CECO Environmental Corp (CECO) 2010 Q3 法說會逐字稿

Good morning.

My name is Debby, and I will be your conference operator today.

At this time I would like to welcome everyone to the Met-Pro third-quarter results conference call.

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

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

(Operator Instructions)

Thank you.

Mr.

Kevin Bittle, Manager of Creative Services, please go ahead.

Good morning and welcome to Met-Pro Corporation's earnings conference call for the third quarter of our fiscal year 2011, which ended October 31, 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, Chief Executive Officer, and President; and Gary Morgan, our Senior Vice President of Finance and Chief Financial Officer.

Before we begin 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 third quarter.

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.

During the third quarter we were able to grow both net sales and net income when compared with the third quarter last year.

We were also able to achieve solid results in all our key metrics including new order bookings, gross margins, operating margins, and cash flow.

In fact, third-quarter net income and earnings per share were up significantly compared with the year-ago quarter.

This is the third straight quarter where net income and earnings per share were up significantly compared with the year-ago quarter.

Many factors contributed to the significant earnings improvement for the current quarter, including gradual improvement in global economic conditions, the Company's lean enterprise initiative, emerging market growth, and better product mix resulting from a higher proportion of Fluid Handling Technologies sales.

As a result, both gross margins and operating margins were up significantly when compared with the prior year.

New order bookings for the third quarter were the best new order bookings total this fiscal year.

We booked the single largest pump order in the Company's history and ended the quarter with a backlog and was 12% higher than the same time a year ago.

Quotation activity remains strong as we continue to execute our strategy to create new opportunities in key niche markets.

During the third quarter the Company continued to generate strong cash flows from operating activities, which allowed us to increase our dividend and further invest in our business by acquiring substantially all the assets, including the patents and technology, of Bio-Reaction Industries, LLC, a pioneer in environmentally friendly air pollution control systems for the elimination of volatile organic compounds, hazardous air pollutants, and odors.

Their technology is a nice complement to our existing Pollution Control Technologies, enabling us to bring new organic solutions to our existing customer base.

In addition, Bio-Reaction Industries has numerous relationships within their core markets of municipal, paints and coatings, wood products, building materials, and chemical processing industries.

These existing relationships create opportunities to introduce additional Met-Pro solutions to their customers.

With one of the industry's broadest product portfolios, we now offer our total air solutions value proposition to a broader market in many industries.

As anticipated, the recovery in our markets continues to be very measured in its pace.

In certain areas, such as large projects, the recovery has been choppy.

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 third 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.

Gary?

Thank you, Ray.

Met-Pro reported fiscal-year 2011 third-quarter net sales of $21.4 million, up 8% from last year's third quarter.

Net sales in our Product Recovery and Pollution Control Technologies reporting segment for the quarter were $9.2 million, up 2% from the third quarter a year ago primarily due to higher sales at our Strobic Air business unit.

Although sales growth in the quarter is off the pace achieved in the first half of the year, the timing of Product Recovery and Pollution Control Technologies' peak sales has historically been uneven.

Net sales in our Fluid Handling Technologies reporting segment were $7 million, up 22% compared with the third quarter a year ago, representing a significant acceleration of growth relative to the first two quarters.

This increase in net sales also drove a near doubling in operating income in the quarter for this operating segment.

As Ray reported, this segment also booked its largest single order in its history this quarter; and all of our pump lines are performing extremely well relative to the prior year.

Net sales in our Filtration and Purification Technologies segment were $2.7 million, up 6% compared with the third quarter last year, where demand increased for our Keystone Filter business unit products.

Demand for our Pristine Water Solutions chemical products, which are also included in this segment, has not yet rebounded.

Net sales in our Mefiag Filtration Technologies reporting segment were essentially unchanged during the third quarter.

But due to the good growth experienced by Mefiag over the prior year, sales are still at substantially better levels than that of the past year.

For the third quarter we reported consolidated gross margins of 36.4%, up from 33.7% in the third quarter of last year.

Except for a slight decrease in our Product Recovery and Pollution Control Technologies reporting segment, gross margins were up in all business segments.

Combined selling, general, and administrative expenses for the quarter were $5.6 million, up 9.2% from the $5.1 million a year ago.

All of the increase was in the selling expense, which were up 20.4% due to higher payroll and related payroll benefit expenses.

More importantly, controllable general and administrative expenses were actually slightly lower on an absolute basis and fell to just 12.9% of net sales from 14% of net sales a year ago.

Higher gross margins and tight control of discretionary spending helped improve operating margins.

For the third quarter, the operating margin was 10.2% of net sales compared with 7.8% of net sales in the same quarter of last year.

For the quarter, we reported net income of $1.4 million or $0.10 per diluted share, representing increases of 38% and 43%, respectively, from a year ago.

Cash flows from operating activities for the quarter amounted to $2.8 million compared with $4.7 million of operating cash flows in last year's third quarter, with virtually all of the change attributable to decreases in working capital achieved last year.

Met-Pro's balance sheet remains strong with cash on hand at the end of the quarter of $34.2 million or $2.32 per diluted share, which is only marginally below the record levels of cash in July.

We kept cash near record levels while using almost $1 million in the quarter to acquire the assets of Bio-Reaction Industries.

Year-to-date net sales were $65.1 million, up 8% from the first three quarters of last year.

The gross margin percent for the first nine months of the year was 36.3%, up from 34.5% for the same period last year.

Total selling, general, and administrative expenses for the first nine months were $17 million, up 6.3% from the $16 million in the first nine months of last year.

Like in the quarter, the increase was related to higher payroll and payroll benefit expenses.

The operating margin for the first nine months was 10.1% of net sales, up from 7.9% of net sales last year.

Net income for the first nine months of the year was $4.4 million, up 39% from the $3.2 million for the same period last year, while our earnings per share were up 36% to $0.30 per diluted share compared with $0.22 per diluted share in the first three quarters of last year.

In summing up the quarter, net sales, earnings, and cash flow for the third quarter reflect continued steady growth and improved leverage.

We continued to use our cash flow to invest in the Company, as evidenced by the completed acquisition of Bio-Reaction Industries, while still rewarding our shareholders with a 10% increase in our dividend.

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

Thank you, Gary.

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

The third quarter represents another quarter of progress for Met-Pro as we continue to grow in the midst of still challenging market conditions.

Revenues for both the quarter and first nine months of the year advanced 8%, while backlog is up 12% and bookings for the year are up 9%.

But we're also continuing to change the game.

In September we brought together key members of our sales management team and business managers for a global meeting to reinforce our strategy to create growth opportunities, rather than chase opportunities only after they appear in the open market.

To achieve this vision we have embarked on a strategy to add and locate Met-Pro business development employees in key geographic markets around the world where we believe we have outstanding growth opportunities.

Our intention is to better understand the buying needs and methods within those growth markets and the potential of our solutions and products to meet those needs.

The progress to date is encouraging, and we are optimistic that this effort will yield improving results especially as the global economy recovers.

The Company will continue to use its cash flow for potential acquisitions, capital projects, research and development, and dividends.

I am also pleased that on October 20 our Board of Directors declared a 10% increase in our quarterly dividend to $0.066 per share payable December 17, 2010, to shareholders of record at the close of business on December 3, 2010.

This is the 36th consecutive year Met-Pro has paid either a cash or stock dividend.

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

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 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 our operator, Debby, to provide instructions for this portion of the call.

(Operator Instructions) Michael Gaugler.

Taking a look at the trends in the new orders and the backlog, I am wondering what your capacity utilization is like these days.

I ask the question because I know you have done some trimming here and there over the last two years.

And I think previously your all-time high in sales was somewhere around the $110 million range.

$106 million to be exact.

Okay.

I am just wondering where you are on the utilization curve and at what point you might run into capacity constraints.

Well, one thing we won't run into is capacity restraints, Michael.

As far as when you look at our business about 50% of it is manufactured inside as far as our products; another 50% outside to -- basically jobs shopped out to fabricators and suppliers.

The other thing is that when you look at what we are currently running, we are currently running single shifts at our facilities where we do manufacture.

So we have the capacity to increase the number of shifts; we also have the capacity to ramp up very quickly globally as far as our suppliers.

So capacity won't be a problem.

Okay.

Then just as a follow-up, what areas are you most interested in these days?

Where do you see the opportunities across -- you've got a pretty varied line of end markets to chase business.

Are you talking end markets or geographic, Michael?

End markets.

The end markets?

We're seeing a lot of activity on the environmental side.

Let's say as far as laboratory fume hood exhaust systems, a lot of activity, a lot of big potential projects out there that we have talked about even before.

When you look at the air side, there are some good opportunities there too.

As far as for instance, when you have the solar panel manufacturing you see a lot of activity right now with solar panels.

And what we are looking at there is the potential where we could supply our air pollution control equipment on that particular marketplace.

We are seeing some things actually in the printing industry, believe it or not.

That has been an industry that has really been decimated over the years.

But through our Keystone division, we have developed a product line that allows them to recycle their fluids.

We are now seeing some buy-in activity there that could result in significant improvement there.

If you go through the rest of the Company as far as where we now have a complete, full line of biological-type scrubbing capability, whereas before we had a piece of it, that is going to bring some interesting opportunities for us in markets where we were never really a player.

And that is because of the Bio-Reaction's acquisition.

But also in the markets where we have been a leader, where we now have more arrows in our quiver.

And then the pump business.

Pump business has been moving right along.

We got our largest order in history, $3.7 million.

That is double any size order we ever got.

Good margins; we were not the low-price supplier on that.

And that goes to us being a niche-oriented supplier where we focus and we are able to many times demand a premium.

So it is across all avenues that we see some very good activity.

We are seeing good growth in our Chinese operation as far as the metal finishing and plating.

We have some things in place to even drive that further.

Our Mefiag business in Europe has improved.

So as the economy has grown, Michael, a lot of our business -- the metal finishing and plating end is growing, the air pollution control.

Going forward to next year you're looking at a big jump in industrial sized boiler pollution control.

This December there is -- the government is supposed to enact some new standards, and that is going to require pollution control equipment on industrial boilers which we can supply.

Another area would be in particulate.

I read an article this week where they are now saying that particulate in the PM -- between the PM 10 and PM 2.5 range can actually cause diabetes.

So there is going to be a lot of emphasis on particulate collection as far as cleaning the air of particulate.

And we are a big supplier there.

So we have got a lot of opportunities there.

All right, guys.

I will let somebody else ask some questions.

Congrats on a nice quarter.

Thank you, Michael.

William Bremer.

Good morning, Ray.

Good morning, Gary.

I was wondering if you could give us a little insight in terms of the Product Recovery unit.

A little bit weaker than what I was expecting for the quarter.

How is it looking as we are in and approaching the fourth quarter here?

Well, one of the things they didn't happen this quarter was that some of the projects we had anticipated actually closing didn't happen.

We didn't lose them; I want to make that clear.

It is just that they did not happen.

I have said this before.

There is a lot more dotting the i, crossing the t's, from our customers where they have to go through an approval process that is much more stringent than they did in the past.

Now the good news is that we have talked to a lot of people.

We have had our people out in the field on these projects face to face with many of the players that are involved with the projects.

What we are hearing is that there is high probability that a number of these projects will go in the fourth quarter.

I can't guarantee it.

An order is not an order until you get it.

But the probability right now that we're hearing from our customers is quite high, and that is in the PR/PC area.

There's numerous products, and if we could get those projects in the door, we will have a nice backlog going into the new year.

Can you comment, Ray, a little bit on the pricing of the bidding as well as the pricing that is currently in backlog?

It varies.

It varies on job to job, William.

We do a lot as far as understanding who the customer is, who we are up against, is there an incumbent.

And that all plays into what you need to quote.

The quotes that we have out there, the margins that we have out there I think are good.

The backlog.

We have some projects that we are quoting very good margins on; other ones that are maybe lower margins.

It is just not one trend or the other.

The one thing we have got to keep an eye on is commodities.

The commodities when you look at it, you have seen copper go up.

That has been offset a little bit by carbon steel, though.

You have seen stainless steel go up.

So we are watching that.

And even with these commodity increases we have been able to still grow our gross margin percentage.

So we have a game plan and we are going to follow that game plan.

Do your contracts have escalators built in?

Where they are longer-term?

Yes.

Okay, and one for you, Gary.

In terms of the new strategy of embedding more Met-Pro ground workers in key geographic regions, how should we be looking at the expense side going forward here?

The selling expense went up in the third quarter, Bill, as I mentioned; and we expected that to be -- I would basically model that going out at the same level of selling expenses in the third quarter.

We have added -- as Ray mentioned, we added a person in South America.

We are adding a person -- we added a person in Southeast Asia.

We also took on the employees of Bio-Reaction, which is not going to contribute into the sales until the next year.

So based upon that analysis I would probably use the same level of sales expense as you had in the third quarter.

Okay.

Then finally on the operating income.

That really dropped dramatically sequentially here.

Can you comment on what you are receiving?

I know the basis point, and there is not much of return on cash right now.

But what should we be looking for there?

Yes, the operating went from 10.8% in the second quarter to 10.2% in the third quarter.

Went down slightly, but I would say that you can't tell quarter by quarter, William, because of the product mix and the amount of Fluid Handling sales versus Product Recovery sales; and then the mix within those components.

I would say that we don't give forecast looking out, but it should trend upwards.

Maybe I misspoke.

I was talking about other income.

Oh, other income?

Okay, that is a little more clearer.

What happened in the third quarter in other income, William, is we had a currency loss of $40,000.

Okay.

So that is not going to reoccur.

Okay.

Tax rate going forward?

Tax rate going forward?

Right now I would model it at 34%.

But depending upon what they do with the new tax rules, which are going to be in the next 30 days, we're not sure at this point if the research and development tax credit is going to be approved or not approved.

Right.

Okay, gentlemen.

I appreciate the time.

(Operator Instructions) JinMing Liu.

Good morning, gentlemen.

Hey, just a quick follow-up there.

The commodity prices increasing, Ray mentioned you guys saw some increase in steel price.

In the contracts you have, do you have a passthrough structure in there?

Or are you just fixed price contracts?

No, we do have a -- I think William asked that question also.

We do have an escalator.

Escalation for escalating of costs.

So we do build that in when there is a longer-term contract.

We will build that in, and if the costs go up the customer does have to pay for the additional costs.

For short-term contracts you just write down?

For short-term contracts we're pretty well covered on those.

We can turn them around very quickly.

When we are putting the quotes together we are already out there negotiating with the vendors and know what the pricing will be, and we are locked in on pricing for that short-term turnaround.

This way we are protected.

Okay, good.

I am looking at your new order booking numbers.

This period last year also saw very good bookings.

But so far this year for the first two quarters, book-to-bill ratio was at 1.

I was wondering what kind of growth we should expect from those numbers.

Well, as far as -- we all know -- everybody on the phone knows we don't give guidance as far as whether it be growth in sales or bookings, whatever.

I will say this though, as I mentioned to both Michael and William, that we have a pipeline of large projects out there that we feel it is not a matter of if; it is when we will get them.

There are good margins on that backlog.

Also, we have a continuing quotation activity that is very high, which is building the pipeline even further.

That is not just on large projects but everyday business.

So the bottom line is that we feel that we have strong opportunities out there for the future.

Okay, good.

Switching to acquisitions, the Bio-Reaction acquisition was a very good start.

Can you comment on your pipeline of acquisitions?

I am not looking for exactly which company you are going to acquire.

But just how many targets you guys are looking at, what size?

I would say right now we have about five of them that I would say are ones that reasonably we would have an opportunity to close, if we find that they are everything that they are cracked up to be.

We are talking to a lot of people.

We are talking to people that deal with some bigger companies that maybe want to divest themselves of some of their smaller business, or what we call other businesses.

I was just out in San Francisco, flew back yesterday, and talking to some people about potential acquisition opportunities.

We have had numerous opportunities during the last couple months even, and with various types of investment banking type firms and so forth that have these opportunities come across their desk on a regular basis.

So I would say there's about five of them.

There are some on the air side, there are some on the Fluid Handling side, and even on the Filtration/Purification side.

So there is a spattering of them throughout there.

The size?

I would say it ranges from about $15 million in revenues to about I would say $40 million.

Those are very good numbers.

All right.

Thanks a lot.

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

Raymond De Hont for closing remarks.

Thank you, Debby.

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 me or Gary.

Have a great day, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.