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Operator
Good morning.
At this time I would like to welcome everyone to the second quarter fiscal year 2008 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.
If you would like to ask a question during this time (OPERATOR INSTRUCTIONS).
Thank you.
Mr.
Bittle, you may begin your conference.
Kevin Bittle - Manager of Creative Services
Good morning and welcome to Met-Pro Corporation's earnings conference call for the second quarter ended July 31, 2007.
My name is Kevin Bittle and I'm 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.
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, 2007.
The earnings release is available on the Investor Relations page of our corporate website, www.met-pro.com.
I'd also like to 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, 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.
Ray De Hont - Chairman and CEO
Thank you, Kevin.
Good morning, everyone, and welcome again from Harleysville, Pennsylvania.
Earlier this morning we released our financial results for the second quarter ended July 31, 2007.
In a moment, Gary Morgan will provide more specific comments on the quarter's financial results, but prior to that, I'd like to offer these general comments on our performance.
We're very pleased with the Company's overall performance during the second quarter.
Second quarter sales were the highest for any quarter in the Company's history.
The strategic measures we have implemented over the past year to improve operational performance continue to help increase gross margins and improve profitability.
As a result, net income for the second quarter was the highest of any quarter in the Company's history excluding the first quarter of this fiscal year, which included a net gain of approximately $2.2 million on a sale of property previously associated with the Company's Sethco business unit in Hauppauge, New York.
In addition, earnings per share increased significantly when compared with the second quarter of last year.
Quotation activity remained strong and the Company's backlog of orders, substantially all of which is expected to shift during the current fiscal year, increased 11% when compared with the same period last year.
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?
Gary Morgan - SVP of Finance and CFO
Thank you, Ray.
Earlier today the Company reported record high results for the second quarter.
Net sales for the second quarter ending July 31, 2007 were the highest sales of any quarter in the Company's history, totaling $27.6 million compared with $23.8 million for the same quarter last year; an increase of 16%.
This increase in consolidated net sales was due to a 20% increase in sales in the fluid handling technology segment, a 17% increase in the filtration and purification technology segment, and a 14% increase in the product recovery and pollution control technology segment.
The gross margins for the second quarter ending July 31, 2007 was 32.7% compared with 28.3% for the same period in the prior year.
This increase in gross margin was due to higher gross margins earned in both the product recovery and pollution control technologies and fluid handling technologies reporting segments, resulting from continuation of strategic measures previously implemented, including selected sales price increases and improved purchasing practices.
Excluding the first quarter gain on the sale of the New York property, income from operations for the second quarter ended July 31, 2007 was the highest in the Company's history, totaling $3.6 million compared with $2.5 million for the same quarter last year; an increase of 45%.
Income from operations doubled in the product recovery and pollution control technology segments and grew 51% in the fluid handling technology segment, while the income from operations in the filtration and purification technology segment decreased by 43%.
The decrease in income from operations solely within the filtration and purification technology segment was primarily related to increases in expenses relating to the expansion of the sales organization which took place in the third quarter of last fiscal year.
Excluding the first quarter gain on the sale of the New York property, we reported the highest second quarter net income of any quarter in the Company's history, totaling $2.5 million compared with $1.8 million for the same quarter last year; an increase of 40%.
Our diluted earnings per share for the second quarter ended July 31, 2007 were $0.22 per share compared with $0.16 per share for the same quarter last year; an increase of 38%.
The Company ended the second quarter with a strong backlog of $26.5 million compared with $24 million for the same period last year; an increase of 11%.
Our balance sheet remains strong.
At the end of the second quarter, our cash on hand totaled a record high $24.4 million or $2.13 per share, and our current ratio was 3.7.
Our debt totaled $6.5 million which gives us a total debt to equity ratio of 8.3%.
This concludes my comments.
Thank you, and I will now turn the call back to Ray.
Ray?
Ray De Hont - Chairman and CEO
Thank you, Gary.
Let me focus again on the things that essentially tell the story for the second quarter.
Sales for the second quarter were the highest for any quarter in the Company's history, and together with improved gross margins, resulted in the highest net income for any quarter in the Company's history as well as a significant increase in second quarter earnings per share when compared with the same period last year.
The strategic measures we have implemented over the past year to improve operational performance continued to help increase gross margins and improve profitability.
Our balance sheet remains strong and we continue to invest in our Company to maximize our future sales and earnings growth.
Quotation activity remained high and we ended the second quarter with a strong backlog.
In closing, we are very pleased with the results for the second quarter.
We believe the strategic measures we have taken to improve our sales and marketing organization and increase our profitability have not only positively impacted our second quarter results, but should also positively impact our future results.
These strategic measures, together with our strong backlog and high quotation activity, allow us to remain optimistic regarding our prospects for the third quarter and the full fiscal year.
We are executing the strategic plan we have laid out and remain committed to creating long-term sustainable value and growth for our shareholders.
I'd like to thank all of you for your participation in today's call.
I'll now turn the call back to Kevin Bittle.
Kevin?
Kevin Bittle - Manager of Creative Services
Thank you, Ray.
At this time we would welcome any questions you may have.
I would like to ask our operator to provide instructions for this portion of the call.
Thank you.
Operator
(OPERATOR INSTRUCTIONS) Ryan Connors, Boenning and Scattergood.
Ryan Connors - Analyst
Good morning, guys.
Congrats to you and your staff on a great quarter.
Just had a few quick questions.
Number one, Ray, I wonder if you could drill down on kind of the relative strength among your various end markets; where you're seeing strength and which areas, if any, are somewhat weaker.
And especially how that breaks down between the different reporting segment.
Ray De Hont - Chairman and CEO
One of the areas that we have seen strength, of course, is in the ethanol market.
Our systems group has done quite well in that market.
There's a number of opportunities out there, not only for future orders but also we had some significant sales in that area during the second quarter.
Our dual division also has seen some good things on the municipal side of the business.
Again, some good shipments in that area and some -- good opportunities, some of which have come up even since our last conference call.
The last conference call I actually was asked the question whether or not we had any $7 million type potential jobs out there or $3 million types.
And at that time we did not.
At this time we do.
We've quoted a job that's worth approximately $7 million.
It has been quoted through our systems group and we're optimistic about it.
We've also quoted some other jobs in the $3 million, $2 million range.
So the quotation activity remains strong in the municipal and in the area as far as ethanol.
The fluid handling is still going strong as far as the normal day-to-day bookings.
The one area that's been a little weak has been the large projects.
As far as last year, we had the Dubai project that we booked approximately around the July time frame and we have not had that large of a project at this point in the year.
We are working on a number of projects but we have not booked one or sold one.
So that's one area that -- the projects, we need to close some of the bigger projects.
When you go through other areas of the Company in the filtration and purification, one area that's been flat or a little bit down has been our keystone filter product line.
But we're looking at doing some things in that area.
We've added some key equipment that will allow us to expand our product mix and improve our gross margins in that area also.
So those are some of the areas that are strong and some of the weaker areas.
Ryan Connors - Analyst
That's great stuff.
Thanks, Ray.
It seems like obviously the big orders are fantastic for business, but it seems like they do make the sequential backlog comps a little bit misleading.
I wondered -- especially right now with this $7 million ethanol order that you were talking about -- I wonder if you -- is there any way you can break out exactly when that order began shipping and how much of it's come off the backlog each quarter, so that we can kind of get an idea what's going on organically in the backlog?
Or should we just pretty much disregard sequential comps in the backlog until that order is finally rolled off?
Gary Morgan - SVP of Finance and CFO
Ryan, this is Gary.
Relating to the $7 million order, $2.9 million of that order was shipped in the second quarter.
The balance of the order, which is a little over $4.3 million, will ship in the third quarter.
Ryan Connors - Analyst
Okay.
Great.
Thanks, Gary.
Gary Morgan - SVP of Finance and CFO
I think you'll see part of it, that's the drop in the backlog.
Ryan Connors - Analyst
Right, exactly.
And then the last question I have was more of a strategic question.
One of the things we've been hearing out there from other companies is that private equity is starting to peel back its involvement in M&A market and that that's opening up opportunities for the strategic buyers to get deals done at more reasonable type multiples.
It strikes me that that would be particularly true for a company like Met-Pro that does have a cash balance and therefore this credit crunch that we're hearing so much about really shouldn't impact your buying power.
So I wondered if you could just talk about whether you're seeing any of that in terms of private equity being less involved in the markets you're looking at and how all that impacts your outlook for taking advantage of your strong balance sheet?
Ray De Hont - Chairman and CEO
We are seeing that, Ryan.
We're seeing where basically they're at the point where they want to, let's say, flip the businesses that they had bought four or five years ago.
And we're working with an M&A firm to pursue these opportunities.
But we are seeing more opportunities, we're setting up more meetings with these people.
I think also you're correct that the multiples will probably be lower than they had been.
Ryan Connors - Analyst
Great.
Well, I appreciate all the color.
Thanks, guys.
Operator
Rich Wesolowski, Sidoti and Company.
Rich Wesolowski - Analyst
We heard Flowserve recently talk in their second quarter about strong pricing in the pump market.
I know you guys don't operate exactly the widespread geographies and markets they do, but judging by your pump margins, you saw that as well.
Is the pricing leverage concentrated there?
Or is it more widespread throughout the business?
Ray De Hont - Chairman and CEO
I think the pricing as far -- you're talking about the high margins or --?
Rich Wesolowski - Analyst
Yes.
Ray De Hont - Chairman and CEO
If you look at our total business, the margins have increased in both the fluid handling side of our business as well as the product recovery pollution control side, where we had a little bit of a -- even the gross margins have increased in the filtration and purification side -- or actually they've been a little flat on that side, sorry.
But the fluid handling and the product recovery both has seen some significant increases in their gross margins.
And that's primarily based not just on the market conditions themselves but also some of the strategic measures that we took during the past year, especially in the product recovery pollution control side of our business.
So that business is now moving up the -- if you look at the product mix for the two quarters -- this quarter, the second quarter of this year and the second quarter of last year, the product mix is basically the same.
So it's not one group or the other that's really driven the increase in the income.
Rich Wesolowski - Analyst
Okay.
That's what I was trying to figure out.
The gross margin you saw those two businesses, which of it is generated by the price increases, which of it is generated by the internal initiatives, and --?
Gary Morgan - SVP of Finance and CFO
Rich, this is Gary.
If you look at the segmentation reporting, you see income from operations in the fluid handling; on a six-month periods it's at 20.4%.
The last six-month period ending July 31, 2006 was at 14.4%.
That's a significant increase.
Of that increase, I would say that 3 to 5% on the sales side was related to the price increases.
Rich Wesolowski - Analyst
Okay, great.
How far are you along generally in aggregating your purchase orders and any other internal initiatives you have in gaining gross margin?
Ray De Hont - Chairman and CEO
We're quite aways with the purchasing side of it.
The organization has been set up.
We are centrally managing that organization.
We now are buying a number of items across the globe rather than just domestically or regionally.
So that's pretty much in place.
We have our three segments set up and we're doing some things, as I've mentioned before, we've evaluated certain aspects of our groups and to make them more efficient and we're implementing those changes as we go along.
We just recently had all of our managers in -- as a matter of fact, it was last week -- for two days to really go over where we've been looking through the rearview mirror and where we're going looking through the windshield.
And it's a -- it was a good meeting.
It was a good meeting for brainstorming and we'll continue to go after the strategy that we've laid out in front of us.
Rich Wesolowski - Analyst
Okay, I'm correct in assuming that ultimately, say, a 34, 35% type of gross margin is where you need to get?
Ray De Hont - Chairman and CEO
Yes.
And that would be in the -- as I've been saying -- somewhere in the three to five-year period.
Rich Wesolowski - Analyst
Yes.
You had some pretty bullish comments on the quoting activity relative to what we heard last call.
Is it correct to assume you've seen virtually no evidence of a tightening corporate credit in your markets?
Ray De Hont - Chairman and CEO
Our quoting activity has been very high and it continues to be very high.
That was one of the topics that we discussed last week with our managers to make sure that we were seeing the same thing that we had been seeing.
They all came back very strongly that the quotation activity is high and very strong.
One area that we may be seeing something with the credit is where the closing of the jobs, as far as it's taking longer on some of the large projects to close than it may have, let's say, a year ago.
Not that they're canceling the job or anything like that but it is taking longer on that end.
Rich Wesolowski - Analyst
Okay.
And finally, my model spits out a free cash flow number for this year that rivals anything that I have you down for over the last 15 years.
Is that in line with your expectation?
Gary Morgan - SVP of Finance and CFO
Our cash flows from operating activities for the six-month period ended up being about $5.5 million, Rich.
And we expect that trend to continue through the balance of the year.
Rich Wesolowski - Analyst
Great.
Thanks a lot.
Operator
[Richard Verdi], [Verdi, Vance and Company].
Richard Verdi - Analyst
Hi guys, nice quarter.
Just a couple quick questions.
On the product recovery segment, could you give a little color on what products did well and what was weak there?
Ray De Hont - Chairman and CEO
Well, on that side of the business, I think they all did pretty well in comparison to the prior three months.
The one area that -- they've all done well on the sales side and the overall group in general did well.
If one division was off -- when I say off to a slower start, where I think they'll pick up momentum as they go -- it would be the dual division.
I see them picking up some steam as we go forward because they have a very hefty backlog.
Richard Verdi - Analyst
Okay.
Next question is on the gross margin.
I know you said the product mix and better purchasing practices improved, but how about on the international side?
Could you say that maybe some of that was improved from going abroad and getting better prices abroad, what have you?
Ray De Hont - Chairman and CEO
I think a couple of things as far as selling overseas, I've said this before in our conference calls and various meetings, that we tend to get better margins on our products when we sell them internationally.
The other thing is by going internationally and procuring equipment or pieces that make up our equipment, that also has improved our gross margin.
So, it has played a good part in our success as far as driving that margin up.
Richard Verdi - Analyst
Are you guys still shooting for a 50/50 split over the next three to five years?
Ray De Hont - Chairman and CEO
I think that's going to happen, yes.
I think there's a lot of -- a wealth of opportunities internationally.
There continue to be opportunities domestically but the greater opportunities I think for the Company are international.
Richard Verdi - Analyst
Okay.
One last question.
On that filtration segment on the operating margin, I know it's from expanding the sales force there and it's been down a little bit here.
Do you think for modeling purposes, running it around 6% is a decent number?
Or could you give a little detail on that?
Gary Morgan - SVP of Finance and CFO
Rich, I would start modeling that up to higher numbers going into the third and fourth quarter and into the following year.
(multiple speakers) raising that number up.
Richard Verdi - Analyst
Okay.
The other part on that too is for the sales force there, are they commissioned, are they salaried, going away to -- and then that will go away to commission?
And if so, how long is that period?
Is that a two-year period, three-year period?
Ray De Hont - Chairman and CEO
Well, they -- a good portion of them are agents, which (multiple speakers) [work them] off of commission.
And what has happened is that we had some accounts -- there were some accounts that we decided we needed to have better service and account management on.
And that's why we brought these agents in.
That was for those accounts.
But also the areas these accounts were in, we felt we could drive the sales up by bringing these agents in.
So when you look at the numbers this year versus last year, remember a lot of these changes took place in the third quarter.
So they weren't actually in the numbers for the first half of the year last year.
So they have been in the numbers for the first half this year.
Richard Verdi - Analyst
Okay, perfect.
Hey, thanks, guys.
A great quarter again.
Operator
(OPERATOR INSTRUCTIONS) Brian Cawolchick, WestPark Capital.
Brian Cawolchick - Analyst
Hi, guys, thanks for taking my questions and congratulations on the quarter.
Give me an idea, if you would, please, of the split of the business between domestic and international?
As I look at your goal to get to 50% mix, where are we now for the second quarter and where are we year-to-date so I can kind of get a feel for the opportunities that you're seeing internationally?
Gary Morgan - SVP of Finance and CFO
Brian, in the second quarter, 29% of our sales came from international, which is up from the prior second quarter of last year 17%.
So a significant increase over the prior second quarter.
For the year-to-date, we're about 27% of our sales are international compared to last year at the same time it was 18%.
So we're up about 9% over the same period last year on -- of sales.
Brian Cawolchick - Analyst
And you're looking to move that kind of split the 50/50 to kind of summarize your targets over the next three to five years?
Gary Morgan - SVP of Finance and CFO
Yes.
Ray De Hont - Chairman and CEO
Yes.
Brian Cawolchick - Analyst
And the domestic side of the business, obviously that projects some pretty substantial growth internationally.
What are you seeing domestically as it relates to a growth target over that same period in time?
Is that a single digit grower, a flat -- you're seeing a flat?
Where are you seeing the domestic business over that same period?
Ray De Hont - Chairman and CEO
I think we're still striving for a double-digit growth in the domestic business based on what we see and what we think that we can do with our products and our organization.
That varies, of course.
The percentages vary depending on what you ship in a month or a quarterly basis.
In some months you're going to have a much stronger international than domestic and in other months it could flip.
But over a period of time we think that, again, it will get back to 50/50 -- it will go to 50/50 as a split and we think that the domestic business will have grown at a double-digit clip during that time frame.
Brian Cawolchick - Analyst
Very good.
Obviously margins benefited.
As you said, the mix was the same year over year, margins benefited from some of your strategic initiatives and some pricing power.
Anything left kind of in the quiver, if you will, to continue on with your initiatives to drive margins?
Ray De Hont - Chairman and CEO
I think so.
I think that we've done a lot on the purchasing side but there's more to do.
I think that there's opportunities for us to procure product overseas and we haven't seen the full impact of that yet.
We're buying things, we're buying chemicals and equipment, various pieces that make up our equipment in many different areas of the world right now.
Some of that has not actually hit the results.
Gary Morgan - SVP of Finance and CFO
I would say we're probably in the third inning of the game right now.
So we're in the beginning.
We've got a lot more opportunity, Brian.
Brian Cawolchick - Analyst
Excellent.
Good to hear that.
Would you remind me about this split in the quarter in the percentage of revenue from kind of the aftermarket in consumables?
Ray De Hont - Chairman and CEO
We have it quarterly?
Gary Morgan - SVP of Finance and CFO
The numbers -- I would say the aftermarket sales for the first quarter, Brian, were somewhere in the area about 35%.
Brian Cawolchick - Analyst
35% in Q1?
Gary Morgan - SVP of Finance and CFO
In Q2.
And then the year-to-date it was probably a little heavier than that, about 38% in total.
Brian Cawolchick - Analyst
Got you.
And last question and I'll jump back.
In looking through some of your filings, I noticed that a significant amount of the facilities are actually owned facilities.
And kind of thinking back to what happened with the New York transaction where you unlocked a lot of value there due to the equity in that property, are there other opportunities to -- maybe to structure similar transactions?
Ray De Hont - Chairman and CEO
Of course there's opportunities but we're not looking to, at this point, we're not looking to sell off our properties unless we make a consolidation somewhere amongst divisions or whatever.
But just as we did with the Sethco facility, what prompted that was we moved the Sethco operation from Hauppauge to a facility here in Telford, Pennsylvania.
As a result, we had the property that was dormant to sell.
But we're constantly looking at our organization and tweaking it as to where we go in the future.
So if the opportunity presents itself to consolidate two businesses and we feel that's the right strategy to take, we will do it and then of course look to sell that property.
Brian Cawolchick - Analyst
Sure, I guess the point I'm driving at, Ray, is that obviously by the sale of that property resulting in a significant gain, the market was significantly above book.
I'm wondering if that same relationship holds in your opinion kind of throughout the rest of the owned real estate?
Gary Morgan - SVP of Finance and CFO
Throughout all the real estate that Met-Pro owns, most of it's under book -- the book value is low compared to the market value.
Of course over the last year or so real estate value has gone down.
But yes, the book value is extremely lower than the market value for all the real estate that Met-Pro owns.
Brian Cawolchick - Analyst
Got you.
All right, guys.
Thanks a lot.
Gary Morgan - SVP of Finance and CFO
There's opportunity there but right now we're using the real estate for our use.
Brian Cawolchick - Analyst
Sure, understood.
Thanks, guys.
Operator
(OPERATOR INSTRUCTIONS) Rich Wesolowski, Sidoti and Company.
Rich Wesolowski - Analyst
Hi, just a follow-up on the earlier point.
Putting in the international sales and then backing into domestic, I noticed the domestic sales were actually down 1% this quarter, if I'm not mistaken.
I just was hoping to get you to reiterate the factors of the market that give you confidence that you can get back to a double digit domestic revenue growth rate over the next year or two?
Ray De Hont - Chairman and CEO
It's primarily a timing issue right now as far as -- we were able to ship quite a bit of our international business with the timing of the international sales in shipments for the second quarter and the timing of the domestic shipments.
We've got some large domestic shipments that are going out over the next two quarters.
But the opportunity we see is -- the quotation activity is very, very strong.
And we're seeing large projects as well as our typical day-to-day business.
So, that's where we look at and say that we have the opportunity to grow these businesses -- the product recovery overall -- by double digits.
Rich Wesolowski - Analyst
Excellent.
Thanks.
Operator
(OPERATOR INSTRUCTIONS) Thank you.
This concludes today's conference call.
You may now disconnect.
Kevin Bittle - Manager of Creative Services
Thank you.
That concludes today's conference call.
We thank you all very much for your participation.