CECO Environmental Corp (CECO) 2007 Q1 法說會逐字稿

Good morning, my name is Stacy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the first quarter 2007 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Bittle, you may begin your conference.

Good morning, and welcome to Met-Pro Corporation's earnings conference call for the first quarter ended April 30, 2007.

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

With me on our call this morning is Ray De Hont, our Chairman and Chief Executive Officer, and Gary Morgan, our Senior Vice President of Finance and Chief Financial Officer.

Shortly you will hear comments from both of these individuals.

But before we begin, I would like to make a few comments.

First, during today's call, we will be referring to adjusted earnings.

This is considered to be a non-GAAP financial measure since it excludes from earnings the effects of certain nonrecurring items.

In this morning's release, we provided a reconciliation of adjusted earnings to our GAAP-based results, together with a discussion of why we use the adjusted earnings.

The earnings release, along with the reconciliation, is available on the Investor Relations page of our corporate web site, www.met-pro.com.

I would also like to remind that you 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, 2007, 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 of our forward-looking statements.

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

Thank you, Kevin.

Good morning, everyone, and welcome again from Harleysville, Pennsylvania.

Earlier this morning, we released our financial results for the first quarter ended April 30, 2007.

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.

Our quotation activity during the first quarter remained high, and we continued to achieve solid bookings.

As a result, we ended the first quarter with a record backlog, which serves as a solid base for future sales growth.

First quarter sales were the highest for any first quarter in the Company's history.

The strategic measures we implemented last year, which included selected sales price increases and improved purchasing practices, continued to help improve our gross margins, resulting in a higher gross margin for the first quarter ended April 30, 2007, versus the same period last year.

In addition, our adjusted first quarter net income and earnings per share increased significantly versus the same period last year.

During the first quarter, we also completed the sale of the property previously associated with the Company's Sethco business unit in Hauppauge, New York for $4.6 billion.

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

Gary?

Thank you, Ray.

Net sales for the first quarter ended April 30, 2007, were the highest of any first quarter in the Company's history, totaling $21.9 million, compared with $19.8 million for the same quarter last year, an increase of 11%.

This increase in net sales was due to a 16% increase in the Filtration and Purification Technology segment, a 13% increase in the Product Recovery and Pollution Control Technology segment, and a 2% increase in the Fluid Handling Technology segment.

The gross margin for the first quarter ended April 30, 2007, was 31.6%, compared with 29.6% for the same period in the prior year.

This increase in gross margin was due to higher gross margins earned in the Product Recovery and Pollution Control Technologies and Fluid Handling Technology and reporting segments, as a result of certain strategic measures implemented, which included selective price increases and improved purchases practices.

During the first quarter, the Company sold its manufacturer facility in Hauppauge, New York, which had been previously used by our Sethco business unit prior to Sethco's relocation and consolidation with our Fybroc business unit in Pennsylvania.

This property sold for $4.6 million, and resulted in a book gain before tax of $3.5 million.

Included in this profitable property sale our income from operations for the first quarter ended April 30, 2007, was $5.9 million, compared with $1.6 million for the same quarter last year.

Excluding the pre-tax gain of $3.5 million on the sale of property, our adjusted income from operations was $2.4 million, still a solid gain of 48% over the same quarter last year.

Again, excluding the gain on this property sale, income from operations increased 67% in the Fluid Handling Technology segment, and 61% in the Product Recovery and Pollution Control Technology segment, while income from operations in the Filtration and Purification Technology segment decreased by 14%.

For the first quarter, we reported net income of $3.9 million, compared with $1.2 million for the same quarter last year.

Excluding the net after-tax gain of $2.2 million on the sale of the New York property, our adjusted net income was $1.7 million for the first quarter, compared with $1.2 million for the same quarter last year, an increase of 38%.

Our diluted earnings per share for the first quarter ended April 30, 2007, were $0.34 per share, compared with $0.11 per share for the same quarter of last year.

Excluding the net gain on the property, the Company's adjusted diluted earnings per share were $0.15 per share, compared with $0.11 per share for the same quarter of last year, an increase of 36%.

As a result of our strong level of bookings, totaling $23.2 million in the first quarter, we ended the first quarter with a record high backlog of $30 million, compared with $21.5 million for the same period of last year, an increase of 40%.

Our balance sheet remains strong.

At the end of the first quarter, our cash on hand totalled a record high $24.4 million, or $2.17 per share, and our current ratio is 3.8.

Our debt totaled $7 million, which gives us a total debt to equity ratio of 9%.

This concludes my comments.

Thank you.

And I will now turn the call back to Ray.

Ray?

Thank you, Gary.

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

Market demand for Met-Pro's products remained strong.

Quotation activity continued to be high, and we were able to achieve solid bookings, resulting in a record high $30 million backlog.

Sales for the first quarter were the highest for any first quarter in the Company's history, and together with improved gross margins, resulted in significant increases in adjusted first quarter net income and earnings per share, when compared with the same period last year.

The record high $30 million backlog at the end of the first quarter, substantially all of which is expected to be shipped during the current fiscal year, provides a solid base for future sales growth.

The strategic measures we implemented last year, along with the additional ones we have already added this year and will continue to add, should positively impact our future gross margins.

Our balance sheet remains strong, and we will continue to invest in our Company to maximize our future sales and earnings growth.

In closing, we are pleased with the results for the first quarter.

The measures we have taken to improve our sales and marketing organization and increase our profitability, together with the continuing strong demand for our products, our record high backlog, and steady quotation activity, gives us confidence regarding our prospects for the second quarter and the full fiscal year.

I would thank all of you for your participation in today's call.

I will now turn the call back to Kevin Bittle.

Kevin?

Thank you, Ray.

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

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

Thank you.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from Ryan Connors.

Hi, guys.

Hi, Ryan.

Good morning, Ryan.

Good morning.

A few questions.

First off, on the gross margin, obviously up year-over-year, but it was a sequential downtick versus prior quarter, and I wondered if you could talk about kind of what drove that, if it was mix, or just what the big drivers were there.

Well, when you look at the makeup of the shipments for the first quarter, Ryan, the Product Recovery/Pollution Control Technologies group had 48% of the sales, versus 27.6, 27, 28% for Fluid Handling, and around 24% for Filtration and Purification.

That's versus 47 last year for the Product Recovery/Pollution Control, and almost 30 for the Fluid Handling Technology.

So when you look at it, we had a little bit more in the Product Recovery/Pollution Control side of our business as far as sales.

And typically, their margins are not as high as the Fluid Handling Technologies group, although they were up on a year-to-year basis, and they continue to improve.

Okay.

And that is part of the reason for that.

Okay.

That helps.

And in terms of last quarter, you talked about some shifting in terms of the logistical issues, pushing some orders forward, first quarter to second.

Are we completely caught up there?

In other words, did everything that should have shipped in the first quarter end up going out in the second quarter?

You mean everything that should have went in the fourth quarter went out in the first quarter.

Right, I'm sorry, right.

Okay.

You get me confused.

Yes.

When you look at -- if you go back to last year, you go back to the third and fourth quarter when we were putting the news releases out on the bookings, Ryan, many of them, the larger ones, basically said that the orders would be shipped in the second and third quarter.

So that is why we have confidence in the second and third quarter.

But primarily everything that should have shipped in the first quarter did ship.

Okay.

And then last one with, just in terms of the backlog, obviously the numbers there are just very impressive, but it does seem like we're starting to run up against the law of large numbers in terms of additional growth from here getting tougher to come by.

Is it fair to say that we kind of level off a little bit versus some of the rates we have been seeing that expand?

As far as on the sales side?

As far as on the growth of the backlog.

Well, I think there is still some room for growth there.

However, you are going to be starting to send -- in the second and third quarter you are going to have some large shipments going out, so that backlog may come down a little bit by the end of the third quarter.

But the activity is really strong right now, Ryan, as far as the quoting activity, and we expect some decent bookings.

So it all depends how the bookings turn out in the next two quarters.

Okay.

And them finally, Gary, just a housekeeping item, what was the precise tax rate for the core business, taking the real estate gain out of the picture?

The effective tax rate for the core business, Ryan, you should be using 33.5%.

And the real estate, the gain on the real estate, I use 37%.

So going forward into the second and third quarter and the balance of the year, we would estimate the tax rate is going to end up being 33.5%.

Okay.

Great.

That's helpful.

Thanks a lot, as usual, guys.

You're welcome.

Your next question comes from Rich Wesolowski.

Good morning.

Good morning, Rich.

Ray and Gary, the 1st Q earnings season, we've heard mixed reports from varied companies on the state of the domestic industrial economy, and just broadly speaking, how do you expect the demand trend, looking past the next maybe one or two quarters, where you can sense quoting activity?

Well, based on the information I've gotten from our general managers and vice presidents, the activity is pretty good.

It is still strong.

We're getting a lot of activity on the quotation side.

Our bookings have been solid.

And they're looking at good opportunities going forward.

So I think the opportunities for our business are still strong, as far as getting domestic bookings.

And also in the International side.

Well, I think the question was about the domestic bookings.

The International business continues to be very strong, also.

Okay.

Great.

I apologize if you covered this earlier, have you made any additional moves to raise prices following the round that was discussed on the second half '06 calls?

We continue to look at it on a case-by-case basis, and we have made some increases in various businesses.

They're selective.

Last year, there were quite a few that were across the board.

But this year, we're looking at where we're impacted by maybe a commodity price increase here and there.

And we've raised our prices accordingly.

Is the strength in the pricing concentrated in one segment over another, perhaps?

Not really.

When you look at the first quarter results, we did well in our Product Recovery and Pollution Control segment.

The gross margins were up in that segment.

The gross margins were up significantly in the Fluid Handling segment.

And in the Purification/Filtration Group, which typically has good high margins, they were about even.

Okay.

What stage are you guys at in expanding the water treatment chemical business to areas of the country where it hasn't been so strong historically?

We're pretty far along.

We have added some agents.

And that's where the impact comes in, as far as on the SG&A, when you look at the Filtration and Purification group, that's where you see a little bit of a dip in the income, and that's because we've added the agents we've added, sales and marketing people into that group.

And the first quarter, although our overall business isn't cyclical, the first quarter is typically -- I would say the toughest quarter for that group, because the chemical business can suffer from weather conditions.

Okay.

Are the entrenched suppliers that you're aiming on seed, are you competing against an alternative type of product or the same product that you now make, made by someone else?

Well, there's different formulas.

Everybody has a different formula that they use for treating a process, let's say.

What we're doing is we're looking at better opportunities, are there better opportunities both domestically and internationally, for us to purchase product that we can then blend into our product.

Okay.

Finally, just a little item.

Did you see a meaningful change in the pension expense since moving to the contribution plan?

We expect a savings of about $500,000 on an annualized basis.

In the first quarter we saved approximately $125,000 on the pension expenses.

Great.

Okay.

Thank you.

You're welcome.

Your next question is from [Christopher Matts].

Hello, Ray, Gary.

Hi, Christopher.

Morning, Christopher.

Just going off the previously asked revenue mix question, is there any way you can break out the revenue growth by say volume, price, currency, any of the above?

Let me just clarify that.

As far as you're looking as far as how it breaks down, between the two -- the three groups?

Yes.

Last year, for the first quarter, when you look at it, as far as we had 47% of our business was Product Recovery and Pollution Control Technologies.

And then it was 30% for Fluid Handling Technologies, and 23% for the Filtration/Purification Technologies.

This first quarter, Product Recovery/Pollution Control amounted to 48% of the total shipments in the first quarter.

Fluid Handling was about 27.5%, and Filtration and Purification Technologies, 24.3%.

Now, that is in comparison to the full-year numbers last year of around 51% for Product Recovery/Pollution Control Technologies, 28% for Fluid Handling Technologies, and then around 21% for Filtration/Purification Technologies.

Christopher, of the 11% sales increase, approximately 3% to 5% is related to the price increases.

Okay.

That helps.

Thanks.

Okay.

And going to the balance sheet, obviously cash balances have been steadily building, and with the recent sale of the real estate, you had a nice pop.

With that said, could you perhaps update us on your thinking regarding any potential cash deployment?

Well, as we've stated, numerous times, both in print and during our conference calls, we are looking at making some acquisitions, and we continue to look, and we've got a number of opportunities out there, and we're working towards hopefully bringing some of them to a close.

That's one end of it.

As far as -- we also are investigating a 1031 for the building that we sold in New York.

We're looking to possibly offset some of the tax consequences by purchasing a building and doing a 1031, Section 1031.

Those are the two main areas at this time.

I'm looking to do that as well on my own house, but a --

Good idea.

All right.

But that's all my questions.

Thank you.

You're welcome.

Your next question comes from Matt Zaute.

Hi, congratulations on the quarter.

Thank you, Matt.

I had a couple of questions.

One is you mentioned a strong quality backlog.

You can maybe elaborate a little bit better what you mean by that?

Are you suggesting there are better margin projects on line?

Or maybe there's just lower risk projects?

Well, I think if you look back last year, and maybe the year before, we had some projects that didn't do too well, as far as they came in below estimated margins.

They had profit erosion.

And we implemented a number of things on the project management side and also on the front end side as far as how we sell projects, and as a result, the projects that are now in our backlog are stronger as far as margin-wise, than they were at the same time last year.

Last year, at the end of the first quarter, we had a couple of jobs in there, a couple of projects, significant projects, that were much lower margins than what we see right now on our backlog.

So our backlog, overall, as far as gross margin is better than it has been in the past couple of years.

And that is the -- the reason is because of things we implemented, but also as we mentioned previously, our International business is doing very well, and we have had a number of news releases recently indicating that, and we're finding we're able to get some very good margins on the International side.

Okay.

So is it safe to say that they will likely be, let's say on average maybe better than the last couple of quarters?

Generally speaking?

I would say better than the quarters last year, the first, second and third quarter of last year.

Okay.

And then the second part is in regards to quotation activity, when there is this high activity, how much of the quoting actually translates to an actual order?

And what is maybe the time frame from quoting something to an actual order?

It varies from group to group.

When you get into the large engineered projects, that -- the quoting cycle from quote to actual closing of the job could be a year, year and a half, because it is such a large project and it has to go through so many channels for approval.

You go through contractors and engineers, the end customer, and so forth.

On other jobs, it is a very quick turn-around.

But the quotation activity, we're very selective.

We're a niche business, historically, and we continue to be a niche business.

So we don't try to be everything to everyone.

So we may get requests for quotes that we turn down.

So we're very selective.

And as a result, our hit rate is pretty high.

But again, it varies from division to division, and subsidiary, because of the type of projects you're quoting, and who your competition may be.

But typically, it is pretty high.

And then is there any kind of business where a contract could be substantial, and I will quantify it a little bit in saying at least, let's say at least $5 million?

Is there anything on the near horizon, any kind of projects that we're trying to bid on?

Well, we're quoting multiple projects, some in the multimillion dollar category.

And it is a matter of -- I don't believe we have anything right now that is at the point of possibly closing for that dollar amount.

But we have a number of ones at a million, 2 million, and so forth.

Those 5 million, 7 million like we received last year, as I said, there is a longer lead time from the quotation or the request for a quote, the quotation and then actually booking the job, but we are working on a number of multimillion dollar-type jobs.

Okay.

And my last question is a gentleman asked about cash deployment, but also the Company has been a steady kind of cash flow generator, and in this world that we're in, private equity firms are very interested in perhaps a company like yours, and given the size of your Company, has management or the Board considered maybe exploring strategic alternatives, and maybe you can just elaborate a little as to maybe why this may or may not be attractive to a private equity firm?

Well, we're always evaluating what our options are as a Company.

And we do that on a regular basis with our Board of Directors.

But we have not been contacted by anybody, as far as looking at all of Met-Pro Corporation.

We have had companies come and ask if we're looking to divest ourselves of one of our divisions or subsidiaries, and at this point, we're really not looking at that because we feel that each of our businesses has good strong potential, and the total Company has strong potential.

But you're correct, with the cash that we have on hand, the cash generation, that's what those companies with the private equity looks for.

But again, we're very diverse.

It is is not like you would be buying a company with one particular product that has numerous products and numerous markets, and that is a plus and a minus, depending what the private equity is looking to get into.

Okay.

All right.

Thank you.

You're welcome.

Matt, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Alvin Hoffman.

Ray, what percentage of your business is foreign?

25 -- I think for the quarter --

25.6%.

$5.6 million of sales were foreign in the first quarter, Alvin, which is 25.6%.

Last year for the whole year was 23.1 million at 25.3%, so our foreign sales continue to tick up.

In fact, the last four major orders we had, three of them were international orders.

Mefiag is included in that foreign business?

Mefiag Europe is included in there, yes.

No, Mefiag U.S.

or Mefiag Holland?

Mefiag B.V.

in Holland, and Mefiag Wanzeo in China are included in those numbers.

All right.

Okay.

Number two, there was a public relations presentation of 15 minutes I noticed on the Internet.

It says that the company preceding Met-Pro, as listed preceding Met-Pro, paid $9,999 for the service.

I would like to to ask if Met-Pro paid, and if so, how much?

Zero.

We did not pay.

Good.

We didn't pay any moneys, Alvin.

Good.

I don't like that stuff.

No, we did not pay.

I will be honest, Alvin, after we got done with the interview, they sent me a form to fill out where they are requesting that we pay, and I said that was not the deal.

And so we did not have to pay.

Congratulations.

Well, thank you.

You're a good businessman.

I'm finished.

Thank you, Alvin.

Thank you, Alvin.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

There are no further questions at this time.

Thank you, Stacy.

That concludes today's conference call.

We thank you all very much for your participation.

Thank you.

This concludes today's conference call.

You may now disconnect.