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Peerless Manufacturing Co. (NASDAQ:PMFG)

F4Q09 Earnings Call

September 14, 2009 10:00 am ET

Executives

Kevin McGrath – Cameron Associates

Peter J. Burlage – President and Chief Executive Officer

Henry G. Schopfer III – Chief Financial Officer

Analysts

Richard Hoss - Roth Capital Partners LLC

Richard Ryan - Doughtery & Company LLC

Ted Kundtz - Needham & Company

David Cohen - Midwood Capital Management

[David Cohen – Aveena Capital Management]

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter fiscal year 2009 PMFG Incorporated earnings conference call. My name is Dan and I’ll be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Kevin McGrath of Cameron Associates.

Kevin McGrath

Good morning everyone and thank you for joining the PMFG conference call and webcast to discuss the company’s financial results for the fourth quarter fiscal year 2009 ended June 30, 2009.

During this call non-GAAP financial measures will be discussed. Reconciliations to the most directly comparable GAAP financial measures are included in the company’s earnings release for the fourth quarter which is available on the Investor Relations page of the company’s website at www.peerlessmfg.com.

Before I turn the call over to Peter Burlage, the President and CEO of PMFG, I need to inform you that certain statements made in this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact made during this call are forward-looking statements. These forward-looking statements include statements that reflect the current views of PMFG’s senior management with respect to our financial performance and future events with respect to our business and our industry in general. Statements that include the words anticipate, preliminary, expect, believe, intend and similar statements of a future or forward-looking nature identify forward-looking statements. You should not place undue reliance on these statements. Forward-looking statements address matters that involve risks and uncertainty.

Accordingly there are or will be important factors that could cause the company’s actual results to differ materially from those indicated in these statements. Important information regarding factors that may affect the company’s future performance are included in the public reports that the company files with the Securities and Exchange Commission including the information in Item 1.A, Risk Factors of Part 1 of our annual report on Form 10-K for the fiscal year ended June 30, 2009, which we intend to file later today.

The company undertakes no obligation to update or revise any forward-looking statement. The inclusion of any statement in this conference call does not constitute an admission by the company or any person that the events or circumstances described in such statement are material.

With that said I will now turn the call over to Peter Burlage, President and CEO of PMFG.

Peter J. Burlage

Thank you, Kevin and welcome everyone to our fourth quarter and year-end conference call. Joining me today is Hank Schopfer, our Chief Financial Officer.

I will address our overall business and then Hank will provide you with our financial results for the fourth quarter. Following Hank’s remarks we will open the call up to your questions.

Fourth quarter and full year results reflect the impact of the worldwide recession that has caused our customers in natural gas, refining, petrochemical and power markets to lower capital spending and delay purchases. However, we are starting to see some early signs of stabilization in our end markets, continued strong activity in the nuclear power market and a more stable credit market. Additionally we have begun to see a modest pick up in our sales activity in the Environmental segment, specifically in the area of peaker power projects. The challenge for us during these uncertain times is predicting when the recovery will occur, how robust it will be and perhaps more importantly, when will the customer make the purchase order commitment.

Looking back for a moment, we entered into fiscal year 2009 in a very strong position and a substantial backlog but then the global recession hit our customers and consequently us. We focused on what we could control and that included our operating expenses, procurement, customer service and the necessary investments to maintain our competitiveness, grow our market share and preserve our reputation as a provider of high quality, reliable products. Throughout the second half of fiscal year ’09 we continued our internal initiatives to align our business resources appropriately with the demand. These initiatives were company wide with particular focus on controlling our manufacturing and operation costs. I am pleased to report that the integration of Nitram Energy has proceeded very well and we are continuing to see the benefit from their manufacturing, product offering and customer relationships in our Process Product segment.

Revenues in Q4 were down 8.1% with both our business segments negatively impacted and across most of our major regions of operation. Our Process Product segment revenues declined by 6.7%, while the Environmental segment saw a decline of 13.4%. On an annual comparison our Environmental segment was up against a tough comparison due to one large order flowing through the first three quarters of fiscal year 2008. Additionally, lower energy demand coupled with the reduction in large capital goods projects contributed to the decrease in demand for SCR equipment.

Orders in backlog are continuing to show the impact of end users of our products reductions in capital investment. Backlog at the end of June was approximately $73 million, down from $85 million at the end of March, 2009 and from $107 million at the end of June, 2008. Our net bookings for the fourth quarter was approximately $25.6 million. Given the still volatile energy markets and global economic conditions, we would expect that quarterly orders to remain uneven. As I stated earlier there are some signs of stabilization in our end markets, but near term visibility in both our business segments remains spotty.

On a positive note, we continue to be pleased with the order and quotation activity for the separation equipment for the nuclear power industry. And we are seeing the benefit of having established a manufacturing presence in China to serve its nuclear industry as well as the manufacturing and supply of separation and filtration equipment for China and other markets in Asia.

With the dynamics I’ve just described as the backdrop, we expect to continue to see reduced activity levels year-over-year for most of our major end markets for the first half of fiscal year 2010. The recent reports from our customers and the macro reports we read lead us to conclude that the first half will be challenging with the second half showing some early signs of recovery. Since the consensus is that we will not see a V-shaped recovery worldwide, we will continue to focus on our cost control initiatives to insure we balance our expenses with our current projected business levels.

In the long term, the trends of our business continue to be very favorable. Energy demand, while temporarily curtailed by the global recession, is expected to continue to grow and with the preference for natural gas this development would benefit both our business segments. When the global economy improves and demand by our customers increases, we believe PMFG will be positioned with its broad product offering to capture the new business and expand our market share.

That concludes my review of our two business segments. I’d like to ask Hank now to share with you the key financial results for the fourth quarter of fiscal year 2009.

Henry G. Schopfer III

Thank you, Peter. Let me take a moment to summarize our financial highlights for the fourth quarter of fiscal year 2009.

On April 30, 2008 the company acquired Nitram Energy and since the date of acquisition has included Nitram’s financial results, including purchase accounting adjustments, in the company’s results for the three and 12 months ended June 30, 2009. In the first quarter of fiscal 2009, we completed a holding company reorganization in which each share of Peerless common stock was converted into two shares of PMFG common stock. All per share information including in our earnings release and in this presentation have been adjusted retroactively to give effect to the two-for-one conversion.

Revenues for the fourth quarter of fiscal year 2009 were $37.6 million, a decrease of $3.3 million or 8.1% compared to revenues of $40.9 million for the fourth quarter of fiscal year 2008. Net earnings for the fourth quarter of fiscal year 2009 was $2.6 million or $0.20 per diluted share, an increase of $4 million or $0.31 per diluted share compared to a net loss of $1.4 million or $0.11 per diluted share for the fourth quarter of fiscal year 2008.

In the fourth quarter of fiscal year 2008, the company recorded as part of cost of goods sold $2.7 million of backlog amortization and expense and an additional $2.3 million of expense related to the fair value inventory adjustment. On a non-GAAP basis, excluding the expenses related to the fair value adjustments of Nitram’s backlog and inventory, the company would have recorded net earnings of $1.9 million or $0.15 per diluted share for the fourth quarter of fiscal year 2008.

Revenues for fiscal year 2009 were $158 million, an increase of $17.5 million or 12.5% compared to revenues of $140.5 million for fiscal year 2008. Net earnings for fiscal year 2009 were $2.9 million or $0.22 per diluted share, a decrease of $5.5 million or $0.42 per diluted share compared to net earnings of $8.4 million or $0.64 per diluted share for fiscal year 2008.

On a non-GAAP basis, excluding expenses related to the fair value adjustments of Nitram’s backlog and inventory, the company would have recorded net earnings of $7.8 million or $0.59 per diluted share for fiscal year 2009. On a non-GAAP basis, excluding the expenses related to the fair value adjustment of Nitram’s backlog and inventory described above, the company would have recorded net earnings of $11.7 million or $0.89 per diluted share for fiscal year 2008.

Process Product segment revenues for the fourth quarter of fiscal year 2009 were $29.2 million, a decrease of $2.1 million or 6.7% compared to revenues of $31.3 million for the fourth quarter of fiscal year 2008. The Process Product segment operating income for the fourth quarter of fiscal year 2009 was $5.8 million, an increase of $4.1 million compared to operating income of $1.7 million for the fourth quarter of fiscal year 2008.

Process Product segment revenues for fiscal year 2009 were $123.3 million, an increase of $43.8 million or 55.1% compared to revenues of $79.5 million for fiscal year 2008. Process Product segment operating income for fiscal year 2009 was $17.7 million, an increase of $7.5 million compared to operating income of $10.2 million for fiscal year 2008.

Nitram’s operating results since the acquisition on April 30, 2008 are reported in the Process Product segment and include expenses of $3.8 million and $2.3 million related to fair value adjustments of Nitram’s backlog and inventory respectively for fiscal year 2009, and $2.7 million and $2.3 million respectively for fiscal year 2008. On a non-GAAP basis, excluding the expenses related to the fair value adjustments of Nitram’s backlog and inventory, the Process Product segment would have recorded operating income of $5.8 million for the fourth quarter and $23.8 million for the fiscal year 2009 compared to operating income of $6.7 million for the fourth quarter and $15.2 million for the fiscal year 2008.

In the Environmental Systems segment, revenues for the fourth quarter of fiscal year 2009 were $8.4 million, a decrease of $1.3 million or 13.4% compared to revenues of $9.7 million for the fourth quarter of fiscal year 2008. Environmental Systems segment operating income for the fourth quarter of fiscal year 2009 was $1.9 million, an increase of $0.5 million compared to operating income of $1.4 million for the fourth quarter of fiscal year 2008.

Environmental Systems segment revenues for the fiscal year 2009 were $34.7 million, a decrease of $26.3 million or 43.1% compared to revenues of $61 million for fiscal year 2008. Environmental Systems revenues for the fiscal year 2008 included approximately $30 million from a large Environmental Systems order. Environmental Systems segment operating income for fiscal year 2009 was $6.9 million, a decrease of $6.9 million compared to operating income of $13.8 million for fiscal year 2008.

On June 30, 2009 the company reported $21.9 million in cash and investments, $56 million of debt, total assets of $153.2 million, working capital of $40.3 million and a current ratio of 1.8 to 1. The backlog at June 30, 2009 was $73 million compared to $107 million at June 30, 2008.

This concludes my remarks about the financial results. We will now address your questions. Operator, please proceed.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Hoss - Roth Capital Partners LLC.

Richard Hoss - Roth Capital Partners LLC

Hank, I’ll start with you. Just a couple more of the granular questions and then I’m going to ask some larger big picture at the end. First the gross margin strength for the quarter, it looked like just looking at the operating income from both segments, it looks like both segments had very strong gross margin. Can you break it out or at least give us a little bit more detail on you know where the strength came from and why?

Henry G. Schopfer III

You know the trend on the gross margins has been in the backlog, Rick. And so that has continued. There’s really no, even though we’ve had a decline in the backlog, the margins in the backlog have continued to withhold themselves. Now there’s a couple of competing factors there. One is there is more pricing pressure in the marketplace on both product lines, but offsetting that is the efforts that we’re doing on as we mentioned earlier on cost containment is keeping those margins in line for us. That’s really where we are. We would expect it you know hopefully to continue with that sort of margin kind of line. So we have to balance out the pressures in the marketplace with things that we can do internally on the cost side.

Richard Hoss - Roth Capital Partners LLC

But don’t necessarily expect a 35% gross margin you know for the remainder?

Henry G. Schopfer III

No. I still look at us in that 32, 34% range perhaps even in this current market more in the lower 32 side of it.

Richard Hoss - Roth Capital Partners LLC

Did you have a foreign exchange benefit this quarter?

Henry G. Schopfer III

I think it’s a negative in this quarter.

Richard Hoss - Roth Capital Partners LLC

Okay.

Henry G. Schopfer III

I don’t think it’s a big number but it’s somewhat a little negative.

Richard Hoss - Roth Capital Partners LLC

And then do you have D&A handy?

Henry G. Schopfer III

G&A?

Richard Hoss - Roth Capital Partners LLC

D&A. I’m sorry, depreciation and amortization.

Henry G. Schopfer III

I thought you were coming up with a new accounting term there for us. Do I have it handy?

Richard Hoss - Roth Capital Partners LLC

Yes. Can you give us what D&A was?

Henry G. Schopfer III

Yes. I have to flip some pages here. Let me flip another page. I’ll get it for you. Just a second here.

Peter J. Burlage

Are you looking for the quarter or for the year?

Richard Hoss - Roth Capital Partners LLC

The quarter’s fine.

Henry G. Schopfer III

Let me give it to you for the year because I don’t have it for the quarter right in front of me, but its $6.651 million for the year.

Richard Hoss - Roth Capital Partners LLC

And then the tax rate, why was that so low?

Henry G. Schopfer III

Because we had some larger benefits than typically we would get from some tax credits.

Richard Hoss - Roth Capital Partners LLC

Okay.

Henry G. Schopfer III

Don’t expect that to continue.

Richard Hoss - Roth Capital Partners LLC

So still look at 35-ish?

Henry G. Schopfer III

Yes.

Richard Hoss - Roth Capital Partners LLC

And then the backlog down to $73, where could this go? I mean could we see $50 million on the backlog?

Peter J. Burlage

Probably not and I don’t know if we want to speculate where we could really be, but I mean like we’ve said our net bookings was $25 million for the last quarter. You know the quarter that we’re in right now is expected to be as we projected early on a weak quarter from a bookings standpoint. But as we mentioned in our conference call it’s going to be lumpy. You know it could be below $70 at the end of this quarter or it could be $90 at the end of this quarter if some of the large projects come through. You know it’s just a matter of what happens in the lumpiness of our quotations.

Richard Hoss - Roth Capital Partners LLC

Peter, you gave us last quarter on our conference call you gave us I think you said that the bidding on the peaker was going to be pushed out to September. Do you have an update on that or can you just give us a little bit more detail on that? Is it one single large project that you’re bidding on or is it still a couple or three or?

Peter J. Burlage

There’s a group of peaker projects that we’re bidding on. There is a couple of them that are projected award here in this timeframe that we’re currently in and there’s a few more that are projected for award right at the end of the calendar year, right starting the beginning of next calendar year. So there is multiple projects that are out there. A couple of them are imminent for awards in this current period and you know we’re aggressively working on those.

Richard Hoss - Roth Capital Partners LLC

And now have you seen them come back with any meaningful vigor? I mean you know they went away or at least they were delayed pretty clearly and just you know thinking about what the marketplace is telling you, I mean guys are really definitely re-addressing the need to have these peakers and you know can you say maybe it’s related to you know maybe an increased use of renewables or is it just you know the standard sort of market drivers there?

Peter J. Burlage

I think it’s more in the standards. I mean there’s a little bit driven by the renewables but the ones that are early and the ones that we’re working on right now are to the more traditional issues associated with constraints and generation and transmission within a high, densely populated geographic area. So it’s back to their traditional peaker needs of just having the constraints in as much the transmission as it is the generation capacity.

Richard Hoss - Roth Capital Partners LLC

What does the price of natural gas given in the twos now today I think we’re in the threes but having a say historically depressed natural gas pricing other than making a more attractive fuel for generation, how does that affect you? I know there’s several type of factors involved here but can you just give us your thoughts on you know natural gas say troughing at $2.50 and then you know quickly recovering to say $4?

Peter J. Burlage

When we look at the natural gas infrastructure that we supply, I mean we provide equipment everywhere from the wellhead for separation all the way to the end user at a power plant or a petrochemical plant for separation and cleaning of the natural gas. Obviously this low cost of natural gas right now is slowing down and putting stuff almost to a standstill at the wellhead from new wells coming online. And we see you know they’re still drilling to support the requirements under their agreement that they have with their permits, but you know there’s not a lot of new wells coming online.

So you move to the other end of the spectrum and that is low cost to natural gas makes it appealing for use and so you know power generation obviously when it picks back up, natural gas use is even more economical with the lower price. Right now we’ve had in the storage facilities that are pumping gas into them in order to store natural gas, so we’ve got the two extremes. The cheaper the price, the more use there can drive on the consumption end but the cheaper the price the less you know work that’s going on on the E&P side. So we’ve got a balancing act there between our upstream natural gas industry which is not doing a lot of capital expenditures and the downstream which is going to drive you know higher demand for natural gas consumption, for power generation or for you know feed stocks for petrochemical or you know heating source.

Operator

Your next question comes from Richard Ryan - Doughtery & Company LLC.

Richard Ryan - Doughtery & Company LLC

Say, Hank, just a question, do you have the breakout on the operating expense items, sales, marketing, engineering and G&A for the quarter?

Henry G. Schopfer III

I do. The quarter or for the year?

Richard Ryan - Doughtery & Company LLC

The quarter if you’ve got it. Either one.

Henry G. Schopfer III

For the year sales and marketing $15.915 million, engineering and project management $8.109 million and G&A is $15.152 million.

Richard Ryan - Doughtery & Company LLC

Say, Peter, can you address a little more color on the nuclear side? You gave us a little flavor of that in your commentary but can you give us a little more color as to what you’re seeing and maybe what has nuclear generated in fiscal 2009 overall revenues?

Peter J. Burlage

I don’t have the breakout for nuclear as far as the total revenues that they’ve generated. Matter of fact in 2009 it’s been more of a bookings aspect than a revenue generation. It’s been a contributor but the bigger orders have been booked. The revenue will be recognized in this year and then you know separate quarters going forward, years going forward. I mean some of the commitment’s that we’ve got are you know 18 to 24 months of cycle time before they ship out. Others are nine months, so we do have a spread there. But as far as the work that’s going on and the orders that are coming in, I mean it is China is obviously the big area that this work is moving forward and the projects are continuing to be let. We haven’t seen any measurable delays in their efforts and what they have planned to let as far as orders coming out of China.

More recently with the changes in the last three or four months, India and the nuclear projects that are going on there are back on the table and the bidding process is in the final order type process is imminent. It’s working on right now. So we see that market coming in the future. For North America or Western Europe, that’s out there a ways. But you know the current period stuff with regard to the Chinese nuclear power market and also India are the two areas that the majority of the activity going on right now.

Richard Ryan - Doughtery & Company LLC

Can you give us a little perspective on the backlog that you have, the $73 million whether it’s you know kind of break it out into the segments you know the environmental process or maybe even what percent of that is nuclear?

Peter J. Burlage

I could not. I can’t. I don’t have the breakout for nuclear. I know from a general breakout between the two segments it’s about one-third Environmental and two-thirds Process Products. I don’t have the breakout in front of me of what part’s nuclear.

Richard Ryan - Doughtery & Company LLC

As far as the pipeline of orders, you know you talked about maybe some imminent awards on the peaker side. Can you give us you know some kind of perspective of the kind of orders that you’re kind of looking at going into the end of the year?

Peter J. Burlage

No, I mean I think we aren’t looking at 20 unit orders or anything like that. But it is multi-unit orders that are being looked at. I mean most of these aren’t ones and twos, they’re bigger than that. But no we really don’t want to give any projections there as to you know what the magnitude of these orders could be.

Richard Ryan - Doughtery & Company LLC

And did you mention, maybe I missed it, pricing pressure you’re facing? Any pricing pressure on these orders?

Peter J. Burlage

I mean yes, there is some pricing pressure on these orders. It’s a competitive market out there. I think we’re not you know the orders that we saw a couple of years ago had a lot less pressure on them. But we do have some pricing pressure on these orders and you know the other side of it is that we want to make sure that it is a competitive bid situation and we want to make sure that we’re successful in that. So we’re making sure we will be there.

Operator

Your next question comes from Ted Kundtz - Needham & Company.

Ted Kundtz - Needham & Company

A couple questions. One could you talk about, Hank this is probably for you, you know your outlook for operating expenses? Do you still expect to be able to reduce some from the current levels? You did take them down nicely in this quarter. Do you expect some further savings there?

Henry G. Schopfer III

Yes. Ted, since Peter’s on the call I’d have to say yes, you know.

Ted Kundtz - Needham & Company

Good answer.

Henry G. Schopfer III

We still have some work to do on the G&A side. You know we’re pretty much through the Nitram deal so we’ll settle down and we really have been looking hard at G&A. I think our sales and marketing is pretty much in line, if you’d look, if you kind of trend us out and you take out the big orders that we had a year ago and to some extent two years ago. And I think that’s the same true for engineering. So we still have some work on G&A. We’re also doing a lot of work, the comment I made earlier about our manufacturing costs. For us to keep the margins in line we have to continue to operate the plants efficiently and set the right levels at the plants. So that’s really a very important area for us is cost containment because as you know that all shows up in cost of goods sold. So on the operating expenses though we still have some in G&A we can do.

Ted Kundtz - Needham & Company

You do not anticipate any write-offs do you? Any charges going forward?

Henry G. Schopfer III

No.

Ted Kundtz - Needham & Company

Okay.

Henry G. Schopfer III

No. We went through our impairment test on say our value and there’s no adjustments there.

Ted Kundtz - Needham & Company

Peter, could you talk a little bit more about you know the outlook for business internationally versus domestically?

Peter J. Burlage

You know for the fiscal year we’re in right now, I mean our international business you know we have it planned on staying pretty much at the level we were at last year. We don’t see fiscal year 2010 being any kind of a drop-off from what 2009 was internationally. Fortunately the result of that comes from the work going on in China as well as the work that’s happening in the Middle East. That’s the two regions. Our UK office has predominantly been focused and support its business out of the Middle East and therefore it is not experiencing the turndown in business to the level that the rest of Europe is seeing, or Western Europe and Northern and Western Europe is seeing. So the fact that they’re tied, a lot of their revenue with the Middle East they see this year being sort of staying pat for next year. So that’s a strong indicator of just you know the markets that they’re serving.

But other than that I mean as far as international, domestic, I mean we sell you know Central and South America, those geographic regions are you know hit and miss. It’s lumpy. It always has been lumpy. Those aren’t that big of markets for us so if you get a couple of good projects in a year, you have a very successful year. And then the other region of international business that’s always a contributing factor to us is the sales in Canada, your western Canada pipelines and/or the sag [deep] stuff, the [inaudible] recovery. You know those markets are slow and I think they’re you know wait and see some stability in oil prices. And there’s some business going on there and some work that’s being quoted, but they’re not at the levels they were a year-and-a-half ago.

Ted Kundtz - Needham & Company

Could you just remind us what the international was for the year? I have it year-to-date but I don’t have the fourth quarter so maybe you could just give us what it was for the entire year.

Peter J. Burlage

I think it worked out to be exactly one-third, 33% of what the total revenues were. And again Ted on that reporting, that is point-of-order is where we identify stuff as international versus domestic. So it’s a point-of-order type [tabulation].

Operator

Your next question comes from David Cohen - Midwood Capital Management.

David Cohen - Midwood Capital Management

I don’t know if you provided this, but can you tell us what Nitram revenue was in the fourth quarter?

Peter J. Burlage

We don’t have it broken out and tracked separately. We track it by product type. For example you know heat exchangers versus silencers versus separation. But these sales forces and everything has been totally integrated together since basically the end of the first quarter and you know it’s virtually impossible to differentiate.

David Cohen - Midwood Capital Management

And then second question, given the acquired inventory adjustment that you’ve made, is there a way in which in terms of how the accounting works where at some future point you’re selling lowered value inventory potentially at a higher margin?

Henry G. Schopfer III

We’re there now, David. Back to that point, you know that 35% margin, we’ve flushed that out. About half of it went to Q4 of last year, then Q1 and Q2 of this year. The adjustment in Q3 of this year and Q4 this year is very small.

David Cohen - Midwood Capital Management

So you say you sold that inventory in the period you took the charge? Or you took the charge in advance of selling the inventory?

Henry G. Schopfer III

No, we took the charge when we sold the inventory. We basically amortized that higher cost as we sold that inventory. And based on Q4 and mostly followed up in Q1 and some in Q2 of this year. But it’s gone now.

Operator

Your next question comes from [David Cohen – Aveena Capital Management].

[David Cohen – Aveena Capital Management]

Ironically enough, another question about Nitram. You know it’s now been about 18 months since you agreed to the deal and a little less than that since you closed. Obviously the world has changed quite a bit during that period. Could you offer us a little bit of reflection on how the integration has gone and how you view what may have changed your market position and how you’re feeling about it down the road a little bit?

Peter J. Burlage

Certainly. We feel very good about it. I think the integration has been fully from our perspective fully integrated on the sales side and from the operations side there. It is combined together. Probably the only areas that we’re working on still with some integration changes on some of our international licensing agreements and things like that. So for domestic purposes it is fully integrated. You know the success I think, one of the big differences we saw when we looked at the two companies is that Peerless set of customers on the separation side was very different than the set of customers that the Nitram people had. They had a much larger focus on OEM type customers and that focus has remained and we continue to have an integrated group but they to some extent separated in the fact that there’s a group that focuses on OEM type customers versus another group that focuses on end users and capital, you know people that own the infrastructure.

So those two distinctive approaches, we have made sure that we’ve maintained those type of approaches. There’s obvious success that was happening at the Nitram organization serving OEM’s and we’ve tried to retain that. In the same way with Peerless, we had a success in dealing with international large contractors, end users and EPC contractors were more Peerless’s focal point. So we feel that we’ve accurately identified the types of customers and we continue to focus on their unique differences and what they desire and what Peerless combined now offers.

[David Cohen – Aveena Capital Management]

And then the other sort of retrospective question is once again obviously the world has changed quite a bit and hopefully we’re coming out of it, but could you talk a little about you’ve identified nuclear as an area where you’ve seen relative strength, as you look at your proposal backlog now versus where we were a year ago what areas have been the most adversely affected and what areas have been relatively resilient?

Peter J. Burlage

The geographic areas I mentioned before have been relatively resilient and those are around separation type equipment in Asia and the Middle East. North America, probably the areas that have been most affected the power generation has just been you know waiting for the demand. I mean we’re expected to see here in the calendar year 2009 the second consecutive year of power generation actually reduction in demand and so you know it’s had an impact on the combined cycle type power plants, the base loaded type power projects that we’ve seen in the past. North America also then capital pipeline projects and some of the larger capital expenditures by the large EPC contractors which are doing projects for the pipeline companies, I mean that area has been impacted significantly. Our OEM type customers they have stayed relatively strong because of their presence in the international markets, again into China and into the Middle East.

So our domestic OEM customers who have an international presence we see those customers still having a relatively stable “and order log” over the last couple of quarters. I mean obviously they’re down from what they were a year ago, but they’ve been able to maintain where some of the other areas like at EPC contractors we’ve seen virtually nothing coming out of those areas.

Operator

Your next question comes from Ted Kundtz - Needham & Company.

Ted Kundtz - Needham & Company

Yes, Peter, just a quick follow up. Are you seeing any cancellations or push out in your business?

Peter J. Burlage

No we haven’t. We experienced some right there at the beginning of the calendar year, but we haven’t had anything recently of any cancellations or push outs in the last you know basically through the summer. There was some done back in the January-February timeframe which were all reflected in our backlogs, but I mean we basically you know again anything that gets put on indefinite hold like that we net it out of our bookings and net it out of our backlog. And so it’s reflected in there. But currently we are not seeing that. You know it’s more on the bid and quote side that people aren’t moving forward with the placement of orders.

Henry G. Schopfer III

Actually we’re pleased subsequent to year-end, and we’ll have it in our K that you’ll see, but one of the orders that we talked about back in January that was put on postpone, and because it was an indefinite postponement we took it out of the backlog, has now come back to us.

Peter J. Burlage

It’s come back to us commercially. In other words, the customer has agreed to pay us for completing it to the current state we’re at and then they’re going to pay us to hold it for a period of time. I think that’s all going to be in there. So the job isn’t moving forward but the commercial agreement with the customer has strengthened again to the point where we’ve put it back into our backlog.

Henry G. Schopfer III

That’s a good sign.

Ted Kundtz - Needham & Company

And so right now looking out you don’t really anticipate any cancellations or push outs?

Peter J. Burlage

No, we have nothing indicating that.

Ted Kundtz - Needham & Company

[Inaudible] pick up in that area?

Peter J. Burlage

That’s correct.

Operator

Your next question comes from David Cohen - Midwood Capital Management.

David Cohen - Midwood Capital Management

Yes, I know you guys don’t offer anything in the way of guidance but given that we’re more than two-thirds through the fiscal first quarter, I know you made a few comments about sort of where activity levels are but is there anything more you can provide in the way of the color or specific details about how trends, sales, orders are tracking now that September’s almost done?

Peter J. Burlage

I’ll give you this as perspective and the bookings report that I gave you, the net bookings report for the previous quarter, two-thirds of that happened in the last month. You know I mean that’s just the way our business comes through and the lumpy aspect. So the $25 million worth of bookings that we had in the previous quarter, two-thirds of it came in the last month of that quarter. You know right now as we sit here today I mean obviously we monitor the bookings rate real close. We also monitor you know the activity on jobs that are being negotiated and you know it’s spotty. It moves around.

The assessment I’ve made of the situation is there’s a lot of activity in the quotations on jobs that are not ready to be placed. In other words, they’re bid for bid jobs or budgetary type bid jobs. Further up in the sales process the projects that are closer in, the large projects that are close to being let, I mean those are being negotiated and the timing. I mean you know some of these peaker jobs may take two months to go from a basically general agreement to having a full fledged order that we can book. You know it takes a long time to put the finishing touches on that. So you know it could easily fall out of a quarter.

Operator

At this time we have no further questions in queue. I would now like to turn the call back over to Mr. Peter Burlage, President and CEO of PMFG for closing remarks.

Peter J. Burlage

I’d like to thank all of you for your interest in PMFG and taking the time to participate in our call today. We look forward to updating you on our first quarter call. Thank you very much and have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Peerless Manufacturing Co. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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