CECO Environmental Corp (CECO) 2011 Q3 法說會逐字稿

Good morning.

My name is Christy.

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 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 hand the call over to Mr.

Kevin Bittle.

Please go ahead.

Good morning.

Welcome to Met-Pro Corporation's earnings conference call for the third quarter of fiscal 2012 which ended October 31, 2011.

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 Chief Financial Officer, Senior Vice President of Finance.

Before we begin, I'd like to remind you that any statements made today with regards 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, 2011, 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.

Welcome again from Harleysville, Pennsylvania.

Earlier this morning, we released our financial results for the third quarter ended October 31, 2011.

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

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

Consolidated results in the third quarter reflect strong top and bottom line growth driven by increased order bookings delivered through our expanded sales and marketing organization.

In particular, we have benefited from a significant improvement in our large project new order bookings, which contributed to a strong rebound in our Product Recovery/Pollution Control Technology segment this quarter.

On the strength of sales growth in each of our four segments, third-quarter net sales increased 18% from the same quarter a year ago, a nice acceleration in our top line growth from that achieved over the first half of the current year.

Growth this quarter was led by a 29% increase in our Product Recovery/Pollution Control Technology segment and a 33% increase in our Mefiag Filtration Technologies segment.

Gross margins in the quarter were very strong at 37%, up both from a year ago as well as from the first half of this year.

Strong net sales growth and expanded margins on a consolidated basis drove a 47% increase in third-quarter net income and a 40% increase in diluted earnings per share when compared with the same quarter last year.

Demand for Met-Pro's products remains strong with new order bookings in the quarter up 11% from the same quarter a year ago.

This follows $29.5 million in new order bookings during the second quarter ended July 31, 2011, a 33% increase when compared with the second quarter last year, and the highest new order bookings quarter in the Company's history.

As a result, the Company's backlog has increased 35% when compared with last year.

Strong new order bookings are being driven by a broad-based recovery in our large projects business.

It is encouraging to note that our large project business has gained traction across a wide variety of markets, including the alternative energy, landfill, educational, industrial products manufacturing, entertainment, food and flavoring, and building materials markets.

It's also encouraging to note that in the third quarter we received an order valued in excess of $3.5 million to supply a Bio-Reaction brand biological air pollution control system, a technology which we acquired a little over a year ago.

Certainly, we are seeing recovery in many of our end markets, including international sales which accounted for 30% of the quarter's net sales and we are up 20% from last year.

We are, however, experiencing weakness in our Pristine Water Solutions business unit, which continues to struggle in a difficult municipal market.

Our transition from a product selling-based Company to an engineered solution marketing approach continues to gain traction.

This new go-to-market strategy is yielding attractive results in both our existing markets as well as in new markets.

Before turning the call over to Gary, I'm pleased to report that our Board of Directors declared a $0.071 per share dividend payable December 16, 2011 to shareholders of record at the close of business on December 2.

This dividend represents an 8% increase from the $0.066 per share dividend of last quarter and is the 37th consecutive year Met-Pro has paid either cash or stock dividend.

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 2012 third-quarter net sales of $25.2 million, up 18% from last year's third quarter.

Net sales in our Product Recovery and Pollution Control Technologies reporting segment for the third quarter were up 29% to $11.9 million, reflecting a recovery in large project business across all the segments' brands.

The large new project bookings of the past few quarters are being converted to sales which drove growth and contributed to more than tripling of the segment's operating profit for the third quarter.

Net sales in our Fluid Handling Technology reporting segment were $7.3 million in the quarter, up 4% compared with the third quarter a year ago.

Fluid Handling Technologies reporting segment operating margins in the quarter remained at very strong levels; 23.8%, up from 22.2% for the third quarter of last year.

Our Global Pump Solutions business is on pace for a record year.

Net sales in our Mefiag Filtration Technologies reporting segment were up 33% in the third quarter.

This follows a 28% revenue increase last quarter.

Net sales in our Filtration and Purification Technology segment were up 2% in the third quarter, once again, primarily on the continued strength of the Keystone Filter products.

For the third quarter, we reported gross margins of 37%, up from 36.4% in the third quarter of last year.

Margins also showed sequential improvement relative to the second quarter of this year.

The Fluid Handling Technologies margins remained very strong and our consolidated gross margins also benefit from a significant improvement in the Product Recovery and Pollution Control Technologies margins where revenue growth has enabled us to better leverage fixed cost.

Combined selling, general, and administrative expenses for the quarter were $6.3 million, up 13% from the $5.6 million a year ago.

The increase was primarily due to higher payroll expenses, personnel acquisition expenses, and management incentive accruals.

As a percentage of sales, selling, general, and administrative expenses were reduced to 25.1% of revenues from 26.2% a year ago.

For the quarter, the operating margin was 11.9% of net sales, up from 10.2% in the third quarter of last year, as we were able to more successfully leverage fixed overhead.

For the third quarter, we reported net income that increased 47% to $2.1 million compared to $1.4 million a year ago, while our earnings were up 40% to $0.14 per diluted share from $0.10 per diluted share in the third quarter of last year.

Quickly looking at the first nine months of fiscal 2012, net sales were up 10%, led by a 21% increase in our Fluid Handling Technologies reporting segment, and a 30% increase in our Mefiag Filtration Technologies reporting segment net sales.

Net income came in at $5 million, up from $4.4 million a year ago.

Diluted earnings per share were $0.34, up from $0.30 per share last year.

Keep in mind that this year's result are also net of a $300,000 or $0.013 per share charge for a voluntary early retirement program in the Product Recovery and Pollution Control Technologies reporting segment.

Met-Pro's balance sheet remains strong with cash on hand and short-term investments at the end of the third quarter of $33.4 million or $2.26 per diluted share.

We generated $5.5 million of positive operating cash flows for the first nine months of the year, which was used to pay quarterly dividends to shareholders and to fund a $2.9 million contribution to our pension plans.

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

Ray?

Thank you, Gary.

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

After an extended period of market weakness brought on by the global recession, we feel we have successfully used these past few years to position ourselves to capitalize, not only on existing opportunities, but also future opportunities arising from an economic recovery.

The steady stream of new order bookings is a strong indicator that our strategy to aggressively attack select niche markets with an engineered solutions mindset is working, both domestically and internationally.

The third quarter was another solid quarter with not only strong top and bottom line growth on a consolidated basis, but solid new order bookings growth as well.

Our pipeline remains robust and our quotation activities strong.

We have mapped a clear strategy to capitalize on the growing opportunities being created by global industrialization and the powerful trends toward global environmental stewardship, energy efficiency, and process improvement, and remain uncompromising in our determination and unrelenting in our pursuit of these opportunities.

The momentum in new order bookings, together with our solid backlog and steady quotation activity, give us continued optimism regarding our future prospects.

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'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.

This time we welcome any questions you may have.

I'd like to ask our operator, Christy, to provide instructions for this portion of the call.

(Operator Instructions) William Bremer with Maxim Group.

Can you hear me?

Yes, I can hear you.

Okay, great.

Okay, let's begin.

First and foremost I would to like to just acknowledge Gary Morgan and wish him all the best.

It was a pleasure working with you, Gary.

Thanks, Bill.

Okay.

Let's begin.

Going into this fourth quarter, you guys have done an excellent job of winning orders.

There's no doubt about it.

I have you at pretty much north of $7.5 million going into the fourth quarter here that we expect to be realized.

That being said, I'd like a little more color in terms of the outlook in terms of your sales as well as your operating margins as we head into that.

In particular, let's go into the Product Recovery, very nice improvement year over year on operating margins.

You're starting to see that leverage from the restructuring program.

Are we -- is it safe to assume at this point that we are over the hump and that this margin that came in at 8.9% this quarter, is this sustainable as we go into the fourth as well as fiscal '13?

William, as you know, with our business, especially the Air side of our business, the margins can very quarter to quarter because of product mix, depending on the size of the projects, the difficulty in the projects you could have a widespread of different margins in those jobs.

So to really predict as far as that every quarter is going to be incrementally growing or stay steady, that's very difficult with that business.

That's half of our business.

So --

Let me ask in a different way then, Ray.

How has been the pricing of the orders that you've been announcing?

It's been a mix.

Some of them are what I would call high margins, some of them are middle of the road, and some are lower than typical.

That's more on the Air side of the business.

When you go over to the Fluid Handling side, you are typically very consistent.

Okay.

All right.

Okay.

Now, let's go into Fluid Handling there.

The growth on that segment level was a little lower than I anticipated, came in at about 4.5% there, but yet margins you were able to hold above the 23% range.

What contributed to the lower year over-year growth?

Is it just timing, or what happened there?

It's primarily timing.

There's a lot of good activity going on there, as you know, we recently announced a large order for that group.

I believe it was $1.3 million.

So the activity is good, it's a timing issue.

That's all that is.

All right.

Now, Mefiag, very solid top line growth.

We are not seeing a leverage.

What happened there this quarter?

Well, we have added some people in the organization as far as to strengthen the organization as it grows and as they reach out more and more worldwide.

So we have done some things on the SG&A line that I think has impacted.

And there has been some pressure on the gross margin side as far as -- particularly, in Europe, where you know the difficulties that are going on there.

So we have seen some impact on the material side as well as we have added some people to improve the overall organization in the operation.

So you are winning in the marketplace but at a lower price.

On some jobs, yes.

Okay, now just a housekeeping.

Now G&A increased quite substantially sequentially as well as year over year.

I know we have the $300,000 hit to the second quarter.

I was not expecting it to increase almost $400,000 sequentially.

Is that now the new amount that should be used as a run rate going forward?

In the fourth quarter, we had some unusual additional payroll expenses, Bill, and we also had some additional personnel acquisition costs that hit us in the third quarter.

I would -- that $3.4 million in the third quarter, I would track that into the fourth quarter and into the first quarter of next year.

Okay.

You went into the acquisition question, which let's open that up.

I know you guys were in talks with three.

One was coming to what we thought was close to coming to finality.

Where does the acquisitions stand at this point?

And could you give us some color on the size of these acquisitions?

I won't go into the details on the size, Bill.

I don't want to do that, but we are still working on them.

One in particular that is, basically, accelerated I think a little more quickly than we had anticipated but we are working on them and hopefully be able to bring some things to fruition.

Okay.

Very solid gross margins on a consolidated level, 37%.

If my memory stands correct, that's one of the highest margin quarters that you guys have had in many years.

As we look out, still a mix, but are you able to give us a range that you feel comfortable with as we head into fiscal '13?

Bill, I think that you're right.

The 37% is the highest gross margin Met-Pro has ever achieved in a quarter.

I would use a range somewhere in the 35.5% to 37% range.

Okay.

For next year, okay?

Very nice quarter, gentlemen.

I will hop back in queue at this time.

(Operator Instructions) Rebecca Simmons with DePrince, Race & Zollo.

I'm just looking at the backlog here.

You guys have had some great growth over the last couple quarters.

Do you think this level is sustainable, or are you expecting further growth going forward?

Yes, we do expect further growth going forward.

As I mentioned, when William was asking his question, we recently announced a large order for our Pump Group.

We have other orders that we are working on.

The quotation activity is strong.

The project queue as far as potential orders is there.

We are pursuing them, pursuing them hard during the second half of this year.

We've closed a lot of large orders.

There's a lot of them out there.

Even though the economy isn't that great overall when you read the newspapers and the magazines, that top line, that booking line continues to have momentum.

That sounds great.

Can you give us an idea maybe of how much of that comes out of Pollution Control compared to Fluid Handling?

I think in this last period as far as when you look at the last three months, the Pollution Control was $12.6 million in bookings.

When you look at that, that was up from the previous year where we were at $9.2 million, so they have a lot of activity, but it's not limited to that.

The Global Pump Solutions business has a lot of opportunities out there worldwide.

That's the thing that's exciting, too, along with the pollution control.

It is just not one group.

As I mentioned in my talk earlier, it's -- we are seeing activity over a number of markets, not just one market.

We booked a large order in the past several months in the landfill area.

We booked one in the solar panel area.

We've had the university one that we booked as far as for laboratory fume and exhaust.

We had just recently the $1.3 million on the pump side, so we have a diverse brand offering, and we are seeing a lot across those brands.

Rebecca, of the $28.6 million of backlog that we had going into -- as of October, $21 million of that is coming from the Product Recovery side of the business.

Okay.

All right.

Great.

And then do you have -- looking more long term, do you have some targets where you would like to see these segments' margin targets?

We do, we don't give any guidance on what they will be, but we are looking to through our efficiency programs as far as lean programs here on the operations side as well as the front end of our business plus the way we are transitioning from a product seller to more of an engineered solution with products.

That's where we are looking to drive the margins as we go forward.

So we are looking for improvement in different areas as we navigate through this.

If you go back and you look at our Fluid Handling side of our business, several years ago, we put the group together.

Initially, it had some issues.

It took a while for it to really start to gain the traction and move along to where it is today.

Keep in mind, we have only in the last two years, it has been where we have taken our Air side and put numerous pieces together.

That's beginning to gain traction, especially with the engineered solution portion as far as where they are going in and not just selling an individual product but a solution with multiple products if need be.

Okay.

That sounds great.

So do you think there is a good -- and maybe you can give us an idea of maybe the magnitude of the room for cost cutting you have over maybe the next couple years or so?

I don't know so much if it is cost cutting.

It's efficiency improvements but it's also being able to sell more competitively in the marketplace as far as price because of what you are offering rather than just the product you are offering, more of a solutions-based type opportunity to the customer.

Let's put it this way; a lot of what we compete against might be small-type businesses where they go in with one product and that's the product they are looking to sell.

We can now go in the way we are situated in the way we built our business, we can go in, ask the customer about his problem, look at the issues they have, present a solution.

It could be multiple Met-Pro products, it could be one Met-Pro product, it could be a combination of Met-Pro and other products but the bottom line is, that gives us a competitive advantage over our competition that's going in with one and as a result, we believe we can improve the margins through that.

Now we can also improve it through better buying globally, which we are doing and as well as making our plants more efficient.

So it's a combination.

It's -- even when you look at things and it says material cost, that material cost can be affected by material price, either increases or decreases but also how you are selling.

So it's a combination of the two, it's the -- of the three, actually -- the material cost, how you are selling, and what margins, what competitive advantage you have, and differentiators, and then your efficiencies within the manufacturing end of your business.

So they all three play a role.

Okay, great.

That was very helpful.

That's all the questions I have.

I really appreciate you answering everything I needed.

Tom Spiro with Spiro Capital.

Good morning.

Question one, as I understand your plans, you are hoping to generate a larger fraction of your business from international sources as time passes.

What will that do to your margins?

How will they be affected as the foreign portion of your business increases?

I think that internationally, what we find, especially we try to focus in on the multinationals that are also going international, that are international presence.

So we focus there.

I don't think it's going to impact as much as far as where I think we can get the same kind of margins, if not maybe slightly better because what happens is it's more of a level playing field and there's not as many competitors.

When I say not as many competitors, when you are dealing locally or domestically here, you've got a lot of local regional type competitors.

They are not there internationally.

So you have your normal, your larger competitors that will compete against you and you are playing more on a level playing field because they have to look at margins, they've got to look at the overhead and everything versus let's say a small business that's basically looking at making income, period.

I see.

As I recall from one of your earlier press releases, you recently established a new office in South America.

It might have been Colombia or Brazil.

I don't recall precisely the country.

It's in Chile.

Chile, I'm sorry.

(multiple speakers) legal entity in Chile.

We have a business development person down there that is looking at only -- he's looking for opportunities.

It's not really -- his job is not really a salesman.

It's more uncovering the opportunities and looking and working with our Procurement Group and our Engineering Group.

How do we really establish ourselves down there to drive our business down there?

So we just have one guy down there?

At this point, yes.

Okay, and then as I recall in China, we added to the sales force recently.

Yes, we also have a business development person over in China that is on the Air side of our business looking for the opportunities, again, working with our Procurement Group and Engineering Group to see what we need to do to really take advantage of the opportunities overseas in that area.

I see, I see.

That's helpful.

Thanks.

Secondly, pricing.

I was just curious whether -- as you're generally speaking, looking across the portfolio, whether pricing has generally been stable over the last six months or so, or has it changed much?

I mean pricing of our products.

As far as our products, is it whether or not we raised the price or --

Or lowered.

Or how we are quoting?

More of which you are obtaining.

Okay, well, there is a mix.

When you look at the Fluid Handling side, they are typically higher margins with as far as with the pumps.

We've got specialty pumps.

We are known in niches that we are one of the top players if not the top player, so those margins have been very strong.

If not, they've been improving.

When you look at the Air side, they've started to improve, too, as we gain traction.

But there is, again, jobs as I mentioned to William where it varies depending on the job, depending on the application and so forth.

It can vary from a lower margin versus typical to a high margin, but overall, I think our margins are pretty good, pretty steady.

Okay.

Then thirdly, not to beat a horse to death, but the G&A line.

If I understood the response to an earlier question about the G&A at $3 million, what was it, $4 million, $3.3 million?

That level is what we should expect going forward.

I'm just a little curious as to why it seems to have jumped up.

Well, one thing is, as Gary mentioned, we've added some people to supplement the good core of people that we've had.

One of the things is when you look at our business, we had to add people that were basically salespeople that were going after the order, chasing the order, looking to close the orders, and so forth.

We've added people, as I just mentioned, in our conversation where business development type people where we are looking at not just the order, the current order, we're looking at the opportunity down the road.

So we are going in at different levels.

So we've added people there and strengthening the organization.

We've had to add people on the operations side also as far as with to execute some of the jobs and the more complicated things that we are doing.

The compensation for our overseas folks or for our people to help us execute particular jobs, those are booked as G&A?

Well, we have some -- as far as when you go into the general, administrative and the -- you have the sales and the G&A.

We have in the general administrative, well, I was talking overall SG&A.

I apologize.

No problem.

I was particularly curious about G&A.

G&A, we've done some things in the corporate staff that we didn't have in place last year as far as we have a business development, a Director of Business Development that looks across all the Company's business units globally.

That position was not there.

Late last year, we had added a Director of Human Resources, so there's been some additions there on the corporate staff.

Okay.

Now lastly, just a request.

I think in your most recent press release or one of your recent press releases disclosing new order, you mentioned that it was an international order, and I, for one, found it helpful to know that some of the business was coming from abroad.

You might consider in future new order releases to identify whether it's a domestic or foreign order, I would find it helpful, perhaps others would, too.

Yes, what we try to do, Tom, when we release these news releases, we will put in that it is for a location in the -- out West or Midwest, that type of thing.

If it's an international, it will definitely state that it's an international order.

Sometimes we are not allowed to actually put the location because the customer won't allow it.

Thanks much and good luck.

(Operator Instructions) William Bremer with Maxim Group.

The large research laboratory hood exhaust system order that we received recently, when is that expected to ship?

Do you have any -- have you finalized a particular quarter where you feel as though you will be able to realize this shipment?

At this point, it looks like most likely it would be the first quarter of the coming year.

Okay.

And then, I would like to go into the balance sheet a little bit.

We had a significant increase in customer advances.

Can you give us some color on that for the quarter?

This is related to the amount of orders we got in the Product Recovery and Pollution Control.

A lot of them are done in progress payments where we get funds upfront, and that's why that is going up significantly because the backlog is going up.

So we try to collect our cash before we actually ship the product.

Okay.

Now, William -- remember, William, as far as with the way we recognize revenue, okay, we will get these cash, these advances but we don't recognize the revenue at that time.

These are just advances.

Exactly, they are advances.

But what I am getting at there is there have been times where we will have equipment built, ready to go and because of a customer delay, the job site not being ready or whatever, even though it's fully built, we can't recognize the revenue.

That happens from time to time.

Okay.

That's exactly where I was going with it, Ray.

All right.

Finally, you guys, you've got over $2 in net cash here.

Where does the stock buyback stand at this point, and are -- will you start it up again in terms of being active at these valuations?

We are reviewing it.

The Board is looking at it on a continuous basis and depending on the price of the stock, we haven't actively been in there buying, but if it gets down to a low enough price, Bill, we would be interested in looking at it.

Can you refresh us in terms of what is available at this time?

About 300,000 shares are available at this time, Bill.

Okay, Gary.

Thank you.

That concludes our question-and-answer session for today.

I would like to hand the program back over to Mr.

De Hont for any further comments or closing remarks.

Thank you, Christy.

Once again, thank you for joining us this morning.

We hope we have been able provide you with the 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.

This concludes today's conference call.

You may now disconnect.