CECO Environmental Corp (CECO) 2009 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Met-Pro second-quarter 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. I will now turn the call over to Kevin Bittle, Manager of Creative Services. Please go ahead, sir.

Good morning and welcome to Met-Pro Corporation's earnings conference call for the second quarter of our fiscal year 2010, which ended July 31, 2009. My name is Kevin Bittle, and I'm with the Company's Creative Services department. With me on our call this morning are Ray De Hont, our Chairman and Chief Executive Officer; and Gary Morgan, our Senior Vice President of Finance and Chief Financial Officer. Shortly you'll hear comments from both of these individuals. But before we begin, I'd like to make a few comments.

I'd 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, 2009, that was filed with the SEC for important factors that, among others, could cause our actual results to differ from any results that 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?

Thank you, Kevin. Good morning, everyone, and welcome again from Harleysville, Pennsylvania. Earlier this morning we released our financial results for the second quarter. I hope all of you have had the opportunity to review them.

Entering the current fiscal year, we felt that the global economic slump would present challenges to our first half of the year financial results, and our performance in the second quarter is consistent with those expectations. This year we are also bearing the added burden of additional pension, health insurance and stock compensation costs.

As a result, both net sales and earnings in the quarter were down from the second quarter of last year. On a more positive note, during the second quarter we were able to sustain solid gross margins, generate significant cash flow, strengthen our balance sheet and implement operational and strategic improvements to more effectively leverage our resources. Demand in our various industrial, municipal and other markets around the world remained weak through the second quarter, and that can be seen in our net sales. Our markets tend to lag overall economic activity as capital spending inevitably falls after any economic slowdown is identified.

In the short run, buyers can temporarily postpone replacing, improving or repairing equipment. But in the long run, making these investments is ultimately unavoidable. Despite the fairly significant drop in net sales this quarter, gross margins were still a solid 34%, due mostly to the various efficiency initiatives implemented over the past several years, including facility consolidations, global sourcing, more effective logistics and lean manufacturing, as well as the ability of our flexible manufacturing strategy to quickly adjust costs to match our level of business activity.

For example, the implementation of more efficient procurement processes helped decrease our relative cost of materials by 380 basis points this quarter. Building on the success of these initiatives, we have expanded our lean manufacturing program more broadly throughout the organization and are implementing a long planned improvement to our ERP system. Both investments will make us better prepared for the recovery and are expected to provide significant returns over the long haul.

We're also undertaking a restructuring of our Product Recovery and Pollution Control Technology segment. By shifting to a matrix organization structure, our Product Recovery and Pollution Control Technology segment will be better able to leverage its extensive engineering, project management and sales resources across its various product lines. We believe this will not only improve operations but will create additional capacity and expertise to pursue new growth opportunities in markets where we currently have a limited penetration or no presence at all.

We also have the advantage of an extremely strong balance sheet. In the second quarter, cash flows from operating activities were $4.2 million, bringing our total cash flows from operating activities to $10.1 million through the first six months of fiscal 2010. At July 31, cash was at an all-time high of $29.2 million.

Keep in mind that our cash is net of over $11 million in cash distributed to shareholders in the form of stock repurchases and dividends during the past 12 months. With credit markets still tight and with the economics slump pressuring earnings throughout our industry, our historically conservative financial management practices have provided us with the resources we believe will be useful in facilitating our long-term growth strategy, both from an organic and an acquisition perspective.

Though bookings in the second quarter are down from a year ago, they are up sequentially from the first quarter, while bid activity has seen a marked improvement. In addition to a better rhythm to our routine orders and inquiries, we are now starting to see more of the larger $2 million to $5 million opportunities and even a large $20 million opportunity that had been rarely seen in over a year. While we are optimistic, there are no assurances that any of these opportunities will result in orders.

There are signs of improvement in the number of our markets. For instance, in our Mefiag business, which was one of our first businesses to feel the effects of the global slowdown, orders and activity trends are on the rise. Consistent with the thesis that businesses to have first felt the economy's ill effects will be the first to experience any recovery, we are encouraged by the improvements in Mefiag's markets.

The same can be seen in our municipal markets where the federal stimulus program is starting to manifest itself in renewed spending. In July we booked an $825,000 contract for a municipal water treatment facility and a $500,000 thermal oxidation order for a municipal landfill. These are projects that had been delayed as the economy began to falter.

Along with the improvement in the new project opportunities we are experiencing, we are also seeing a similar improvement in the quantity and quality of acquisition opportunities. Clearly, in an environment where many buyers are being limited by constraints in the credit markets, our financial strength, reputation and performance are characteristics that many acquisition candidates find attractive. Nevertheless, we are maintaining our discipline to only pursue acquisitions that make sense from an operational, strategic and financial perspective.

The first half of fiscal 2010 has been a challenge, and the lagging effect on our markets from the economic slowdown continues to represent some near-term risk. We are making significant progress in these difficult times with the strongest balance sheet in our Company's history and solid gross margins. Operational efficiency continues to improve, and we remain prudent in our expenditures even as we invest in new programs that will improve our productivity and create new resources to pursue growth opportunities previously beyond our reach. Our strategy is to get the most out of our resources by leveraging our existing investment and by creating additional growth opportunities to attack new horizontal and geographic markets where we believe the quality, dependability and reliability of the Met-Pro brand can succeed.

I would now like to ask Gary Morgan to review our recent financial performance in more detail, after which I will provide some concluding remarks before we take your calls and questions. Thank you, Gary.

Thank you, Ray. Met-Pro reported fiscal year 2010 second quarter net sales of $20.9 million, down 25.8% from last year's record second-quarter net sales. Net sales continued to reflect the lagging effects of the global economic slowdown on industrial and municipal demand, especially large project work, which we have seen slow over the past several quarters.

Net sales in our Product Recovery and Pollution Control Technologies reporting segment were $10.3 million, down 27.3% from the second quarter a year ago. Our Product Recovery and Pollution Control Technologies reporting segment is highly sensitive to changes in capital spending. As a result, this segment continues to be most predominantly reflect the lagging effect of our markets from the struggling economy.

Net sales in our Fluid Handling Technologies reporting segment were down 27.2% compared with the second quarter of a year ago. Last quarter we mentioned that we have started to see some flattening in this market, temporarily slowing the strong growth exhibited by this segment over the past few years.

In our Filtration and Purification Technologies segment, net sales were down 6.5% from the second quarter a year ago. Our Keystone Filter business has been slow, while sales in our Pristine business unit seem to be holding their own, although we are feeling the effect of intense competition on growth and margins.

As Ray mentioned, our Mefiag Filtration Technologies reporting segment was one of our first businesses to feel the onset of the economic slowdown. While net sales in this segment continued to remain far off the pace of a year ago, there are some signs of recovery in their very economically-sensitive markets.

For the second quarter, the consolidated gross margins came in at 34%, virtually unchanged from a year ago, although sales in the quarter were down by over $7 million, or 26%. Our strong gross margins in the second quarter were driven by efficiency initiatives, such as consolidation and global sourcing as well as lower commodity cost.

On a relative basis, cost of material in the quarter were down 380 basis points from the second quarter of last year. Our gross margins were strong in the second quarter in spite of the fact that product mix actually had an unfavorable variation in the quarter, due to lower sales in our high-margin Fluid Handling Technologies reporting segment.

On a consolidated basis, income from operations in the second quarter was $1.8 million or 8.5% of net sales compared with 14.2% of net sales in the same quarter of last year. The lower consolidated operating margins were a function of a 26% decrease in sales volume and an increase in certain expenses which are tied to variables outside our control, such as the performance of the stock market.

Our pension, health care and stock option expenses in the quarter were up approximately $450,000 relative to the same period a year ago. The combined impact of these various items on the year-over-year quarterly earnings comparison was approximately $0.02 per share.

For the quarter we reported net income of $1.2 million or $0.08 per diluted share. Adding back the various charges of $450,000 previously mentioned would have made this quarter $0.10 per diluted share. Cash flows from operating activities for the quarter amounted to $4.2 million, which compares with negative cash flows in last year's second quarter.

As a result, Met-Pro's balance sheet is the strongest it has ever been, with cash on hand at the end of the quarter a record $29.2 million or $1.99 per diluted share. Cash is up $6.5 million from the same period a year ago, even after distributing over $11 million in cash to shareholders in the form of dividends and share repurchases.

Year to date, net sales were $40.5 million, down 20.2% from the $50.8 million for the first half of last year. The gross margin percentage for the first half of this year was 34.8% versus 33.9% for the first half of last year. Total selling, general and administrative expenses for the first half of fiscal year 2010 were up $350,000 or a little more than 3% from last year, but were actually down when normalized for pension, health care and stock option cost.

Net income for the first half of this year were $2.1 million, down from $4.6 million for the first half of last year, while earnings were $0.15 per diluted share, down 50% from the earnings of $0.30 per diluted share in the first six months of last year.

One concluding thought -- although our income statement exhibited some unfavorable second-quarter variances when compared against the prior year, our balance sheet remains strong. We believe the conservative financial management we have practiced over the years has enabled us to consistently reward shareholders with attractive dividends and stock repurchases in the near-term while providing sufficient resources to invest for the healthy growth of the Company over the long-term.

Given current credit conditions and earnings pressures, we believe we are in a very strong competitive position, which will enable us to continue to generate attractive returns for our shareholders, especially as our markets recover.

Thank you, and I would now like to turn the call back to Ray.

Just a few concluding thoughts before we open the call to questions.

Last quarter we said we thought the second quarter would be challenging as the economic slowdown stalled the progress of capital spending that was still in the pipeline. We saw this as an opportunity to plant the seeds for the eventual recovery by investing in our business at a time when many in our industry were struggling to simply survive. We have been successful in accomplishing many of our objectives while sustaining profitability, generating positive operating cash and strengthening our balance sheet during some of the most difficult economic conditions in recent memory. As I mentioned earlier, though, bookings for this quarter illustrate the -- although bookings for this quarter illustrate the hurdles through which we are still navigating, inventories need to be replenished, equipment needs to be maintained, and regulators have not relented in pressuring business to improve efficiency and reduce harmful pollutants.

Over the long term, we are confident that our Company is well positioned to capitalize on these powerful global trends and create long-term sustainable growth and value for our shareholders.

I'm also pleased to announce that on June 3, our Board of Directors declared a quarterly dividend of $0.06 per share payable September 11, 2009 to shareholders of record at the close of business on August 28, 2009. This is the 34th consecutive year Met-Pro has paid either a cash or stock dividend.

I'd like to thank the many loyal, dedicated and talented employees who have contributed to our success as well as thank our shareholders for their continued support. I would also like to thank all of you for your participation in today's call. I'll 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 the operator, Lori, to provide instructions for this portion of the call.

(Operator instructions) William Bremer, Maxim Group.

Let's go into your Fluid Handling division a little bit. Margins there sequentially pulled back; year-over-year, they are down 670 basis points on the operating margins there. Can you provide us a little information of what's happening here?

Well, the biggest part of that, William, of course, is the reduction in sales. If you look at, let's say, the last three months, the sales in that group for the Fluid Handling went from $7.9 million last year to $5.7 million this year. So you have that large sales differential where you can't -- basically, you struggle to cover all the expenses for operating the business. So the operating margin went down that way.

We are doing things to improve that operation, and the lean manufacturing is a significant program that we're actually implementing. We're getting pretty far along there, and we see significant progress already. But we see future progress as well.

Have you had to cut any pricing, any prices, to stay competitive?

If we have to, William, it has been more on a select basis, not across the board. We are still -- when you look at the total Company, the gross margins have been solid. And that's a tribute to the people as far as the purchasing people and the various things we've done along the way. And if anything, we see as we go forward still -- our goal is still to drive those margins up over the next three years or 3 to 5 years, as we've been saying all along. And in order to do that, we are implementing new programs, as I said, such as the lean manufacturing and the ERP system.

Okay. Let's go into the Mefiag. Pretty much saying that we've seen the bottom of that market and we'll probably see some sequential improvement going forward. Can you provide us a little more on that?

Yes. Over the last several weeks things are starting to open up a little bit. We've had several projects, anywhere from -- remember, this is a small business -- but anywhere from $80,000 up to EUR200,000. And it has not just been in one place, it's been around the world. So we've seen an $80,000, a EUR200,000, a EUR150,000 type projects that you haven't seen in a long time with Mefiag because the automobile industry, the housing industry -- as everybody knows, they've been really down. And that's a big part of the metal finishing and plating product.

So we're starting to see things that we haven't seen in a long time. And these are not only big jobs but profitable, good-margin jobs.

Okay, excellent, that's good to hear. Now, in terms of your G&A, you've done some restructuring, nice sequential pullback from the first quarter. How much more should we anticipate, or are we pretty much at the level that we should be using going forward around this $2.8 million?

On the G&A side, I would recommend that you would use the $2.8 million going forward is a dollar amount. Remember, the lower the sales, the higher percentage. I would recommend, though, using $2.8 million going forward.

Richard Verdi, Sturdivant & Co.

I wanted to say, with the economy the way it is, it wasn't that bad of a quarter, especially after you put back that $0.02 due to the issues outside of your control there. Looking out here through the rest of fiscal 2010 and into fiscal year 2011, with Product Recovery and you just go through the different segments, where do you think you see the most opportunity? Where are you really going to get the bang for your buck there?

Where we are seeing some big opportunities right now, Rich, is on the Product Recovery/Pollution Control side. We've seen some opportunities recently in the $2 million, $5 million, even one as high as $20 million. And this is globally; this is just not domestically. And we have not seen -- our industry has not seen these type of opportunities for well over a year. So if we see a big uptick, if some of these come through, it most likely will be on the Product Recovery/Pollution Control side of the business. That's not to say that the other side doesn't have opportunities, but the real big opportunities are on the product recovery/pollution control side.

Okay. And I remember in last quarter's call, you had mentioned that the day-to-day business is still ticking along. Is that still the case? Are you seeing any kind of negative issues there?

Well, during the second quarter as well as the first quarter, as I believe I mentioned during the last conference call as well as in the news release and various other things that we've published, that we did see a little bit of a slowdown on the Fluid Handling side as far as the day-to-day business. I think that that industry on a whole has seen that. You look at the other players in that industry, their new orders have slumped. And part of that is because I think people have really tightened down on their inventories. Some of the manufacturing facilities that are out there -- they're not up to full production, so they're running at a much lower percentage of capacity. And that has impacted the Fluid Handling side. Eventually, though, in order to run these manufacturing plants and as the economy comes out of it -- and of course, recently, we are hearing that the economy has bottomed out and things should be going forward. We'll see, as time will tell. But as that starts to happen, I think you'll see them starting to build their inventory a little bit more and also replacing some of the pumps they have been using patchwork on.

So, for the most part, though, day-to-day stuff is still ticking along? And so, it's okay, for the most part, what you are saying?

Yes. For the most part, I would say yes.

Okay, so for the most part, the day-to-day business is fine and you are starting to see the larger opportunities come back into play here with the Product Recovery, which sounds good.

Now, in terms of mix on a segment basis, looking out throughout the rest of the year, what would you think -- what would you think would outperform? Would you think that Fluid Handling is going to do a little bit better than the Product Recovery, or can you just give me a little bit of color on there?

Rich, I would say that we have flattened out on the Fluid Handling side and probably also in an uptick mode on the Product Recovery side from the first quarter, even. I would say you will see an uptick on both the Fluid Handling and the Product Recovery side of the business.

What we are seeing now, Rich, and what we are hearing from the field, from our distributor and sales reps, that they are seeing more activity. And the big thing is, where you would get a big uptick if you happen to get one of these big projects, that that can really make things happen a lot quicker if you were to get a $5 million or even -- if you were to get to $20 million, that's a big uptick. But if you can get a couple of the $2 million, $5 million type jobs, that makes things a lot easier.

I'm just trying to think of mix here when I'm trying to model out the gross margin. Okay, now, there were some issues before, on the last call, about timing, what have you. Can you just touch on that a little bit? Is that really tightening up here? Just give me a little bit of color there.

You're talking about timing on projects?

Timing on with -- when your salespeople go out and they're giving quotes, and then by the time their projects finally come to fruition? If you would just give me a little bit of color there?

I think it's stabilized. I don't think it's increasing at this point. If anything, it might be dropping back a little bit. What we're seeing in these large projects that I've been talking about is that we feel very confident that these are projects that are actually going to be let, that this is definitely not busy work. These people are serious, and they are looking to let these projects -- if not to us, to somebody else. But they are going to let them go, which last year I don't think anybody had the confidence that anything was going to be let.

So it's at least a stabilized; and, if anything, it has shrunk a little bit as far as the time frame. The good thing is, Rich, and I've said this before, is, as we prepare our business for the recovery, we are able to, I think, turn these jobs around quicker than we ever have because of the efficiency things that we've done within our groups and what we are looking to do going further.

I mentioned in my talk here today that we are reorganizing our Product Recovery/Pollution Control group. This is something I think all of you have been waiting for, for years. And we wanted to do it when the timing was right and when we felt it would really benefit the Company and our shareholders. And we believe the timing is right. We've had several meetings on this. We're moving along with it. We are going to go from a typical mechanical organization, which is all siloed and so forth, to a matrix-type of an organization for that group because you want to take the benefit of the flexibility and engineering and project management and sales.

And the other thing that we're going to do with this group and this organization is we are going to improve our ability to really go get the business and not wait for the business to come to us. I feel that we've done a fairly good job over the years. But the bottom line -- I think we more were a Company, as most companies are, that chased opportunities rather than developed opportunities. This new organization will be better suited for actually going out and finding opportunities and developing opportunities. So we are excited about that.

Okay, so just so I'm thinking this through, okay, so day-to-day, the day-to-day business, is in good shape?

Yes.

The large contracts, or large opportunities, that's in good shape. The time lag between quotation and when the projects come to fruition -- that's stabilized, if not tightening up a little bit. So it sounds like things are pretty good. You're doing a restructuring so you'll be in good shape and you will see some operating leverage there. So it sounds like, for the most part, everything is in good shape.

Now, one last question, and then I'll jump back into the queue. On a regional basis, could you just talk a little bit about China and where you think you see some of the best opportunities globally here?

Well, I think in Asia, for one -- not just China, but in Asia, there are strong opportunities, and we are seeing them. And there are some of the $2 million type opportunities over there now, as well as the typical $100,000, $150,000, $300,000 type opportunities.

We are seeing some good things here domestically as far as the municipal side of our business. Our Duall business has done quite well this year as far as on the municipal side, and part of that is because of the federal stimulus. Even though the monies haven't gotten to some of the municipalities, the contractors and engineers that work in that field -- they know it's coming, they feel it's coming. So they've let loose on some of these projects during the first quarter and a couple of them here in the second quarter. So we are seeing some movement there. And as I mentioned to you, on the metal finishing, we've seen some opportunities and some good things happen in Europe.

Okay, I mean that sounds good, I'm sorry, I do have one more question. On the other income line, you go from about $14 million to almost $63 million there -- or, I'm sorry, $13.9 million to about $62.8 million. You are obviously doing a lot of good things with that cash. Should we expect that to continue there?

I would say the same trend in the second quarter, earnings that we earned in the second quarter on the cash, should be consistent with the third and the fourth quarter coming up.

That's fantastic, that's great. I want to say thanks for the time today and I think you guys are doing a great job.

Chris Noon, Brean Murray.

Ray, I'm reading through the release, where you're talking about seeing the resurgence of the quotation activity, especially in municipal markets, that you just started to touch on there. I was wondering if we could get a little more color from you just on which specific products maybe you're seeing the most demand? Is it pumps? Is it complete turnkey solutions or air, or just where you're seeing that?

Sure. On the largest opportunities, the biggest opportunities we see right now, would be on the Strobic Air side and the Duall side, at this point. We are seeing some -- well, there's a very big opportunity out there, possibly, for the Flex-Kleen operation also. But the Duall -- there's multiple opportunities worldwide, and for Strobic Air. There's solid opportunities for both of those groups.

The Fluid Handling -- there's opportunities but nothing of that type of a large impact, $1 million or $1.5 million type impact. Where -- Mefiag is starting to see more opportunities and it has actually booked some opportunities recently. But the big ones are on the air side, mostly in the Duall and Strobic Air portion.

Okay, that's helpful. And then, just one more question. How do you see this year's third quarter comparing to last year's third quarter? It looks like it might be kind of a tough comp, but where do you see us going forward as far as the third quarter?

You're always trying to get me on this, Chris. You know I'm not allowed to give guidance. We don't give guidance. So if I'm looking at the second -- I'll give it on a broader thing, the second half of the year. The second half of the year I think that we're going to see improvement on our booking line, and we should see improvement on our sales and bottom line. It's not going to be the big bounce-back that used to occur after recessions and downturns. It's going to be a nice, I think, level, even move towards the end of the year.

(Operator instructions) Jinming Liu, Ardour Capital.

Can you give me more color -- actually, give me a breakdown of your international/domestic sales for the second quarter.

In the second quarter, Jinming, our international sales were $4.7 million and our domestic sales were $16.2 million.

Okay. So, if you compare with -- I remember you have a very nice international sales last year?

Yes, last year -- you have a good memory -- last year, the second quarter, the international sales were $9.5 million, and the domestic was $18.6 million. But on a quarter-over-quarter, the first quarter, April ending April, the international sales were $4.9 million. So it's basically flat with the first quarter of this current year. Although we are seeing signs -- a lot of the orders, large quotations that Ray was talking about, the $2 million quotations, are coming from the international side of the business.

So we are seeing some turnaround on the international side.

Some opportunities -- and I don't want anybody thinking that we are 100% sure we're going to get all these opportunities, either.

Okay. And -- well, that's very interesting. And, basically, if we take away the loss on the international sales side, domestically your decline is basically in line with general economic conditions. Actually, on that front, have you seen any loss of market shares?

No; I don't believe we're losing any market share. If anything, our markets -- our competitors, in many instances -- I won't say all, but in many instances, are doing far worse than we are as far as maintaining their market share. It's market-related. It's the economy that basically has affected the sales, not anything that we are doing or our competitors are doing.

Okay. And, on the municipal side, recently I noticed that the EPA released, quite some [degree of] stimulus money to some different states. Which geographic area do you think you can benefit from the recent move by EPA?

Well, it all comes down to as far as what type of projects we are talking about. If it's an odor control system, we are typically -- it's us and one or two other competitors. We're probably either one or two in that marketplace. So typically, if there's a project to be let, we are involved with it. But they are all over the country, and at various times, depending on the climate, too, because when you want to build these things you want to make sure you are building them in a climate that's not going to shut the project down. So it will depend on where the work is on the odor control. That's one area where we have already seen some impact on the bookings side from the stimulus.

You will see some things also with, I believe, our systems business as far as their product line with the municipalities. But to put it down on a geographic, it would be very difficult because it has to go through the engineering process, the contractor process and then go out for bid.

William Bremer, Maxim Group.

Can you provide an aftermarket amount for the quarter?

It's still running in about the 35% to 40% range, William.

Richard Verdi, Sturtevant Company.

Actually, Gary, the Filtration segment, just a quick question there with this selling. A few years ago you guys had hired a few salespeople there. If I remember correctly, you were giving them a salary and then the salary would just give way to commission. Where are we at in that process there? Is that still salary or -- ?

Yes. In the Filtration and Purification section, that's the Pristine Water Solutions business, and that is still the same way. They are paid upon sales; they are not paid --

It's a low base. What happens is, it goes down to a low base with predominantly commission.

(Operator instructions). At this time there are no further questions. I will now return the call over to Ray De Hont for closing remarks.

Once again, thank you for joining us this morning. We hope we have been able to provide you with a useful update on Met-Pro's progress and performance, but if you should have any further questions, please feel free to contact either Gary Morgan or me, Ray De Hont. Have a great day.

Thank you for participating in today's Met-Pro second-quarter results conference call. You may now disconnect.