Met-Pro Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: Met Pro (MPR)

Met-Pro (NYSE:MPR)

Q1 2014 Earnings Call

June 06, 2013 11:00 am ET

Executives

Kevin Bittle

Raymond J. De Hont - Chief Executive Officer, President and Director

Neal E. Murphy - Chief Financial Officer, Vice President of Finance, Treasurer and Secretary

Analysts

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

William D. Bremer - Maxim Group LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Met-Pro First Quarter Results Conference Call. [Operator Instructions] I will now turn the call over to Kevin Bittle, Manager of Creative Services. Please go ahead, sir.

Kevin Bittle

Good morning, and welcome to Met-Pro Corporation's earnings conference call for the first quarter of fiscal year 2014, which ended on April 30, 2013. My name's Kevin Bittle and I'm with the company's Creative Services Department.

With me on our call this morning are Ray De Hont, our Chief Executive Officer and President; and Neal Murphy, our Vice President of Finance and Chief Financial Officer.

Before we begin, I'd like to remind everyone 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 year-end report for the fiscal year ended January 31, 2013, that was filed with the SEC for any 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.

Further, during today's call, we may refer to adjusted net income and adjusted earnings per share, which are non-GAAP metrics which include first quarter fiscal 2014 legal, accounting, investment banking and other transaction-related expenses, as well as 2013 CFO transition costs. The company believes the use of these non-GAAP measures is appropriate to enhance understanding of its historical performance as well as prospects for future performance.

Adjusted net income and adjusted earnings per share are non-GAAP measures that are detailed in the table titled Reconciliation of GAAP to Non-GAAP Financial Measures that was included in this morning's press release and are now posted on our website.

With that, I will now turn the call over to Ray. Ray?

Raymond J. De Hont

Thank you, Kevin. Good morning, everyone, and welcome again from Harleysville, Pennsylvania. Earlier this morning, we released our first quarter fiscal year 2014 financial results. I hope all of you have had the opportunity to review them. In a moment, Neal Murphy will provide more specific comments on our financial results. But first, I would like to offer my perspective on our performance.

In the first quarter, we demonstrated continued progress in our overall efficiency initiatives and disciplined cost control as we improved gross margins while reducing selling, general and administrative expenses when compared with the first quarter a year ago. Gross margins in the first quarter were 36.5%, up 100 basis points from 35.5% versus last year's first quarter. The improvement reflects structural and organizational changes to improve operational effectiveness and efficiency, as well as disciplined cost control. Margins in the quarter also compared favorably with the 34.4% achieved for fiscal 2013.

I'm particularly pleased with the results in our Product Recovery/Pollution Control Technologies business, where our focused efforts continue to show steady margin improvement, which accounted for a significant portion of this quarter's year-over-year margin expansion.

Total selling, general and administrative expenses in the first quarter were down roughly 10% or over $700,000 from the first quarter a year ago after adjusting for last year's CFO transition expenses. This improvement also reflects structural and organizational changes to improve operational effectiveness and efficiency, as well as disciplined cost control. I would also note that total overhead was down sequentially from the fourth quarter of last year, a continuation of the sequential improvements achieved over the past year, as we made steady progress reducing overhead as a percentage of revenues.

Net sales, bookings and backlog in the quarter were all down from a year ago, reflecting the quarterly variability that is endemic to our business. However, backlog increased 8% from the beginning of the fiscal year.

As we have previously noted, quarterly variation can simply be due to the timing of one large project booking or shipment. This year's first quarter results reflect the timing of large project bookings, which either closed later than expected or are in various stages of negotiations but have not closed in the timeframe originally anticipated, both of which have negatively impacted fiscal 2014 first quarter sales.

Routine bookings for original equipment, as well as parts and consumables, are actually ahead of last year's first quarter pace. For instance, although overall Global Pump Solutions bookings were down due to the timing of large project work, routine bookings in the first quarter were actually up 18% from the first quarter a year ago.

Just a little insight as to some of the factors affecting this quarter's booking metrics. A vast majority of the year-over-year new order bookings decrease was in our Global Pump Solutions business, where a year ago, we booked a $6 million project. While it is difficult to say we are going to have another project of that magnitude in Global Pump Solutions again this year, there is sufficient activity to indicate that we can recover those bookings in the form of Global Pump Solutions singles and doubles over the balance of the year. At the same time, in our more backlog-dependent businesses, mainly Product Recovery/Pollution Control, bookings and backlog in the first quarter were up 24% and 15%, respectively, from a year ago.

For instance, in the first quarter, we booked 2 orders totaling $2.3 million to supply Flex-Kleen brand pulse jet dust collectors and Product Recovery systems to a large multinational chemical manufacturer. We also booked 2 large orders totaling $2 million to supply 2 U.S. municipalities with dual-brand chemical scrubber systems.

Importantly, separate independent engineering firms specified Met-Pro brand products for these contracts, a strong indication of the success we are achieving with our marketing strategy to build key relationships throughout targeted industries. We were also successful in booking a $600,000 Met-Pro systems brand, Regenerative Thermal Oxidizer project, in the first fast-growing green fuels market. And more recently, in April, a $500,000 system that included a Met-Pro systems brand Regenerative Thermal Oxidizer, a dual-brand chemical scrubber and a Fybroc brand recirculation pump.

To complete the picture, quotation activity remains strong while our pipeline of potential opportunities continues to grow. Because we have experienced quarterly variability before, in fact, as recently as the first half of last year, we remain optimistic about the outlook for the full year.

Before turning the call over to Neal, I am pleased to announce the company's Board of Directors declared a $0.0725 quarterly dividend to be paid September 13, 2013, to shareholders of record on August 30, 2013. This is the 22nd consecutive year that Met-Pro Corp. has paid a cash dividend.

As previously announced, on April 21, 2013, the company entered into an agreement and plan of merger, the merger agreement with CECO Environmental Corporation. Pursuant to the terms of the merger agreement, in the event that the closing date of the first-step merger, as defined in the merger agreement, occurs before August 30, 2013, then the dividend declared on June 5, 2013, shall not be paid to the company's shareholders. However, in such event, CECO has agreed to set its record date for the payment of its third dividend occurring during its current fiscal year to occur on a date that is at least 2 business days after the closing date of the first-step merger.

Neal?

Neal E. Murphy

Thank you, Ray, and good morning, everyone. First quarter net sales were $22 million compared with $25.2 million for the same quarter last year, with a decreased spread across our business segments. As Ray noted, despite lower revenues, we were able to increase year-over-year gross margins by 100 basis points from 35.5% to 36.5%. This consolidated gross margin improvement is particularly encouraging, because it was achieved despite lower sales in our high-margin Fluid Handling Technology segment.

Turning first to our Product Recovery/Pollution Control Technology segment, first quarter sales were $9 million, down 15% from a year ago first quarter. Despite substantial quoting activity, timing of purchase orders and shipments on potential large projects lagged a bit in our first quarter.

More importantly, this segment reported better than $0.5 million improvement in operating profits despite lower net sales. As Ray mentioned, we've worked hard on improving profitability in this segment through operating effectiveness and efficiency, and results of this quarter are a continuation of the turnaround that began to take hold in the second half of last year.

In our Fluid Handling Technology segment, first quarter net sales were down 14% to $8.1 million. Despite lower volumes, we were able to maintain Fluid Handling operating margins at 25.3% for the quarter, which were constant with last year. While standard business in our Fluid Handling business was actually up from a year ago, the timing of our larger project business was down from the first quarter of fiscal 2013.

Based upon current project business activity levels and the growth of our standard business, we believe Fluid Handling should achieve its fiscal 2014 performance objectives.

Turning to our Mefiag Filtration Technology segment, first quarter net sales were down $2.6 million, down about 8% -- I'm sorry, they were $2.6 million down about 8% from a year ago, mainly due to lower volume in Europe. Despite lower revenues, operational efficiencies enabled Mefiag to slightly outperform last year's first quarter earnings performance with an operating loss of $35,000 this year as compared to last year's first quarter loss of $70,000.

Finally, first quarter net sales in our Filtration/Purification Technologies segment decreased approximately 9% from the prior year first quarter, principally due to continued weak municipal demand in our Pristine Water Solutions business unit. However, this segment recorded an operating profit of $117,000 in the quarter, a nice improvement from the $122,000 operating loss for the first quarter of last year, once again, reflecting focus on productivity enhancement throughout the organization.

On an absolute basis, selling expenses were down over $300,000 or about 9% from the first quarter of last year. Because of the variable nature of sales commissions, selling expenses tend to trend with sales.

General and administrative expenses decreased 27% in the quarter. And even after adjusting for last year's $700,000 of CFO transition-related expenses, we were still down roughly 12% or over $400,000 from the prior year first quarter.

Total G&A expenses were also down $300,000 sequentially from the fourth quarter of last year, a continuation of the progress achieved over the past year as we've moved towards our stated objective of reducing SG&A to roughly 20% of revenues over the longer term through a combination of cost control and revenue growth.

We incurred $1.4 million of legal investment banking, accounting and other transaction expenses in the first quarter associated with the company's previously announced acquisition by CECO Environmental Corp.

On a GAAP basis, first quarter net income totaled $230,000, and diluted earnings per share were $0.02. Adjusted net income for the quarter, which is a non-GAAP measure, was $1.5 million or $0.10 per share compared with adjusted net income of $1.6 million and diluted earnings per share of $0.11 for the same period last year.

Adjusted net income and adjusted earnings per share are non-GAAP measures that are detailed in the reconciliation of GAAP to non-GAAP financial measures section of our earnings release.

In arriving at adjusted non-GAAP income, we carved out merger-related expenses of $1.4 million in the first quarter of this year and CFO transition cost last year of approximately $700,000 from net income.

Turning to our balance sheet. It remains quite strong with cash on hand and short-term investments at April 30, 2013, of just under $40 million and continued a reduction in debt levels to $2.6 million. Cash flow from operations were almost $7 million in the first quarter.

In summary, despite lower sales volume for the quarter due to timing of large order projects, orders and shipments, business activity is strong, and our continuous improvement efforts have enabled us to increase adjusted operating margins to 10.4% in the first quarter compared with 9.7% in the first quarter a year ago. Again, adjusted operating margins exclude merger costs in the first quarter of this year and CFO transition expenses in the first quarter of last year.

We expect our continuous improvement activities will translate into ongoing increases and operating margin leverage as strong levels of market activity are converted into increased revenues.

With that, I will turn the call back to Ray for some closing comments.

Raymond J. De Hont

Thank you, Neal. Just a few concluding remarks before we open the call to your questions.

We are extremely excited about the recently announced merger of Met-Pro Corp. and CECO Environmental Corp. This is truly a combination in which the whole will be much greater than the sum of the parts. We are confident that this combination will lead to increased growth and profitability, well beyond what would have been achieved by either company on a standalone basis. The market synergies, the expanded global footprint, the diversification of the product platform and the cost efficiencies associated with combining our 2 companies are just a few of the compelling drivers behind this combination.

Further, the strong financial position of the combined company should enable continued expansion and market leadership in our chosen markets and generate significant value for all of our shareholders.

As the merger process progresses, Met-Pro will be focused on sharpening our organization to ensure our shareholders realize the full benefits of this combination. Product selectivity, disciplined pricing and effective project execution should help expand margins. Disciplined cost control will help capture the operating leverage in our business model, and a commitment to sustain the investment we are making in our sales and marketing strategy should continue to build the Met-Pro brand on a global basis, creating growth opportunities, both now and in the future, that will mitigate quarterly variability on the industries we serve.

I'd like to thank the many loyal, dedicated, talented employees who have contributed to our success and who are the foundation on which the combined Met-Pro and CECO Enterprise will be built. I also want to 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 Bittle

Thank you, Ray. At this time we'll welcome any questions you might have. I'd like to ask our operator, Laurie, to provide instructions for this portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Gerard Sweeney of Boenning.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Nice job of the expenses in the SG&A. If you have trouble hearing me, let me know. I'm actually on a train. But I'm wondering if you could just dig in a little bit more on the Product Recovery/Pollution Control. I'm assuming some of the timing of projects that were focused on, on your [indiscernible]. Curious to see were there any specific large projects that got pushed out to the next quarter? Or was it a series of smaller projects and just overall timing in general?

Raymond J. De Hont

It's a combination of things, Gerry. Well, our normal business, we have projects, $1 million projects, $1.5 million and so forth. But some of them, the timing isn't what you expect, and that's what happened here on that particular side of the business where you had some projects there. But on the Fluid Handling side, if you go over to that side, you had a very large project last year, which I mentioned, which was a $6 million project, which is an extraordinary size project, not a normal day-to-day business or even project business. But it really comes down to where we're not losing them, but the negotiations got eased and sees [ph] and you're in that mode. You got early stages and you have middle stages. So we're in various stages, a lot of opportunities out there. There's opportunities, for instance, in the woodworking industry. We see that coming back with housing. Automobile industry is perking up. And even in municipal, as I mentioned, we sold a couple of projects into the municipal marketplace, which is a good sign for our Product Recovery/Pollution Control, but it all comes down to timing as far as when these projects hit these events.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Okay. I'm sorry, I apologize. Is that business a little bit seasonal as well as [indiscernible] call, maybe had like a build up until the end of the year? Or is that a way to look at it on the PRPC?

Raymond J. De Hont

Well, look at it this way, okay? When you look at January and February, not a lot of construction's going on during those months. So you could have some of that and we see some of that where customers in different parts of the country don't want their equipment until, let's say, our second or third quarter because of the weather, the impact to a construction project. So there's some seasonality because of that.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Okay, got it. Finally, the cash flow seemed pretty good, $7 million. I mean, is that just a little bit of timing of some of the cash coming in? Or is that -- just a detail or 2 on that?

Neal E. Murphy

Yes, Gerry. It's a combination of things. Some focus on the working capital side, a little higher profitability as a percentage of sales. But the largest driver is cash advances. That can -- there's a lot of timing issues around customer cash advances, and we received a substantial cash advance in the quarter that drove cash flow up.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Okay. And then any comment on the deal closure timing?

Raymond J. De Hont

Well, as it was published, the published date was, we were estimating September. And I couldn't give you any other estimate than that, what we put on the table there, because we have no control over it, as far as with the SEC and so forth.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Got it. Now just a little bit of a different question. If you pull -- I did notice that a dividend was being paid of record at the end of May. Are we going to squeeze another one of those, get one in before the merger closes?

Raymond J. De Hont

Well, as we discussed during the conversation earlier, we have basically announced a quarterly dividend. But we also made it clear that as previously announced, in the April 21st conference call and the information that went out, that this may not happen if this merger closes before August 30.

Neal E. Murphy

Yes. So, Gerry, there's 2 -- as you said there's 2 different dividends. We have the one that the shareholders of record May 30th that will be paid June 14. And then we've announced a second dividend today to shareholders of record as of August 30. And if the transaction closes...

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

I got it. Okay, I misread that, I apologize.

Raymond J. De Hont

Gerry, one clarification, okay. You were talking about bookings with the Product Recovery/Pollution Control side. Their bookings are actually up year-to-date over last year.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Okay, got it. Yes, I was just curious. Just more on timing and how it develops. It seems maybe just a little bit of a promise [ph] to year end sometimes, but I understand.

Raymond J. De Hont

Okay.

Operator

[Operator Instructions] Your next question comes from the line of William Bremer of Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

Let's talk pricing of the bookings. How's pricing year-over-year? And let's go through the segments, if we can.

Raymond J. De Hont

Well, I think overall, we're doing a better job as far as getting value for our products, and that's what we've set out to do. If you remember, last year, we had especially on the Product Recovery/Pollution Control side, we had some issues with regard to margins. And we've dedicated time and energy to improving that and getting the value that we're selling, getting paid for the value. So they've improved.

William D. Bremer - Maxim Group LLC, Research Division

Okay, so pricing in backlog is better year-over-year?

Neal E. Murphy

That's correct. I think, Bill, I'd say, even across the segments, I'd say, we're not seeing price reduction and we're seeing selective price increasing and really a concerted effort, particularly in Pollution Control Product Recovery. Now each project is a little different, so it's hard to say year-over-year pricing. But we're focused on getting value -- getting paid for the value we're delivering.

William D. Bremer - Maxim Group LLC, Research Division

Okay, no, agreed. Mefiag, let's go there. We're starting to see the automotive build, stabilize, even grow a little bit here. A lot more optimistic talk in that segment. I'm assuming Mefiag sequentially should be better than this first quarter.

Raymond J. De Hont

When you look at our outlook for the year, we're seeing as far as the automotive, we're also seeing the housing where that should start to actually help Mefiag. They also are getting into the printed circuit board market. We have a filter that we've designed, working with one of the chemical suppliers in that industry for that specific industry, which is a much bigger industry than the metal finishing and plating. So we're trying to expand the market breadth from Mefiag. But you're right, Bill, especially in Europe, you're actually starting to see some activity in Europe with the automotive. Now on the housing side, that's in the pits over there. But of course, in the U.S. and other parts of the world, the housing is coming back and we see that being a positive impact on Mefiag, globally.

William D. Bremer - Maxim Group LLC, Research Division

Any chance you want to comment on what your targeted margins are for the year in that segment?

Raymond J. De Hont

No, very simply.

William D. Bremer - Maxim Group LLC, Research Division

Neal, in your commentary, you spoke on the Fluid Handling year objectives. What are those objectives?

Neal E. Murphy

Yes, we don't share specific objectives for the company or for each business. But we continue to see growth in our core business, and that includes the core elements of GPS.

William D. Bremer - Maxim Group LLC, Research Division

Okay. So I noticed that you bought back some stock in this quarter. I'm assuming that was prior to the announcement of the acquisition. Now, does that cease because of the timing?

Neal E. Murphy

Yes, I think there were very, very small amount of options with respect to prior employees. But beyond that, any -- there's prohibitions against the trading up through the proxy filing.

William D. Bremer - Maxim Group LLC, Research Division

Okay. And my last question is just on the restructuring. Fantastic job on really curtailing the expenses, pretty much broad based. How much -- what inning would you say you're in on that, currently? And how much more can we expect?

Neal E. Murphy

Yes, that's a fair question. If you kind of look at our history, and I'll talk in percentage terms, Bill. But obviously events and variations in revenue can change that. But if you look at the last few years, our SG&A was, a few years back, 26% of sales and 24% of sales the following year, 24.7%. And last year, it was 23.6% of sales. And we're -- we've publicly stated that over the next few years, we see 20% as a realistic target and we see continuing on that trend line this year. And it's a combination of selective cost reduction and cost control, but it's also continuing to grow the revenue line the way we have over the last few years.

Operator

At this time, there are no further questions. I will now return the call to Ray De Hont for any closing remarks.

Raymond J. De Hont

Thank you, Laurie. Once again, thank you 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.

If you should have any further questions, please feel free to contact either Neal or me at any time.

Thank you.

Operator

Thank you for participating in the Met-Pro First Quarter Results Conference Call. You may now disconnect.

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