CECO Environmental Corp (CECO) 2010 Q2 法說會逐字稿

Good morning.

My name is Ann-Tenile and I will be your conference operator today.

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 would now like to turn the call over to Kevin Bittle, Manager of Creative Services.

You may begin.

Good morning.

Welcome to Met-Pro Corporation's earnings conference call for the second quarter of our fiscal year 2011, which ended July 31, 2010.

My name is Kevin Bittle and I am 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 31, 2010 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.

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

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

During the second quarter, we were able to grow both the top and bottom line for the second consecutive quarter while achieving solid results in all our key metrics, including new order bookings, gross margins, operating margins and cash flow.

In fact, the second quarter was our most profitable quarter in the past year and a half.

Though net sales for the second quarter of fiscal 2011 were up only slightly from last year's second quarter, net income and earnings per share were up significantly compared with the year-ago quarter.

The improvement in bottom-line performance was once again attributable to strong gross margins.

Our gross margin for the second quarter was approximately 37%, which is up versus last year's second quarter as well as sequentially when compared with the first quarter of this year.

Margins in the quarter benefited from a favorable product mix, our various efficiency initiatives, and our flexible manufacturing strategy, which provides us with a cost structure that is very responsive to changes in the level of demand.

During the second quarter, we continued to generate strong cash flows from operating activities, increasing our cash position at July 31, 2010 to a record $34.2 million, or $2.33 per share, further solidifying our already strong balance sheet.

Demand for Met-Pro's products continues to remain strong, as evidenced by the 14% increase in second-quarter new order bookings, which followed a 17% increase in new order bookings during the first quarter ended April 30, 2010.

On a year-to-date basis, new order bookings are up 16%.

We are encouraged that the increase in new order bookings both in the second quarter and year to date was achieved without the benefit of any material contribution from large projects.

The timing of which still remains unpredictable.

Large project quotation activity, however, remains steady, adding to an already significant pipeline of opportunities for which we believe we are well-positioned.

As anticipated, the recovery in our market has been very measured in its pace and in certain areas, such as large projects, the recovery has been uneven.

The results we have achieved can be attributed to our disciplined strategy to efficiently produce and deliver high-quality products that provide compelling value to our customers, which we believe builds value in the Company for our shareholders.

By all measures, the second quarter was another very solid quarter upon which we can further 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.

Thank you, Ray.

Met-Pro reported fiscal 2011 second-quarter net sales of $21.4 million, up 2.6% from last year's second-quarter net sales of $20.9 million.

Net sales have now increased year-over-year for the second quarter in a row.

Also, keep in mind that, after declining earlier in the year, revenues last year did recover as the year progressed, which makes revenue growth experienced in the second quarter that much more noteworthy relative to revenue growth in the first quarter of this year.

Net sales in our Product Recovery and Pollution Control Technologies reporting segment were $9.7 million in the second quarter, down 5.9% from the second quarter a year ago.

This decrease was due primarily to lower sales in Strobic Air.

Segment operating income for the quarter consequently was also down from a year ago.

On a sequential basis, however, both segment operating income and operating margins were up nicely compared to the first quarter of this year, which is the result of the efficiencies being achieved since implementing our new Environmental Air Solutions organization structure.

Net sales at our Fluid Handling Technologies reporting segment were $6.5 million, up 13.6% compared with the second quarter a year ago.

The year-over-year increase reflects growth in demand for all product brands within this reporting segment.

Segment operating income for the second quarter was $1.3 million, up 35.4% from the second quarter a year ago.

In our Filtration and Purification Technologies segment, net sales were down 4.6% year over year as a result of a decrease in demand for certain of our specialty chemicals.

While net sales were marginally lower compared to a year ago, segment operating income actually increased due to an improvement in sales of higher-margin filters, cartridges, filter housings and filtration products.

And although down from a year ago, segment revenues were up $400,000 sequentially from the first quarter.

Net sales in our Mefiag Filtration Technologies reporting segment were $2.5 million this quarter, up 25.9% compared with $2 million in the second quarter of last year.

This sizable increase is primarily due to a relative improvement in the auto and housing industries, Mefiag's two largest end markets.

Mefiag's net sales for the quarter were also up sequentially from the first quarter this year.

Segment operating income for the quarter was $163,000, a significant turnaround from the operating loss of $143,000 in the second quarter of last year and consistent with the steady improvement we've seen at Mefiag over the last few quarters.

The consolidated company-wide gross margin for the second quarter came in at 36.6%, up from 34% in the second quarter of last year.

These improved margins largely reflect the favorable product mix, as well as the continued contribution from our various efficiency initiatives.

In addition, segment gross margins this year showed an increase over the comparable quarter a year ago except for a slight decrease in the Product Recovery and Pollution Control reporting segment's gross margins.

Selling expenses for the quarter were $2.8 million, up compared to last year's second quarter, but down sequentially from the $2.9 million in the first quarter.

This year-over-year increase is due primarily to higher representative and distributor commissions.

Second-quarter general and administrative expenses were $2.8 million, down $50,000 from last year's second quarter, largely due to lower payroll and benefit expenses for the quarter.

On a consolidated basis, income from operations for the second quarter was $2.3 million, or 10.8% of net sales, comparing favorably with the 8.5% of net sales in the same quarter of last year and 9.4% of net sales in the first quarter of this year.

This is one of our strongest operating margins in the past several years as our expanding margins and disciplined expense management had combined to improve the leverage in our business model.

For the second quarter, we reported net income of $1.6 million or $0.11 per share, up 31% and 38% respectively from the $1.2 million or $0.08 per share in the second quarter of last year.

These are the Company's best earnings results in the last six quarters.

Cash flows from operating activities for the quarter amounted to $2.9 million.

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 totaling a record $34.2 million or $2.33 per diluted share, up nearly $2 million since April 30 of 2010.

Quickly looking at the year-to-date results, net sales were $43.7 million, up 7.9% from the first six months of last fiscal year.

The gross margin percentage for the first half of this year was 36.2% versus 34.8% for the first half of last year.

Total selling, general and administrative expenses for the first half of fiscal year 2011 were $11.4 million, up 4.9% for the same period last year.

Net income for the first half of this year was $3 million, up 38.8% from the $2.1 million earned in the first half of last year, which equates to an earnings of $0.20 per diluted share, up 33.3% from the $0.15 per diluted share reported in the first six months of last year.

We are very pleased to have achieved growth in both the second quarter and first half of the year despite the lingering effects of the global economic slowdown and without any material benefit from large projects.

The gradual recovery in our markets we have seen since the beginning of the year has stabilized end demand at levels of those of a year ago and sets us on track to resume the pace of growth previously achieved.

Our goal is to maintain discipline throughout the organization, to improve operating efficiencies, to further expand our reach into existing domestic and international markets, and to sustain our leadership position and outstanding reputation in the niche markets we proudly serve.

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

Ray?

Thank you, Gary.

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

The first half of the year has witnessed the measured pace of recovery we expected heading into the year.

Our businesses have generally rebounded in line with the more stable environment and we expect many of the large projects in which we are involved, which are typically the last segment to recover, to move forward as the year progresses.

At the midpoint of the year, our bookings are well ahead of last year's pace while our pipeline is ripe with existing opportunities and continues to strengthen.

From all dimensions, it is clear that the hard work of our many dedicated employees is being rewarded with new opportunities for growth and added marketshare as Met-Pro becomes increasingly recognized for our ability to solve the many complex challenges of a clean environment and more efficient process.

As the recovery continues, we will remain focused on improving efficiencies that better leverage our organizational resources.

Our lean initiatives both on the factory floor, as well as throughout our entire organization are more than meeting expectations.

We are engaged in numerous other initiatives that are bearing fruit in the form of some of the best margins in the Company's history even before revenues returned to the levels of a few years ago.

And we are currently sitting on increased backlogs and double-digit growth in new orders compared to a year ago while being in the best financial condition in the Company's history, which only fortifies our competitive advantages.

Though we continue to look for a measured pace of end-market recovery, we believe our ability to consistently win in the market and improve our efficiencies will enable us to build value for our shareholders over the long term.

I am also pleased to announce that, on June 2, our Board of Directors declared a quarterly dividend of $0.06 per share payable September 15, 2010 to shareholders of record at the close of business on September 1, 2010.

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

I would 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'd 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 our operator, Ann-Tenile, to provide instructions for this portion of the call.

(Operator Instructions) Michael Gaugler, Brean Murray, Carret.

Congrats on a nice quarter.

Listen, when I look across bookings, orders, your comments earlier, Ray, what I would really like to do is kind of have you drill down a little bit and tell me is this a -- is it more geographic?

Is it more business line-centric?

Or is it one particular industry that you serve that is driving all this?

Okay, I will break it down this way.

When you look at the pipeline, let's say, of the larger projects -- in this case, I will talk $1 million or better, not $500,000, but $1 million or better.

We have approximately $20 million of large projects of that type out there.

Those projects consist of projects from the Met-Pro Environmental Air Solutions Group, Strobic Air, which are typically the two large project groups in our Company.

They deal primarily with large projects.

But also our pump group, and these projects we have been working on for a considerable amount of time.

We feel we are well-positioned.

They are not just domestic; they are also global.

When you look at the mix as far as global, international versus domestic, it's about a 60/40 mix, 60% international, 40% domestic.

And you start to look at the different markets.

It's not just one market.

You look at -- it's the market as far as the laboratory fume hood exhaust type business, there's projects there in the US.

There's projects in Saudi Arabia for that productline and in Asia.

You look at the Duall brand scrubber, there's -- in that $20 million now I'm talking, there is good projects.

One would be domestically.

There's a large project we're working on, but there is also projects overseas.

Again, Saudi Arabia and Asia.

Then you look at the pump group.

Now here's one that typically does not have what I would call real large projects.

Once in a while, you will get one.

I think the record project we ever had was about $1.7 million a few years ago on a large aquarium.

Even they are seeing some large projects and they have a project they have been working on for a while that is in the multimillion dollar range.

So when you start looking at this thing, it's across numerous businesses.

It's across numerous types of markets, both the municipal, the industrial and so it's a broad array of opportunities.

It's just not one productline or one market or one area in the world.

I don't know if that answered your question, Michael.

Yes, it does.

I was just wondering was it one particular segment or sector that was getting particularly hot.

And sounds like it certainly isn't.

I guess the other question I would have on a little bit even more granularity, on your Pristine Water Solutions business, what are you seeing there particularly on the municipal side?

What is happening there, we all know of the floods in the Midwest.

That created some havoc as far as usage of chemicals.

The other thing, there is some pressure there on the municipalities, so they have cut back on their usage wherever they can.

In some cases, there is some pricing pressure where the municipalities, because of the lack of funds, have actually gone out for a bid type business rather than working the base on a service-type business.

So all those things added up have impacted that business and that business is off this year.

Now, there are some opportunities for that business going forward and some of the keys are, okay, to look at maybe going and working with some of the larger municipalities than we have in the past, but it has been impacted by the weather.

It's been impacted by the lack of funds in the municipalities and some of the municipalities going from where their main concern was service to a bid low-price type business.

Understood.

All right, guys.

That's all I had, thanks.

Richard Verdi, Sturdivant & Company.

Congrats on a great quarter there.

Sorry, I jumped off the call there for a second and I just had a question.

Could you guys just talk a little bit about the Product Recovery segment?

Everything was really solid across-the-board there, but that was the one number that I kind of missed on.

I was hoping you could kind of drill down on that for me.

Sure, when you look at -- I was mentioning it in my answer to Michael's question.

When you look at our business, we have two branches of our business, which is -- let's take Strobic Air and the Met-Pro Environmental Air Solutions side, they deal with large projects, typically.

They are dealing with multiple projects, larger projects, engineered products.

And when you look at that side of the business, especially the Met-Pro Environmental Air Solutions side of the business, the large projects haven't been there.

Not that we haven't quoted them, not that the pipeline isn't building, but the release of those projects has not happened at this point.

So all their businesses, they have been basically on the day-to-day business.

When those large projects come, that's what supplements the day-to-day business and that's where you see the growth and so forth.

That varies from month to month, quarter to quarter.

There are a lot of opportunities out there, as I mentioned before, where we have big jobs.

We feel we are well-positioned and we're looking forward to when these jobs close.

There's no guarantees.

We all know until that contract is signed, you don't know if you've got the order, but we feel we are well-positioned.

And that's what's happening with that particular group.

Okay, that's super, that's super.

Thanks, Ray.

Gary, a quick question for you.

Could you just talk about interest expense here?

Yes, during the second quarter, we had to make an adjustment for an entry that was made incorrectly during the first quarter.

It was an entry for about $25,000.

It was between -- it was an intercompany, interest income, interest expense eliminator entry and it had no impact on the net income in the first quarter.

So on a quarterly basis, interest income should be around $50,000 per quarter.

Okay, okay.

And I know I've asked this of you guys a million times before, but could you just talk about the acquisition front a little bit here?

Yes, we are at various stages right now, Rich, and it's frustrating in a way because we are talking to a lot of people.

We're working with people to try to find good potential acquisitions.

And as I said, we are in various stages.

Part of the problem is that a lot of companies are coming off of a bad year where their sales were down, their income was down.

And (technical difficulty) and hoping that the economy will come back stronger and they will be able to get a better price.

And so they are reluctant to let go at this point, but we are keeping in touch with companies.

We're making the phone calls.

I am making phone calls.

I'm getting in front of people and we are trying our best to do something, but that's where we are at.

We are at various stages along the line.

Okay, all right.

One other last question.

How about any buybacks maybe out there?

Maybe are you thinking about buying back stock at all?

Well, we evaluate it as we go along during the year.

We look at what the stock is doing.

We look at what we feel, as far as value-wise and as the Board of Directors, along with management, we are constantly keeping an eye on it.

We don't know -- based on our evaluations will determine what we do at any given point.

We have not bought a lot back in the past other than the one time and even the ones we bought back earlier this year is primarily due to stock options.

Okay, all right, super.

All right, thanks a lot, guys, and hey, great quarter.

Thank you.

William Bremer, Maxim Group.

Good morning, gentlemen.

Nice quarter.

Ray, did I hear you correctly in terms of the mix of bookings were 60% international, 40% domestic?

I'm talking about that pipeline now.

The pipeline, okay.

I am talking that the $20 million, approximately $20 million worth of large projects, $1 million or more.

The mix there is about 60% international, 40% domestic.

That's currently what you are bidding on or is that bookings?

We have bid that.

Okay, but that's not bookings?

That's not bookings.

Those are back -- a pipeline of bids that are out there that we feel we are well-positioned on, but again I don't have that crystal ball.

I can't tell you 100% we're going to get them, but we feel we are well-positioned.

For the bookings in the second quarter, William, the $22.1 million of bookings, approximately 31% was international and the balance was domestic.

Thank you.

And also what was the sales breakdown for the quarter?

Sales breakdown in international and domestic?

Exactly.

International sales for the quarter -- let me --

And also the aftermarket.

International sales for the quarter ending 7/31 was 23.2% and domestic was 76.8%.

Yes, we had international sales of $5.7 million and domestic sales of $15.8 million.

Okay, excellent.

Okay, all right.

Let's -- how much was your aftermarket as a percentage of sales for the quarter?

We don't break that apart, William.

I would assume it has been pretty consistent, I would say about 40%.

Okay.

William, I apologize.

I gave you a wrong number there as far as -- I was looking at the six months when I gave you the breakdown between domestic and international.

For the three-month period second quarter, the actual breakdown was 26.5% for international, 73.5% for domestic.

The numbers I gave you before was our six-month period, which is 23.2% international, 76.8% for domestic.

Okay, Ray.

Thank you.

I appreciate it.

One other question regarding the gross margin.

Very, very nice mix.

Are you seeing any pricing pressure in some of your segments as you bid projects, in particular, say Fluid Handling?

Not so much on the Fluid Handling side.

When you look at our Fluid Handling business, we are really -- and our whole Company, we are niche-oriented, so we play in niches where we have a lot of knowledge and we're able to demand things because of that knowledge.

Where we are seeing some pricing pressure, I mentioned earlier, was in Pristine on the municipal side with the chemicals.

We are seeing a little bit on the Air side, but you see some -- it depends who the customer is and what part of the market it is because we're also seeing on the Air side on some of these large projects very good margins.

So it's a mix.

But there is some pricing pressure out there.

It depends what particular competitor you are up against.

One that might be let's say not having the success on the bookings side, they might go in at a lower number.

But our numbers, when you look at our results with the 36%, the excess of 36% in gross margin, they include some lower margin jobs in there.

We don't just bid and win all high-margin jobs.

There is a mix there, but we watch it and what we try to do is make sure that our business doesn't go from a high-margin business to a commodity business, so we watch that very carefully.

Exactly, very nicely done.

Just one housekeeping, Gary.

G&A, nice reduction sequentially here.

With the potential of larger projects in the second half and going into your fiscal '12, how should we look at G&A as a run rate going forward?

In the second quarter, G&A was slightly under $2.8 million.

I would use that number going forward in the third.

I would think it would be consistent in the third and fourth quarter moving forward this year.

Great, thank you, gentlemen.

JinMing Liu, Ardour Capital.

This is Robert [Lahey] speaking on behalf of JinMing.

Most of our questions have already been answered, actually, but I was just wondering if we could go back to your international sales a little bit.

I was wondering if you can just give a little more granularity in terms of which markets were the biggest in 2Q, or in this quarter, and also any trends you are seeing that could stretch into calendar year 2011?

Well, I think the big activity, one of the bigger activities is with our Strobic Air business.

There's a lot of activity there, both in Saudi Arabia and Asia.

We are seeing activity in Australia.

We're also seeing activity in Australia for our Air side of our business, which is the Met-Pro Environmental Air Solutions group.

So we are seeing activity there for scrubbers, dust collectors.

You go over to the Singapore area, we are seeing some good activity in that area with our pump group, our global pump solutions group.

So the heavy activity with good potential is Strobic Air for sure overseas, Asia, Saudi Arabia, as I said, Australia.

Also the scrubber side of our business, the Duall brand, and then the pump side of our business.

All right, thank you.

And do you have a Company headcount?

Yes, the last headcount of the Company was -- I believe it was 322 total headcount.

Approximately that number.

Thank you, gentlemen.

(Operator Instructions) [Will McGoldrick], Heartland Funds.

Good morning.

Thanks for taking my question.

I would just like to get back to the cash balance.

We're now in the fourth quarter of north of $30 million in cash.

Cash as a percentage of trailing 12 month revenues has never been this high at 41%.

The Company, if you look back over the last 10 years, has grown a whopping 6%.

I realize I am cherry-picking the timeframe there because we've gone through this great recession, but I am really curious what you're going to do to jumpstart some growth at this Company here.

A couple things, Will.

One of the things that we are driving the business towards is rather than chasing business, driving the business.

What we've done, we've added some key people in our organization as far as product -- where -- marketing/business development.

We put a marketing business development person down in South America.

We've just brought on a marketing business development person for our Met-Pro Environmental Air Solutions group.

We put one in the market and business development in the Keystone area.

We are looking to drive the business rather than chase the business.

Another thing is, as far as when you look at what we have coming up in September, we are bringing the salespeople in with the general managers.

We're all meeting together and the whole emphasis is driving that top line.

Agreed.

When you look at it [with] 6%, you take the -- if you go back from let's say 2003 two five years forward, we grew the business over 53%, 54%, and then the economy started to go backwards.

We feel we are set up now better than we ever have.

We took the organization.

We combined Flex-Kleen systems and Duall product brands into the Met-Pro Environmental Air Solutions group.

We have that set up now.

We're pushing and pulling on that organization to make it as strong as possible.

But we've set the organization up now to where we really can attack our niches and penetrate the niches better than ever.

So we are taking the focus and we are really becoming much more aggressive of driving the business rather than chasing the business.

And we see opportunities there.

We also are looking to fill the voids that we might have in our product brands, our productlines.

And we are -- as I said with Rich's questioned, we are in various stages talking to people.

We're investing in R&D.

We are continuing to develop new products, new technologies.

We are improving products.

We have got a lot going on on the R&D side, so these are things to fill the product or let's say our menu of products of where we go to the market.

Okay, well, thanks for the color there.

Thank you.

At this time, I show we have no further questions.

So I would like to turn the call over to Mr.

De Hont.

Thank you, Ann-Tenile.

Once again, thank you all 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 please feel free to contact either me or Gary if you have any further questions.

Have a great day, everyone.

Ladies and gentlemen, we thank you for your participation.

This concludes today's conference call.

You may now disconnect.