CECO Environmental Corp (CECO) 2006 Q2 法說會逐字稿

Good morning.

My name is Regina, and I will be your conference operator today.

At this time I would like to welcome everyone to the Met-Pro Corporation second quarter ending July 31, 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

I will now turn the call over to Kevin Bittle, Manager of Creative Services.

Thank you.

Mr. Bittle, you may begin your conference.

Good morning and welcome to Met-Pro Corporation's first-ever earnings conference call.

My name is Kevin Bittle, and I'm with the Company's Creative Services Department.

On our call this morning with me is Ray De Hont, our Chairman and Chief Executive Officer, and Gary Morgan, our Senior Vice President of Finance and CFO.

A few comments before we begin.

During today's call we will be referring to our earnings release for the second quarter ended July 31, 2006.

The earnings release is available on the Investor Relations page of our corporate website, www.met-pro.com.

I would also remind you that any statements made today with regard to our future expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Please refer to our annual report for the fiscal year ended January 31, 2006 that was filed with the SEC for important factors that among others could cause our actual results to differ from any results which might be projected, forecasted, or estimated in any such forward-looking statements.

And with that, I will turn the call over to Ray.

Thank you, Kevin.

Good morning to everyone and welcome from Harleysville, Pennsylvania.

Earlier this morning we released our financial results for the second quarter ended July 31, 2006.

In a moment, Gary Morgan will provide more specific comments on the quarter's financial results, but prior to that, I would like to offer these general comments on our performance.

Market demand for Met-Pro's products remains strong, resulting in the highest booking performance for any quarter in the Company's history and the highest backlog total at the end of the second quarter in the Company's history.

The impact of this demand, however, was offset by margin compression due to weak product mix and higher material costs in both operating segments.

The Company has taken steps which are expected to relieve pressure on our gross margins in the third and fourth quarters.

In essence, these three things tell the story for our second quarter.

We will discuss them at greater length throughout our call this morning.

I would now like to ask Gary Morgan to review our second-quarter financial performance, after which I will provide some concluding remarks before we take your questions.

Gary?

Thank you, Ray.

Today we reported net income of $1.8 million or $0.16 per share compared to $2 million or $0.17 per share in the second quarter of last year.

Net income for the second quarter was impacted by product mix and higher material costs in both operating segments, combined with a loss of one large Product Recovery and Pollution Control Equipment project, which alone reduced our net income by approximately $264,000 or $0.02 per share.

Income from operations in the Product Recovery and Pollution Control Equipment segment totaled $900,000, a decline of $200,000 from the second quarter of last year.

A loss on one large project in this segment reduced the income from operations by $387,000.

In addition, this segment was impacted by product mix and higher material costs.

These items were partially offset by a higher sales volume of $1.2 million.

Income from operations in the Fluid Handling and Equipment segment totaled $1.5 million, a decline of $200,000 from the second quarter of last year.

Product mix and higher material costs accounted for this decrease.

Our record high bookings for the second quarter totaled $26.6 million compared to $21 million for the second quarter of last year.

This increase in bookings was due to a 20% increase in Product Recovery and Pollution Control Equipment segment and a 38% increase in the Fluid Handling Equipment segment.

As a result of these record high bookings, we ended the second quarter with a record high backlog for the period ending July 31, 2006 of $24 million compared to 16 million for the second quarter of last year.

Our backlog in the Product Recovery and Pollution Control Equipment segment totaled $16.8 million compared to $12.1 million for the second quarter ended July 31 of 2005 or an increase of 38%.

And the backlog in our Fluid Handling and Equipment segment totaled $7.2 million compared to $3.9 million for the same period of last year or an increase of 85%.

Our balance sheet remains strong.

As of the end of the second quarter, our cash on hand totaled $20 million or $1.75 per share, and our current ratio has increased to 3.4.

This concludes my comments.

Thank you and I will now turn the call back to Ray.

Thank you, Gary.

Let me focus again on the things that essentially tell the story for the second quarter.

Market demand for Met-Pro's products remains strong in both operating segments, including international sales, resulting in record bookings for the second quarter and the highest backlog entry in the third quarter in the Company's history.

The impact of this demand, however, was offset by margin compression due to weak product mix and higher material costs in both operating segments.

With regard to weak product mix, net sales from our Product Recovery Pollution Control Equipment segment were a larger share of our total net sales when compared to last year.

The gross margin for this segment of our business is typically not as high as those in our Fluid Handling Equipment segment.

In addition, a significant portion of the product mix within the Product Recovery/Pollution Control Equipment segment was made up of long leadtime engineered projects whose gross margins are not normally as high as the shorter leadtime standard product type sales.

Our total gross margin was also impacted by product mix in the Fluid Handling Equipment segment due to flat or reduced sales in the higher margin businesses within this segment and higher sales in its lower margin businesses.

As Gary already mentioned, the backlog in the Fluid Handling Equipment segment at the end of the second quarter totaled $7.2 million compared with $3.9 million for the same period last year.

A significant portion of this increase is in the higher margin businesses within this segment.

In addition, the backlog in the Product Recovery/Pollution Control Equipment segment is of higher quality entering the third quarter than it was entering the second quarter.

Several large projects contained in the Product Recovery/Pollution Control Equipment segment's backlog were sold at gross margins similar to the gross margins normally achievable only on standard product type sales.

Our industry has continued to experience higher material costs.

Unlike the last two years, however, our customers are much more amenable to price increases, and we have been able to increase our prices to offset some of the material cost increases we have incurred.

Most of these price increases occurred during the second quarter and as a result have not yet fully impacted our financials.

In addition, we continue to improve our purchasing practices, reduce the total cost from our suppliers and find new sources of supply both domestically and internationally.

With respect to the loss on one of our large Product Recovery Pollution Control equipment projects, this project was a long leadtime engineered project that shipped in May and was severely impacted by higher material costs resulting from increases in commodity prices between the time the equipment was quoted and shipped and project execution.

We have taken aggressive steps to improve project management and avoid profit erosion on this type of project in the future.

The relocation of the Company's Sethco and Mefiag divisions and the expansion of the Company's Netherlands and Telford, Pennsylvania facilities are now complete and are expected to result in improved operational performance going forward.

In closing, I believe the measures we have taken to improve our profitability, together with the strong market demand for our products and a quality backlog, give us optimism for our third quarter and full fiscal year.

I would like to thank all of you for your participation in today's call, and I will now turn the call back to Kevin.

Kevin?

Thank you, Ray.

At this time we would welcome any questions you may have.

I would like to ask our operator, Regina, to provide instructions for this portion of the call.

Thank you.

(OPERATOR INSTRUCTIONS). [Ryan Connors], Benning & Scattergood.

First of all, just a housekeeping kind of item for you, Gary, I guess.

The SG&A line actually came in pretty low for the second quarter.

I'm getting it just under 18% in terms of percent of sales.

Can you just talk about what drove back and whether or not that is a sustainable type number and whether we kind of revert back up to the mean on that?

In the first quarter, the SG&A was higher due to the one-time charges related -- non-recurring charges related to the move of our Hauppauge, New York facility down to Pennsylvania.

In the second quarter, the reason the percentage went down was due to higher sales volume, which the G&A portion of the SG&A is basically a fixed number, and it does not increase as high as the same levels of sales increase.

And going forward, we expect the same level of G&A expenses going forward.

Okay.

So presumably there is leverage there then?

I mean if sales continue to expand based on the backlog and so forth, the SG&A should increase at a slower rate?

The selling portion of this should increase consistent with sales, but the G&A portion should basically be flat or a little smaller -- a slighter increase.

So there is some -- with the higher sales volume, some of that profitability should drop down to the bottom line.

Great.

Next, if I could, just in terms of if you back out the single project that was unprofitable and you look at the two different contributors, you talk about mix bringing down margins a little bit and input costs.

Can you break down -- again, backing out that single project, just in terms of order of magnitude, how big a contributor those two were?

Is it kind of 50-50 each, or is it more like 90/10 one way or the other?

On the one project that we had a loss on, that reduced our gross margin by $387,000 or about $0.02 a share, a little about $0.023 a share to be exact, Ryan.

As related to the product mix and the material costs, we cannot quantify that, but that happened in both the Product Recovery and Pollution Control Equipment segment, also the Fluid Handling Equipment segment.

I would imagine that would have impacted about the same amount of money.

Okay.

Great.

Just quickly on the backlog, obviously the backlog is robust, and that bodes very well for the rest of the year.

Can you just talk about -- so two questions on that.

Number one, what is really driving that order flow in terms of -- is it a general strength in one of the key end markets, or is that something you guys are doing internally in terms of reorganizing the sales force or so forth?

I think it is a combination, Ryan, as far as we have put a lot of effort into growing our topline over the last several years.

We had to change the way we sold.

We had to get in front of the customer more frequently than we were in the past, and we are doing that.

A lot of the industries that we play in also are doing well.

So we've got the combination of the two where we are aggressively going out there and taking the business rather than waiting for it to come to us, and the markets are pretty good.

As far as the backlog, when you look at the backlog that is built now with approximately 24 million going into the third quarter, it is spread quite a bit across all of our divisions.

The majority of our divisions are doing quite well as far as the booking end, and as a result, our backlog has grown.

As I mentioned in my comments earlier today, when you look at the Product Recovery side of the business, we have a number of projects in there that are at very good margins.

In addition, the Fluid Handling equipment side has grown significantly to 7.2 from 3.9 million, and that has historically been our higher margin business, that segment.

So we've got a lot of good things going for us moving forward.

Okay.

And then just finality, you have talked a lot in the past about margins getting back up into the mid 30 range over the next several years.

If you could just update us on your thinking on that front in terms of whether this quarter changes your timeline, brings it forward, pushes it back, what your latest thinking is in terms of your roadmap towards that range?

Well, we would like to get back to the 34, 35% gross margins that we experienced three or four years ago, and we're doing that through a number of means.

One is we are now able to increase our prices of our products.

Customers are more amenable to that.

We are selling more international and becoming more global.

We are finding that our international business is at a higher margin because there is actually less competition.

What is happening is the customers overseas they are selecting a group of suppliers that they consider qualified suppliers, and typically you are on a level playing field when you're playing against the same type of supplier.

So you are not having somebody coming in and cutting the margins drastically.

So we are seeing higher margins there.

We also back in May of 2005 we brought on a Director of Procurement and Logistics and, in order to manage from the corporate office from a central location, our Procurement and Logistics Group.

That is starting to turn into some nice cost savings.

You're not going to see them all immediately because what you do there is you may negotiate a contract that is going to result in, say, $100,000 in savings over a year, so you're only seeing the first month or two of that as you go forward into this year.

But, as the year goes on, you will receive more and more savings along those lines.

So we're doing it on the operations side.

We're doing it as far as going internationally.

We are doing it on the pricing side.

And also domestically the way we set up our organization, we are taking advantage of more synergies within our group than we ever have.

We are packaging products.

We're bringing -- if a division has a good reputation in a certain market niche and another one does not but has products that would work in that niche, that division with the reputation is bringing them into it.

An example would be the aquarium industry where Fybroc is the dominating player as far as nonmetallic pumps.

They are now bringing Dean and Sethco into that.

Great, that is very helpful.

Well, listen, thanks, guys, for the time and best of luck the rest of the year.

Michael Gaugler, Brean Murray Carret.

Ray, I would like to go back to your comments a little bit about pricing.

On this most recent price increase, any pushback from customers at all?

Actually, no.

We have been able to have across the board increases in some of our pump businesses, our filter businesses, and the customers are accepting them.

We are not getting a pushback like we did last year and the year before definitely.

We got a pushback in basically the customer said that if you're going to increase our prices, we're going to your competition.

And this year we are not seeing that.

In some of our divisions, we have actually had some significant increases of 15, 20% and not gotten the pushback.

As you can see when you look at our bookings for the second quarter and the backlog, we are still growing.

It is still a good market demand for our products.

Okay, that is helpful.

The third question, what is left on the restructuring plan?

Do you basically have everything at a level you would consider optimal at this point?

I would not say optimal.

I think we have structured it in a way that is going to help us evaluate and move forward a little better going into the future.

Recently early this year we put together, we promoted two people to Executive Vice President positions.

One of them that is basically overseeing a group of our air companies.

And he will be evaluating with the Vice Presidents from those companies, how do we configure that group of companies to take it and move it forward more strongly into the future?

We have simplified our organization as far as our pump organization where all of our pump companies are under one management group.

We actually moved one of our divisions from Hauppauge, New York over to our Telford facility.

Now we have both plastic pump companies under one manufacturing group.

We simplified our Mefiag filter company by putting all the Mefiag business under one head worldwide.

These things build flexibility, they build depth and they allow us to take advantage of the synergies.

But to say that we are at an optimal right now, I think that we have room for improvement, and we will continue to look to do so.

Okay.

So I take from that comment that we could be seeing some more manufacturing rationalization going on in the next couple of months?

I would say months and even into the next year or so, yes.

And last question, how does the acquisition pipeline look?

We have got some opportunities that we are talking to right now.

Hopefully we will be able to close one or two of them, but we have got some good opportunities out there.

(OPERATOR INSTRUCTIONS). [Alvin Hoffman], individual stockholder.

A couple of my questions were already asked, but why at this time did you decide to go to conference call method of communicating with your stockholders?

I think the main reason was we wanted to give our shareholders more visibility into the Company.

Historically we basically put out a news release, and that was about it.

Recently I have been visiting a lot of not only current stockholders but also potential stockholders, and we felt that the conference call was another way of giving them visibility what is behind the numbers and to be able to discuss things as we're doing today.

So that was the main reason for it.

Thank you.

[Jim Schwartz], [Harvey Partners].

Could you just break down from me in Fluid Handling, you said that the increase in backlog is from higher margin pieces.

I mean if I did a year-over-year look, the change in your backlog in Fluid Handling, just sort of the margin differential between the two just so I could have an idea going forward of how we can get the 500 basis point improvement in gross margin?

Well, if you look at the Fluid Handling portion of our business last year ending 7/31/05, our total gross margin was 38%.

In the first quarter -- the second quarter this year 7/31/06, the gross profit was down to 36.1, and the reason is the product mix.

However, on the booking and backlog side, that has flipped.

That has changed now where, for instance, our Fybroc and Sethco divisions, which are typically the higher gross margin companies within that group, their backlog has increased significantly during this period.

They have had a lot of bookings during the second quarter.

They are entering the third quarter with a very strong backlog, and that is why I say that a large share of this backlog for the Fluid Handling going into the third quarter is from the higher margin parts of that Fluid Handling group, primarily the pump businesses, the two pump businesses, Sethco and Fybroc.

Okay.

Great.

Thanks, guys.

[Brad Oslegier], DePrince, Race & Zollo.

A couple of quick questions for you, the first of which goes back to Michael's question I believe on your gross margin outlook, 34 to 35% longer-term.

Could you help us understand kind of a reasonable timeframe for when Met-Pro would begin to approach that goal?

Is it a number of years?

Should we see steady progress throughout?

Obviously we're looking for improvement in the back half of the year, but going forward beyond that, would it be a reasonable expectation to expect continued progress off of that level?

Yes, I think we would look at continued progress from where we are at, and I would say to get back to those type of numbers you're talking about a three to five-year span if everything that we are implementing goes the way we think it can.

Okay.

But continued progress from here on out?

Yes, I think that there will be a gradual increase in the gross margin as we go forward.

Okay, great.

Last question.

Can you give us an update on China?

Is it currently profitable and kind of where do you see the market heading there?

Well, we don't break out the businesses as you know, and we would not break that out.

But what is happening now is we're getting the bookings and the shipments.

We're like on the hockey stick.

We are at the lower end of the hockey stick looking at some decent large size or decent sized quotations that we feel we will be able to book during the third and fourth quarter.

Okay.

Great, guys.

It is progressing well.

We're doing some things there that I think will give us some good future business.

[Kevin Wink], [Paulenis Capital Management].

I have got a couple of questions.

Your comments on the backlog said that you had some higher gross margin products in the backlog.

What I was uncertain about is whether you had looked through the whole backlog and whether the gross margin potential at this point, and I know things can change as you manufacture stuff and ship products, but whether the gross margin potential in the whole backlog is higher than what you had in the latest quarter adjusted for the loss on the contract?

I think the answer to that would be yes.

The quality of that backlog on the margins in that total backlog -- we have looked at the total backlog, not just these individual jobs.

We think the quality is better than it was going into the second quarter and during the second quarter.

Okay.

And then the next question is, I feel that in the press release and in some of your comments there is a suggestion that there are specific things you are going to work on in Q3 and Q4 to improve gross margins aside from possibly increasing prices and being more disciplined on monitoring gross margin potential of larger projects.

So if you could give us some more color as to what some of those individual activities might be for internal gross margin improvement?

Well, first of all, we have merged one of our divisions, Sethco division, with our Fybroc group over in Telford, PA, and that is going to help us as far as operating costs because of the synergies and so forth and where we don't have to duplicate overhead as far as management and having two of each, two engineering managers, two controllers and so forth.

That is going to help us on the operating side.

Our procurement group, we're negotiating contracts with suppliers.

We are negotiating on the total Met-Pro spend rather than the individual division.

When you look at it historically, each of the individual divisions would typically do their purchasing and their logistics in a regional area or sometimes somewhere in the domestic United States.

We're now looking not only at the domestic, we are looking at the international for buying our products.

And again we are going to these vendors on a total spend.

Instead of going for each individual division, we are adding up all the divisions going to a supplier and saying, look, this is what our spend is, what can you do for us?

And we're seeing some good results from that already that will result in pickups as far as margins and so forth.

We're being more selective I think as far as on the front-end also.

We're looking at -- we have put some limits of authority on sum of those divisions to where we won't allow them to go below a certain margin without coming to the corporate office and discussing it.

We bumped them up a little bit, and I think that will help us to be more disciplined as far as the gross margins and sell it at the higher gross margins.

We do not want to change from what our historical core value was as far is going after a niche market where we can be one of the top two or three players where it is a growing market and we are -- we can make good margins.

So we want to continue to do that, and sometimes you have to reevaluate and change the niche you are in because it is no longer what it originally was.

Okay, that is helpful.

And without asking you for quantifications as to how much of the improvement we're going to see in Q3 and Q4, in terms of the relative timing are we going to see 25% of what you're talking about in Q3 and 75% in Q4, or what are your thoughts on that?

That is a difficult one to answer because of all the different things that are going on within the areas, the different pieces that make up the improvement, and it comes down to again project execution.

It comes down to getting the better pricing from suppliers and so forth, and that is going to be a month-to-month thing.

We're already seeing -- I can give you some examples where we have gone out and on our freight, our freight costs as everybody's freight costs had gone up over the last two or three years.

We went out and we went to a broker as far as a 3PL and we negotiated a contract.

And what we had been able to do is reduce the cost of our freight significantly compared to what it once was.

The problem we had before is, all the divisions were negotiated on small pieces of it, of our freight.

We found that for the same carrier we had different discounts throughout the Company.

So by putting it altogether, we have been able to improve that part of our business significantly, and that is going to help us in two areas.

It is going to save us on our inbound freight, but it is going to help us with our customers, which will make our pricing to them less than what it would have been with all the increased freight costs.

So it is difficult to answer as far as what the impact is going to be at any given time, and it depends on what products shipped at what time.

Okay.

And a couple of minor questions.

The other income in the quarter, how much of that was interest income and how much of that was non-interest income?

Kevin, the majority of that was interest income.

We have $20 million of cash on hand, and interest rates have gone up from last year, and the majority I would say 95% of that is interest income.

Okay.

And then a rough CapEx budget for the second half?

The second half -- in the first half, we spent about $3.2 million on CapEx. 1.5 was for completing a building in Telford, Pennsylvania to relocate the Sethco division from Long Island down to Pennsylvania.

We spent an additional 700,000 to complete the expansion of our Netherlands operation, and the balance, 700 to 800,000 for the first six months, was from normal operations.

We expect the balance of the year to be somewhere around 800,000 for the balance of the year.

Okay.

And then one final question cash at quarter-end?

Cash at the quarter-end was $20 million.

(OPERATOR INSTRUCTIONS).

Alvin Hoffman, individual stockholder.

The last conference call you mentioned that you found the Dean Pump's applicable to fresh water aquariums.

How big a business is fresh water aquariums as a potential?

Well, it is not necessary fresh water aquariums.

It is the fresh water within the aquarium park.

And also with you have got parks such as Sesame Street Park and so forth that have a lot of fresh water.

What it does it gets us into -- and zoos, a lot of zoos use fresh water.

It is difficult to pull that together as far as the total market for that type of group because a lot of those people play close to the vest as far as how much they spend and they promote how big the park is, but they don't promote how much they spend on the parks.

All right.

Are there any new salt water aquariums on the horizon?

There are.

There are some large ones that we are working on overseas.

There is some good international ones.

There is some smaller projects domestically, but the aquarium business still is quite robust.

Can the current aquariums that are operating continually buy more pumps?

Yes, what they have to do, they have to change up their exhibits, and they do it on a pretty frequent basis.

So they will change an exhibit because after a while after two or three years customers want to see something different.

So they do change up their exhibits.

In some cases they build a whole new park, which there are quite a few on the drawing board right now.

So it is a dynamic industry?

Yes.

I did not understand that.

Thank you.

At this time there are no further questions.

Are there any closing remarks?

Yes, thank you, Regina.

That concludes our conference call for today.

We just want to thank everyone again for your participation.

This concludes today's conference call.

You may now disconnect.