Powell Industries, Inc. (POWL) Earnings Call Transcript & Summary

Good morning. My name is William Shelmire, and I'm an account manager here at Three Part Advisors. And I want to thank you all for joining us for our 17th Annual Midwest IDEAS Conference. To start things off today, we have Powell Industries, which trades on NASDAQ under the ticker symbol POWL. Representing the company today is their Executive Vice President and CFO, Michael Metcalf. Michael?

Thank you, William, and it's good to be back in Chicago again. We haven't been doing this for 17 years, but I think this is our third or fourth year consecutively at the conference. And -- we really like the conference, so it's good to be back. Again, my name is Mike Metcalf, CFO at Powell Industries. And I'll take you through what where we came, where we grew up, where we come from, what we sell and a little bit of the financial perspective. We're 80 years old, nearly 80 years old, 79 to be exact. And we make low- and medium-voltage switchgear predominantly based in the U.S. I'll get into that in a few slides. Last year, we generated a little over $1 billion of revenue. As we sit here today, we just reported our third quarter results, and we're at about $860 million. So we're well on our way to eclipse what we did in fiscal 2025. We've got a global footprint. Most of our manufacturing facilities are in the United States, 5 in the U.S., we have a large Canadian operation and an operation in the U.K. as well. And as I'll go through in a little while, our balance sheet is pristine, no debt, great liquidity position. So what is it that we make and what is it that we do? Our intellectual property is that product you see on the left side, that's a circuit breaker. So in your house, your apartment, wherever you place a residence, you have a panel full of circuit breakers. And that is a 500-pound version of what's in your house controlling your circuits. That circuit breaker goes into what's called switchgear, and that's the metal enclosure, and that's the middle picture. So we make the metal enclosure. We have the intellectual property, the circuit breaker. We actually have two medium voltage circuit breaker -- circuit breakers. We bought GE's circuit breaker in 2006, and Powell has its own medium voltage circuit breaker. So our wheelhouse is really in medium voltage, 1,000 volts up to 38,000 volts. In a fully integrated solution, we will put our switchgear and our breaker in what's called a power control room or a module. What you see on the right-hand side is this happens to be an offshore module, big, heavy 2-story, blast-resistant module. This one looks probably like it's going to an offshore rig to distribute the power on a rig. So kind of the specifications on where we play in the electrical spectrum. I just mentioned voltages. We have low voltage switchgear. So we make the cabinets. We don't have a low-voltage breaker, we will typically buy our breaker from an Eaton, Siemens, and we do a lot of medium voltage, where we build the switchgear, and we have two medium voltage breakers. So we have a full medium voltage line, really don't get into high voltage at all. So our sweet spot is really between 480 and 38,000 volts. From a product complexity standpoint, when I was here last year, I would tell you that we are almost entirely engineer to order, highly configured electrical applications. As you can see, we are -- with the onset of the data center volume, this is what we call configure to order. So it's highly engineered, you engineer the first configuration, but you just build a lot of it thereafter. It's not engineering, there's not an engineering thread throughout the entire project like there is on an LNG project or a utility project. So we're doing a lot of what's called configure-to-order, and that's a lot of what's in our backlog today, which I'll go through. And we have our traditional engineer to order and customer relationships historically have really what's gotten us to the table and won the jobs. We're very, very well respected in the core industrial markets. So just when you hear the grow resiliency, what is the grid and where does Powell play? It's important to understand that how is really agnostic to how the power rather is generated and where the power is going. So whether it's coming off a solar field, whether it's coming off a gas plant, it doesn't matter. Once it goes from high voltage to medium voltage, we distribute the power. And from there, it goes to either a residential neighborhood, an industrial plant, a subway. I mean, CTA, we have a lot of gear on the CTA here. So really, it's important to think about Powell is just really important in the supply chain of distributing the power irrespective of where the power is coming from or where it's going. The other important thing to understand in our business is the fact that there's 2 electrical standards in -- around the globe. There's what's called ANSI and that's where we grew up, Powell grew up in the Gulf Coast of the U.S., and we're very strong ANSI -- in the ANSI market. So ANSI is electrical standards for all in North America, some parts of Latin America, some parts of the Middle East, like Saudi Arabia is a lot of ANSI gear, in some parts of Southeast Asia. Everywhere else, it's what's called IEC. So it's the international standard. We have one plant in the U.K. that is 100% IEC. But when you take a view of the entire TAM of IEC, very, very small. And you can see that play out in where our geographic revenues lay out. So I mentioned earlier, we have modules on the right-hand side, which I talked about but more commonly is what we call a power control room. This is a -- some people call them e-houses, substations. These things can get up to 10,000 square feet inside. So they can be very, very large or they can be 500 square feet. They can be small. They're engineered to the application that they're going to be suited for. And this one happens to be on the left-hand side, looks like it's in a refinery or a petrochem facility. And if you can envision two dozen of these things sprinkled across the site of an LNG facility, distributing power across that facility. That's kind of the solution that Powell brings to these large industrial applications. And we're starting to see a lot of these in the data center world as well. We are today on the outside of the data center, so we don't do anything on the inside. But a lot of these data centers are requiring the higher-end voltages, so the 38 kV with PCRs to distribute the power inside -- into the data center. This is just another visual of the entire solution that we provide. We -- the switchgear inside the PCR and the PCR distributing power where it needs to -- where it is -- it needs to distribute the power. Now automation is a key component for us. This is a very -- it's a high-margin business. We're growing this arm of our business. Pretty rapidly. I mean we -- over the last 5 years, we've -- it's grown quite rapidly. It's still not a reportable segment yet. But we did do an acquisition, which I'll talk about in a minute in this space. And when you think about automation, we think about it as predictive analytics, preventative maintenance. When you think about one of those PCRs with lineups of switchgear in it, and there's two dozen scattered across a plant, it's much easier to monitor your equipment with automation. If there's an abnormality, it's running had, it's dirty, whatever the case may be. Our sensors and our automation can pick that up as opposed to having operations teams manually check this gear once a week or once a month, whenever it needs to happen. So this is a fast-growing space across our entire industry. Schneider is doubling down on at Siemens as well. This is an acquisition that we closed last year, and it is a controller for -- it was bespoke in the U.K. for utilities. And this was a small little company didn't want to sell the PE. The principals had built it over 40 years, and wanted to go to a good home and a good -- with a culture similar to theirs and they agreed to sell to us. And this has been -- it's small but mighty. We closed it in August of '25 and in the first month that we had the business, we were able to apply it to one of these large data center orders that we won in the U.S. So this one -- this acquisition has been a great success, very well integrated, and we're looking forward to more of these down the road. So the end markets that we play in, predominantly, and we grew up in the core industrial markets. So petrochemical, oil and gas, I would define oil and gas refineries, pipelines, heavy industrial applications. And over the last probably 5 to 7 years, LNG export terminals has really taken off as well, and it's still very, very active. But most recently, over the last couple of years, clearly, the data center volume has really taken a exponential step up in our business. It's about 1/3 of our backlog today as we sit here. Really, the same product, it's not any different. It's just as I said earlier, it's -- you design it once, but there's just a lot of it. They just need a lot of the gear. So the utility space is also -- there's clearly a second derivative in utilities with the data centers. How much that is? I couldn't tell you because when we sell a utility job, we don't ask them where the power is going, whether it's going to a residential application, infrastructure upgrade in that certain region or a data center. But our utility commercial activity is very, very robust, continues to be very robust as well. We get a lot of questions, especially when we talk to some of the European investors, how do you compete with ABB and Siemens and Schneider in Eaton. And it's really an interesting relationship. We buy a lot of equipment and gear from particularly Eaton and Siemens, not so much ABB and Schneider. But at every at every campaign, specifically in utility, we'll run up against all four of these guys. In the core industrial, we typically run up against an ABB. But what we bring to the table is we build our own build. We build our own PCR. We build our own modules, whereas the other four x Eaton because Eaton just bought fiber bond a couple of years ago, and we'll see how that goes. But ABB, Schneider, Siemens, they don't build a building. So they have to go outsource to a building supplier, send their kit to the building supplier, integrate it there. If there's problems, there's a lot of engineering that happens. It's just not an integrated model. And that's what -- that's our value add. That's what wins us business specifically in the core industrial space. What's our strategy that Brett laid this out, our CEO laid this out probably 4 or 5 years ago, and we haven't deviated from it, irrespective of this data center craziness. I talked about the automation. We're doubling down on automation. We think that is going to be a real margin accretion machine, and we're starting to see that. We think there's an opportunity in services. I mentioned that GE -- GE's breaker joined the Powell family in 2006, and these things, they're all over the world. And there's a huge installed base. And we think there's good opportunity within the services -- the value-add services, not just wrench turning and buying people to do just general maintenance but value-added engineered upgrades, things of that nature. And then heading on to the portfolio in utility, this is a real key component of our strategy is growing that utility in the utility space. And in utility, you have generation, distribution and transmission. We do the generation and the distribution. We don't do much in transmission at all. Is that a space that's interesting to us? Yes, it could be to broaden our utility scope. So from a capital allocation perspective, as we sit here today, our last report out was over $600 million of cash on the balance sheet, so -- and zero debt. So we've got -- we've got a very, very healthy balance sheet, a lot of liquidity. When you think about how that cash is going to be deployed? We are in a highly capital-intensive projects business. So we get a lot of upfront payments. So typically 12% to 15% of every revenue dollar is going to be deployed at some point in the future to work in capital, so that's a big chunk of it. But it's a lot of room for organic growth in R&D. We've really upped our game in R&D. When I joined the company 8 years ago, we were maybe 0.5 point of sales on R&D spend. Now we're almost triple that and starting to commercialize some really exciting products. We brought in a new R&D VP, and he's built a good team. And in this space, that's what you need to do. You really need to invest in new products and develop IP and patents and the like. And then inorganically, this is something that Brett and I are continuing to knock down doors. It's tough in the space right now because PE is really gobbling up these smaller electrical companies, whether they're products or the their services, bundling them together and either spinning them back out or IPOing them. But there are nuggets like Remsdaq was a nice nugget we found last year. So I mentioned of the $600-plus million, most -- half of it probably is going to go to working capital at some point in the future. And we're spending a lot on facility expansions right now. We're just finishing up a 335,000 square foot expansion at our fabrication yard that will give us the ability to lay down 10 to 12 additional substations to work on per year. Each substation is $10 million to $15 million. So that will help us. We -- that's bespoke for large, large one-piece buildings for the core industrial market, LNG specifically or refineries. But suffice it to say, we've got -- we've got a nice NestEgg, some dry powder if we find the right opportunity that we can leverage that liquidity. Now getting into the financials, you can clearly see '21 coming out of COVID was a really hard year because, again, we're a very long-cycle business. When we book an order, that order takes 12 to 18 months to execute. And we're all POC, so percentage of completion. So we'll take revenue along the year, 1.5 years time frame. But we were hungry and COVID took some orders just to feed the factories. And you can see it's about a breakeven year. Fast forward to '23, when the industrial wave hit us, all this LNG work, we really filled up our factories with an industrial work from the LNG space, predominantly in Louisiana and Southern Texas. And then in '24, '25 and continuing into '26, the data center folks actually found us after COVID because they ran out of their typical Schneider's and -- ABBs and Eaton ran out of capacity. They found Powell. We didn't go hunting for them. But that's been -- it's been an evolution. We've been working -- we initially worked with the hyperscalers and the colos and we've found that this new niche now, we booked a large order last quarter with a Neoscaler, a new term to us. But the terms and conditions on some of these hyperscaler colo operations are really tough. So we found different channels to market. So we're learning our way as we navigate through the data center channel and markets. But we've had some real success going direct with Neoscalers and going through distribution, predominantly with some of the hyperscalers and colos. So as we sit here today, I mentioned earlier, we're -- through 9 months. We're about $860 million of revenue. So well on track to meet or exceed what we did last year. We're about flat as we -- as on a year-over-year basis on gross profit. We talked about gross profit in our last call. We are seeing some inflationary pressures, but we are offsetting it with price. It gets a little more challenging in a long cycle fixed firm price environment. But we've got a lot of levers such as hedging our copper, we use a lot of copper and leaning forward on some of our engineered components. So we've managed to get a little bit of favorability there. And we hope with some of this configure to order as it begins to exit the backlog early to mid next year that we can squeeze out some productivity because there'll be less engineering in those types of jobs. And cash flow through the -- cash flow through the first 9 months is phenomenal, almost $200 million. And that's really -- that's really indicative of the advanced payments that we get. When we sign a contract, we'll get 25% of that contract right upfront before we lift a pencil. Last quarter, it was a record quarter on multiple fronts. So we booked last quarter, we announced it, it was a subsequent event to our second fiscal quarter, but it was a $400 million plus data center order that we won in early April. It was formally booked in Q3 this last quarter. So you can see in the lower left, just -- it's off the charts from an orders perspective, $934 million of orders in the quarter through the first 3 months, almost $1.9 billion, bringing our backlog to $2.4 billion. And we also talked about -- we get a lot of questions about what's the convertibility of that $2.4 billion. And we do highlight that in our SEC filing every quarter, roughly a little better than roughly 55% of that $2.4 billion is going to exit backlog in the next 12 months. And then you have your book and ship stuff on top of that. So it's -- this order and the current environment is really helping '27. '27 is essentially booked at this point. We're booking into '28. Backlog. So we have intentionally and very thoughtfully been doubling down on utility, utility backlog. And you can see from '21 to current, it's not dramatically different. The only difference is if this were in dollars, the dollar growth would be phenomenal. It's maintained about 1/4 of our backlog, but our backlog has grown exponentially. So as I mentioned earlier, utilities is a core part of our strategic growth plan. Both in Canada, the U.S., those are predominantly the two markets where we're really focusing on -- and we are not disappointed. It's been a -- once you get into the utility space, it's almost an annuity. You get on their approved vendor list, it helps reduce that saclidity of the oil and gas market up and down, whereas the utility space is pretty static, pretty flat. And then you can see the consumer and other industrial of that 40%, 34 points of that is attributable to data centers. So it's almost entirely data center-driven and it popped -- clearly, it popped with that $400-plus million contract that we won in third quarter. So it is -- you've got 1/3 of our backlogs, data centers, 1/3 is roughly core industrial, oil and gas, LNG, refineries, things of that nature and then the remainder is essentially utilities. This illustrates the differentiation between what I explained earlier, the ANSI in the IEC. So you can see the blue and the orange color. The orange color is countries that have both ANSI and IEC. So we play in those countries. We're relevant there. The gray is where we really don't -- we don't have a lot of business because it's IEC and we don't -- we're not predominantly not in the IEC space today. But very, very strong in North America. We go toe to toe with the big guy -- all four big guys, ABB, Siemen, Schneider and Eaton. Every one of them in every campaign in North America, and we hold our own in the medium voltage space. So U.S. revenues, almost 80%. The remainder is predominantly Canada and a little bit over in the U.K. From a sector segmentation perspective, you can clearly see the growth in commercial and other industrial, not as accentuated as what you see in backlog. But as you -- if you play this forward, that 20% likely will grow to 30% over the next to 12 months given where our backlog sits today. I like the utility space. We like to see that at 25% or greater. We want to continue to build that. And our industrial space will always be between 1/3 and 1/2 of the business because that's -- it is a core tenet of where Powell grew up and where we're really strong. We've got a majority share of that market, and we intend on keeping that. We're very strong in the ANSI-U.S. core industrial markets. We're finding LNG specifically, pipelines to a lesser extent. And that's an overview. I'll take any questions. We have a few minutes for questions.

[indiscernible]

Yes. Everything on here, we would not have a need to go raise debt or issue additional equity. From an inorganic standpoint, our inorganic pipeline contains ideas of all shapes and sizes. Some very transformational, in which case, if they were to happen, we'd have to take -- we'd have to do something different, either debt or equity. In some, like the Remsdaq acquisition that I went through a few minutes ago, that we paid cash, and we could -- you saw that we've got about $250 million of dry powder that we could pay cash for something or fund something with our -- from our cash reserves without issuing debt. Everything -- all our CapEx that we see on the horizon today, there wouldn't be a need for debt. We've talked about -- Brett talked about a $75 million to $100 million greenfield facility add-on at some point in the probably the next 24 months to address some of this capacity. All things being equal, we could fund that with cash reserves.

[indiscernible]

Well, I'm going to give you probably a interpretation of my view of what it is. The neo scalers are -- what we're finding is real estate folks, folks that grew up in real estate, they've got this idea that, hey, they can build a -- they can put some infrastructure on real estate that they may or may not own or they are privy to, build it out and lease it back to a Google, a Microsoft. So they are the main purveyor of that asset, but they're leasing it for -- I heard on CNBC when there was one snippet that -- Google and Microsoft are paying like $1 billion a month for compute. So I mean that's $10 million to $13 billion a year. But that's what a neoscaler is. And we're seeing a lot more of these neoscalers are -- they're a little easier to do business with than some of the hyperscalers from the terms and conditions. They're not as arrogant to put it bluntly. We're not going to leverage the company with crazy terms consequential -- I mean the terms from some of these hyperscalers. We've never -- you'd never see them in a utility contract. You never see them in an LNG contract or an ExxonMobil or a marathon, crazy terms like if there's 5 minutes of downtime and it's due to your equipment, then you have consequential damages for millions and millions of dollars we just we're not going to sign up for that.

[indiscernible]