to our competitors.
So, cost opportunities, price opportunities, they should be there for Powell. Now as you dig into, when we build substations and we do major buyout, I'll point out like batteries. We don't a lot, very few people, if any, I think most batteries will come out of head east, kind of India and beyond, they're all going to come over overseas, your typical large lead acid battery (40 GBP 500), and there'll be multiple of those in the substation, they're going to be subject to some risk and so we're.
Working with our clients and and their and the end clients to ensure that you know that those costs are well understood and that really shouldn't be borne by Powell and so that's the approach we're taking and while we're trying to do everything we can to minimize the impact of the project and the ultimate.
Viability of a project to go forward. It isn't something that at this point I think there'll be some effect, but I think we'll be.
Will be pretty successful at mitigating that. It could be a little bit of, as it kind of comes in the cost materials maybe or things we can't see it'll leak in inflationary, but I think over time we'll roll that out. It's the big hitters that might come in short term when we'd look to pass those through.

Got it. Okay, I appreciate the call. Thank you.

Operator

Thank you. Our next follow-up question comes from John Franz rep from Sidoti and Company. Please go ahead.

Yeah, just on the data center discussion, can you just tell us what kind of annualized run rate you're at, and Brett, you said you expect to grow in a double-digit pace on a go forward basis. (Did I hear that) correctly?

Brett Cope

Well, I, when I look at the growth of that of the commercial and other industrial sector, it's growing, but it, I don't we announced it years ago. Yeah. (multiple speakers)

Michael Metcalf

When we broke out the commercial and other industrial sector back in '23. If you looked prior to this data center wave that we're currently navigating through, it was roughly 6% of the total revenue, and that's grown now to, mid-teens, and that growth is really attributable to the data center volumes.

Brett Cope

So, I mean there are other things in that sector, John, but just like I noted last quarter, they're not. $50 million dollar LNG jobs, but they are for gear, when we sell gear only into a job, they're nice chunky orders that are improving as we better understand the market, better (positionile), demonstrate to those clients and their engineering partners how we do things, so that process is that that effort that we have to undertake or any client in any sector as we engage, it's paying, it's starting to pay dividends, so.

So, this, so I got this right, so data centers is mid-teens of total company revenue. And the trajectory is still expected to be at a double-digit clip, or am I overstating something?

Michael Metcalf

No, it's sub double digits. What I was alluding to is the increase from data centers went from six to, mid 10s 15 or so we're still, in the single digits from data centers, but to Brett's point, the market is quite large and quite robust.

Okay, I just wanted to get in context. Thank you, Mike. Thank you, Brett. Appreciate it.

Operator

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

Brett Cope

Thank you, Sager. Mike and I are fortunate to work with the most talented group of people that you'll find in the industry.
Thank you to our employees for their incredible contributions to our stellar results this past quarter. I would like to also thank our customers for their continued trust and support of Powell. We have and will continue to recognize the importance of transparent, agile execution and working to support critical project delivery milestones. Powell is committed to your success.
Thank you to everyone for joining us this morning. We appreciate your continued interest and support and look forward to updating everyone next quarter.

Operator

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

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