CECO Environmental Corp (CECO) 2010 Q1 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Met-Pro 1Q results conference call.

(Operator Instructions).

Thank you.

I will now turn today's conference over to Kevin Bittle, Manager of Creative Services.

Please go ahead.

Good morning, and welcome to Met-Pro Corporation's earnings conference call for the first quarter of our fiscal year 2011 ended April 30th, 2010.

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 will hear comments from both of these individuals, but before we begin I would like to make a few comments.

I would 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 31st, 2010 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?

Thank you, Kevin.

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

Earlier this morning, we released our financial results for the first quarter ended April 30th, 2010.

I hope all of you have had the opportunity to review them.

In a moment, Gary Morgan will provide more specific comments on the quarter's financial results; but first, I would like to offer my perspective on our performance.

I am pleased to report a good start to fiscal 2011.

First quarter net sales earnings and new order bookings all grew relative to the first quarter last year.

These results reflect the continuing recovery in some of our end markets that began in the second half of last year.

Net sales in the quarter were up 13% year-over-year, the second highest first quarter net sales in Met-Pro's history and the first growth in quarter over quarter net sales since the July 2008 quarter.

Net income for the quarter was up an even greater 48% year-over-year, as we leveraged top-line growth into an even better bottom-line improvement.

New order bookings in the first quarter were up 17% from the first quarter a year ago, despite a somewhat weaker than expected contribution from bookings of large projects.

We continue to leverage our organizational improvements to enhance operating efficiencies and generate solid cash flows.

Gross margins for the first quarter, which came in at approximately 36%, were up slightly from last year's first quarter.

Cash flows from operating activities totaled $2.3 million, which increased our cash position at April 30th, 2010 to $32.5 million, or $2.21 per diluted share, further solidifying our already strong balance sheet.

First quarter net sales and bookings are tangible evidence that some end market conditions are improving.

In fact, we started to see signs of improvement during the second half of last year when new order bookings exceeded first half new order bookings for the first time in three years.

While some of our end markets are improving, this is not cause to abandon our disciplined cost management.

In fact, general and administrative expenses in the first quarter were actually down from a year ago, although selling expenses rose primarily due to higher commissions commensurate with our increased revenues in our product recovery pollution control technology segment.

All in all, a very solid quarter upon which we can build.

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 questions.

Gary?

Thank you, Ray.

Met-Pro reported first quarter fiscal 2011 net sales of $22.3 million, up 13% from last year's first quarter net sales.

This was our second best first quarter in the Company's history and our first year-over-year quarterly revenue growth since July 2008.

Keep in mind the first quarter has historically been our weakest of the four quarters.

In the first quarter, net sales in our product recovery and pollution control technologies reporting segments were $11 million, up 45% from the first quarter a year ago.

Operating income was also substantially higher, up 255% from the first quarter last year, as incremental sales volume leveraged our fixed infrastructure.

Net sales in our fluid handling technologies reporting segment for the quarter were down 6.4% compared to a year ago, but up nearly $500,000 from the fourth quarter last year.

Operating margins in our fluid handling technologies reporting segment were only slightly off from a year ago, thus continued to exhibit the cumulative benefits of the attractive margins consistently earned on our pumps, aftermarket parts, and consumables.

First quarter new order bookings for the fluid handling technologies reporting segment were up $2 million versus a year ago.

It is our opinion that the sequential quarter to quarter trends here are a better indication of the fluid handling technologies reporting segment performance.

The filtration and purification technology segment's net sales for the first quarter were down 11.7% from the year-ago period, primarily due to the continued competitive conditions in the chemical business.

Within this segment, Keystone Filter continues to deliver strong results, enabling this segment to improve operating income in the quarter by nearly 152% compared to a year ago.

First quarter net sales for our Mefiag Filtration reporting segment were essentially unchanged from a year ago, although operating income swung from a $15,000 loss last year to a positive income this year of $207,000.

For the first quarter, the consolidated gross margins came in at 35.8%, which is a 10 basis point improvement from the prior year.

Relative to the previous quarter, the margin is up an even more favorable 260 basis points.

This is one of Met-Pro's best quarterly gross margins in the past several years.

These margins were achieved through the combination of revenue growth that leveraged our fixed overhead, combined with our enhanced operating efficiencies.

On a consolidated basis, income from operations for the first quarter was $2.1 million, or 9.4% of net sales, which is almost a 200 basis point improvement over the operating margins of 7.5% of net sales in the first quarter of last year.

Again, the consolidated operating margins were a function of higher gross margins and sales volume increases.

Higher sales commissions and sales payroll led to a $400,000 increase in selling and advertising expenses in the first quarter this year.

Selling expenses vary from period to period depending upon the mix of marketing channels and sales volume.

On the other hand, general and administrative expenses in the quarter were incrementally lower than a year ago.

For the quarter, we reported net income of $1.4 million, or $0.10 per fully diluted share, with net income up 48% and earnings per share up 43% from a year ago.

Positive cash flows from operating activities for the quarter amounted to $2.3 million.

Met-Pro's balance sheet remains strong.

As of April 30th, cash on hand totaled a record $32.5 million, or $2.21 per diluted share.

At April 30th, our current ratio was 5.8, and our total debt was only $3.9 million, giving us a total debt-to-equity ratio of just 4.8%.

In summary, I'm happy to say we have been able to leverage a slight economic turnaround and some limited improvement in our end markets into a quarter showcasing sizable improvements in our financial performance through the combined benefits of strong margins, disciplined spending, and better operating efficiencies, all the while further strengthening our balance sheet.

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

Ray?

Thanks, Gary.

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

We are off to a good start in fiscal 2011, with increases in all of our key metrics -- net sales, earnings, and new orders.

As we have previously remarked, we expected our markets to recover from the depths to which they had fallen last year, but to do so gradually and somewhat unevenly.

That scenario seems to be unfolding, with gradual growth in many of our businesses.

Though it remains difficult to say our end markets have returned to normal, we are encouraged by the improvement in new order bookings during the last nine months.

We are also encouraged that the increase in new order bookings during the first quarter was achieved without the benefit of any material contribution from large projects.

Large project quotation activity remains solid and our pipeline of opportunities continues to grow.

Though we remain optimistic we must caution you there are no assurances as to when or if any of these opportunities will turn into new orders.

We also believe our new business and operating initiatives such as the creation of Met-Pro Environmental Air Solutions are gaining momentum, further expanding our ability to service our markets and end customers.

And with our strong balance sheet, we have the resources to support investments to further enhance our efficiency initiatives, develop exciting new products and pursue acquisition opportunities.

Over the long-term, we remain confident that Met-Pro Corporation is well-positioned to capitalize on the very powerful trends towards global environmental stewardship, energy efficiency and process improvement.

Before opening the call to questions, I am pleased to announce that at their meeting on June 2nd, 2010, the Company's Board of Directors declared a quarterly dividend of $0.06 per share payable on September 15th, 2010, to shareholders of record at the close of business on September 1st, 2010.

This is the 35th consecutive year the Company has paid either a cash or stock dividend.

I would like to thank the many local, dedicated, 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 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 to ask our operator, Stephanie, to provide instructions for this portion of the call.

(Operator Instructions)..

Your first question is from the line of William Bremer with Maxim Group.

Good morning, gentlemen.

How are you?

Good, William.

How about yourself?

I've got a few questions.

Good, good.

Nice quarter, nice execution during the quarter.

I've got a few questions, though.

Let's first go into the product recovery segment.

Strong revenues, higher than what we were anticipating there, but operating margins at 4.7 -- that disappointed us a little bit.

Can you give us a reason why the operating margins there are still at this level, given the sales?

William, good morning.

This is Gary.

The $11 million of sales, that was all related -- the operating margin of 4.7% was related to the product mix in that group during the first quarter.

That's basically the reason for that.

It was for sales in the systems division and also in the dual division segment of the business.

And how do you see that proceeding throughout this year, throughout 2011?

Do you see that the operating margin there -- are we expected to have a little bit of an incremental gain here throughout the year, or should we be anticipating sub-5% operating margin from that division.

I would see that operating margin going north -- going closer to 7%, 8% in the future as we go through the year.

Okay, good, thank you.

Now you provided a little color on the selling expense.

In that increase, it looks as though it was more commissions.

Ray, did you mention there was advertising also in the selling activity?

No, what we did, in addition to the commissions -- and the reason for the commission increase is that if you look at where the sales came from -- the majority of the sales increase came from -- it came from product recovery pollution control.

Now that's a sales rep-type business where you are selling through sales representation, and they get paid commissions.

The other thing that impacted the sales side of the SG&A is that we are increasing our abilities as far as on the marketing side.

And what I mean by that is, we're supplementing the good core of sales people that we have with some marketing/business development people.

We just recently added a development person earlier this year down in South America, and that person's job is to develop the business channels and understand that market better than we ever have.

And as a result, we are seeing opportunities there and understanding the marketplace much better than we had previously in the past.

So we've done some things on the business development marketing side.

Right, okay.

No, no, I like the investments there.

So I guess this next question goes to Gary, then.

These are not one-time items, and thus we should be incorporating the higher amounts in selling going forward then?

I would look in the area of 2.7 to 2.8 million on an ongoing basis, William.

All right.

Great, thank you.

And now the G&A, that increased -- I mean, yes, year-over-year it was down; but yet sequentially, it was up quite materially.

I guess the same question there.

I mean, are we at this level now throughout?

Except for the fourth quarter last year, we're at 2.5 million.

The third and second quarter last year were 2.8 million, so I would recommend a run rate there about $2.8 million to $2.9 million.

All right.

Can you give me an idea of the product mix, specifically, I guess, in the product recovery pollution -- the products that sold well during the quarter?

And as well as some -- we have spoken in the past about some international expansion.

What was the international exposure for the quarter?

Well, as far as booking-wise, we had one of the best quarters in over a year.

It was about $5.8 million in bookings.

The sales were down slightly, but that's because of the impact -- the trailing impact from last year where basically the global economy was in the toilet.

So we that had trailing effect.

But the good news is that the booking side was the highest in over a year at $5.8 million.

When you look at what product lines or product brands were strong during the first quarter, Strobic Air had a strong first quarter, a lot of opportunities going forward.

We're doing a lot of international travel, so there's opportunities internationally as well as domestically.

Duall had a decent quarter, and Flex-Kleen actually had a -- came through with a decent quarter versus last year.

So -- but the big one -- the one with the biggest activity was Strobic Air.

All right, gentlemen, great.

Thank you very much.

You're welcome.

Thank you.

Your next question is from the line of Richard Verdi of Sturdivant & Company.

Good morning, guys, nice quarter.

How is everybody?

Good, Rich.

How are you doing?

Good morning, Rich.

I'm doing well.

Thanks for taking my call this morning.

Just a quick question, guys.

Looking at the interest expense line item, all of my numbers were pretty close.

I mean, you guys exceeded sales and gross margin, but that it was one line item where I was a little off.

Could you just talk a little bit about what's going on there?

We have one piece of debt out there, and we're looking that it piece of debt to reduce that interest expense, Rich.

The reason for that is because the LIBOR is going down and we have a floor on the LIBOR rate.

Okay.

Okay?

Okay.

And we've seen a lot of turmoil there in Europe.

Could you just talk a little bit about how that might impact your Company?

And if it does, where it will impact and what have you?

Well, if you look at where we sell, we have a Mefiag group over in Heerenveen, Holland, and the good news is that the European marketplace has not really impacted them negatively this year.

As a matter of fact, their bookings are up substantially versus last year.

Now their sales were impacted -- again, going back to the trailing effect from the economy last year.

They have been able to not only quote a number of projects but win the projects against their competition.

We did a lot of things last year in Europe to improve the efficiency of the operation and to tweak it to where it could handle whatever it was faced with this year, and that's proving to be very valuable as far as as they move forward, not only on the selling side but also on the income side.

So we have not been really impacted tremendously by the European economy that's over there.

We are concerned as far as what happens over there, how does it impact the rest of the globe?

All right, super.

And just one last quick question.

The dollar -- could you just talk a little bit about that, if the rising dollar is going to impact you, and if so how?

Since we sell as much in the European marketplace as we buy in Europe, we have very little currency impact.

The only -- right now, our European market, Mefiag, in Europe is doing extremely well.

It's not being impacted, as Ray mentioned, so we see no impact from the currency.

Okay, all right.

Super.

All right, great.

That's all from me, guys.

I'll jump back in the queue, and Gary, I'll talk to you offline.

Thanks a lot, guys.

Good quarter.

Thanks, Rich.

(Operator Instructions).

Your next question is from the line of Jinming Liu of Ardour Capital.

Good morning, Ray and Gary.

Hi, Jin.

Ray, you mentioned briefly about using our cash to make acquisitions, and you talked before some opportunities in Europe.

I mean, given what's happening there, whether you will have a better opportunities or something else?

Can you give me more color on that?

I knew you were going to ask that question.

Our acquisitions -- as far as looking at acquisitions, we've been very active in that area in Europe, as well as domestically.

We've gotten some new information as far as updates with what is happening with the businesses that we're looking at over in Europe, and at this point, they still seem to be within the realm where we're going to look and see what we can do going forward.

I can't make any promises there, but the activity -- we're talking to a number of people.

We are working again with an M&A firm.

The discussions are proceeding.

We've been -- I've been out meeting with people face to face.

And we'll see where it goes, but we are looking to do something.

But again, as I have said many, many times, we are not just going to acquire a Company just to acquire something.

We are going to make sure that it is the right acquisition for our Company.

We're a small Company who can't afford to make a poor acquisition.

Okay.

That's good.

I have a very specific question regarding (inaudible) the orders you booked last November, and I believe that was 2.8 million orders you guys announced early last November.

I believe 2.2 million of that part of that order will be shipped in the second quarter this fiscal year.

Am I right on that?

Jin, I'd be honest with you, I don't have an answer for you.

I can check into it, and more than glad to speak to you after the conference call.

But I would have to look through and see exactly which job you're referring to.

Okay no, problem.

Lastly, your cash position is very strong.

Have you guys had to have a -- you guys did repurchase some stocks during the quarter.

Are you guys going to continue to do so?

Well, if you look historically, we have not really purchased back our stock unless there was a specific reason or if it really went down as far as the value or the stock price.

The biggest time was year or so ago where we purchased back about $5 million worth of stock.

But we constantly review where the stock value is at, what we think our position should be, and we discuss this with our Board.

We discussed it at our last Board meeting, and it's a constant issue.

We have our fingers on the pulse and we will see where we go.

Okay, thanks.

You are welcome.

Your next question is from the line of Joseph Gardner of Emerald Advisers.

Good morning, gentlemen.

Hi, Joe, how are you doing?

Good morning, Joe.

Very well.

Couple questions for you.

The revenue growth in the quarter appears to have been driven entirely by the product recovery and pollution control equipment area.

You specifically called out the improvement in activity in Strobic Air.

I'm wondering if you can talk a little bit more about what's going on in that particular segment.

How sustainable might that be going forward, particularly since the comparisons will get a little more -- I guess a little more challenging there?

In the next quarters, the revenue numbers were higher throughout the balance of last year than they were in the first quarter.

I think one of the things you've got to look at, Joe, we've said all along that it's going to be a gradual growth over the year.

And the way our business operates -- and you have been following it a long time -- you could have quarters that are up significantly because certain projects shipped or were book shipped, and the next quarter you may not have that big booking in there or big shipment in there, so it c an vary from quarter to quarter.

We do believe there are opportunities out there.

Our regular business -- our day-to-day business -- has definitely improved and improved during the first quarter, not only with the product recovery pollution control, but even in the pump side of the business, where although the sales were down, the bookings were up about $2 million in the first quarter.

Again, we still believe it is going to be gradual.

A lot depends what kind of -- how that curve goes -- that gradual curve.

Depends on the large projects.

If we're able to close some of the larger projects, the earlier we close them, the more impact it is going to have on the year.

But I caution everybody not to think that every quarter you are going to be 17% or 20% higher.

It does depend on when these jobs are let, and that our standard business -- our day-to-day business -- remains and continues to grow gradually as it has.

On the pump side of the business, can you talk about what helped drive the bookings there since that's your highest margin segment?

That's obviously going to be important to the bottom line.

I think part of it, Joe, is when you look back a year, year and a half ago, the industrial marketplace, a lot of people closed down processes.

A lot of people reduced their inventory to almost virtually no level.

Now over the last, I would say, five to six months, that's changed.

People are buying more for their inventory, they're bringing processes back online.

There's opportunities globally that weren't there a year ago.

So it's been a combination of overall business improving as far as gradually improving and needing the pumps and the parts and so forth, and also -- and that goes not only domestically but globally.

But finding and uncovering new potential business with customers, we've done some things as far as product improvements.

We've done some things with new products.

We've got a hot water line, where in the past we only had a hot oil line.

We're doing things with vertical in-line pumps, where before we didn't have vertical in-line hot water pumps.

So it's products, it's the overall economy improving, and then going out and finding new applications.

Okay, the gross margin came in relatively well this quarter, close to 36%.

I would be curious on your thoughts on that going forward, particularly if we start to see some large projects coming in.

Is that going to weigh on the gross margin a little bit the balance of the year?

Well, if you get -- depending on when that project ships, it could for a quarter impact the margin.

I wouldn't say materially, but a large project typically doesn't go at the 35% to 40% gross margin.

It depends how large that margin and how many of those large projects there are.

But we're work hard on the gross margin side in a number of areas.

We're doing it with simplifying our business.

We've reorganized various businesses over the past year, or past several years, which I think improves our efficiencies.

We've been working on the procurement side for a long time, trying to find global sources, and we're finding more and more.

We're out there shaking the trees and the bushes.

So it's a combination.

But, yes, if you get a number of large projects at one time, they all go in the same quarter, that's going to impact the margin, but I don't think significantly.

We're still looking down the road long-term getting back to where -- I'm talking a number of years ago -- where we were somewhere around the 37%, 38% gross margin.

I realize that you guys do not give guidance, but I would be curious in your thoughts as I look at some of the consensus numbers out there, it would certainly imply that the sales momentum continues and that you probably would have to get to like a low double-digit type of operating margin, it would seem, to get there.

I would be curious in your thoughts on maybe how realistic or do you think your ability to be able to achieve those kind of numbers for the year.

Well, I think one thing, I don't think anybody can get overly confident that you are going to have a sharp in sales or income.

It is a month to month, quarter to quarter type thing; one, because of the way our business is, where a lot of the business that we do is book shipped very quick, as far as parts, consumables that type of thing.

So you really -- to put a finger on that can be difficult sometimes.

But the other thing is as far as when the larger projects go.

You get a couple of large projects, you can leverage your SG&A and so forth, and you absorb a lot more of your engineering, your labor.

So I still think it's going to be gradual, and it could fluctuate from quarter to quarter, but we are looking overall for the year, we would hope -- again, I can't give you guidance, but we would hope we would be in a good position as far as revenues and bottom line income.

Okay, and one last question for Gary.

The 34% tax rate in this quarter, is that a reasonably good number to use for the rest of the year?

That's a good question, Joe.

I raised to 34%.

It all depends if the research and development tax credit is approved this year.

That's not done yet.

It could go as high as 35% depending upon the research and development tax credit.

Okay.

Okay?

Thank you very much.

Thanks, Joe.

You have a follow-up question from the line of William Bremer with Maxim Group.

Gentlemen, can you give me some color on specifically your metal finishing area, since we're starting to see a little stability in that market?

I was just wondering what you are seeing there, and just give us some color there?

I think for one, William, is that you are seeing the automobile industry is doing some good things compared to a year, year and a half ago.

Two years ago, we were talking about them all going bankrupt.

But that's not the case now.

And you are seeing some things -- some stabilization, I think, on the housing around the world.

We're seeing some good things in China.

We're seeing -- we've done some good things in Europe, but also domestically and even in South America.

So I think it's the automobile industry globally coming back a little bit, some of the housing, and different projects that were put on hold coming around to fruition.

You want to provide for us what actually as a percentage of sales that was for the quarter?

The only thing that we can do is we do show the Mefiag group, okay, as a segment, so you would be able to see that.

And if you look at three months ended April 30th of this year, Mefiag's sales, okay, were $2.4 million.

Now remember, their sales were lagging, okay, because of what happened last year.

But when you go over to their bookings, their bookings were $3 million versus $1.9 million last year's first quarter.

So there's a substantial increase of 58.4% in bookings, even though there was a slight lag in the sales.

Very nice.

Thank you.

I appreciate it.

You're welcome.

At this time, you have no further audio questions.

I will now turn the call back over to Mr.

De Hont for any closing remarks.

Thank you, Stephanie.

Once again, thank you all for joining us this morning.

We hope we've been able to provide you with a useful update on Met-Pro's progress and performance, but please feel free to contact either me or Gary if you have any further questions.

Have a great day, everyone.

This does conclude today's conference call.

You may now disconnect.