Robbins & Myers F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

Robbins & Myers, Inc. (RBN)

F1Q08 Earnings Call

January 10, 2008 5:00 pm ET

Executives

Peter C. Wallace – President, Chief Executive Officer & Director

Christopher M. Hix – Chief Financial Officer & Vice President

Analysts

Ned Armstrong – FBR Capital Markets

Andrew DeAngelis – Keybanc Capital Markets

Mike Schneider – Robert W. Baird

Craig Johnson – Mirage Research

John Franzreb – Sidoti & Company, LLC

Peter [Winnerler] of Formula Capital

[James Soun – Debelli]

Allen Metroni – Silver Lake Asset Management

Presentation

Operator

Good afternoon and welcome to the first quarter Robbins & Myers earnings conference call. My name is Sarita and I will be your coordinator today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions) I would now like to turn the presentation over to our host for today call Mr. Peter Wallace, President and CEO of Robbins & Myers. Please proceed.

Peter C. Wallace

Good afternoon. Again I am Peter Wallace. Joining me this afternoon will be Chris Hix, Chief Financial Officer for the company. I am pleased to take this opportunity to provide an update on our most recently quarterly performance, discuss the business environment in our key markets and address your questions.

I would like to bring your attention to the precautionary slide. This is familiar to most everybody else we are providing this update under safe harbor. Some comments may be forward-looking and actual events and results may differ from those described in this presentation due to significant changes in capital expenditures in our primary markets. We also refer to various non-GAAP measures such as EPS, excluding special items as we feel that they are helpful to investors in assessing our ongoing performance.

This morning or this afternoon I will comment on our most recent performance, add some comments relative to each of our platform business groups, discuss the top objectives going forward and update our guidance for the next quarter and the full fiscal year. Following my comments Chris Hix will present a financial review of highlights for the quarter and following his presentation we will open the phone lines to address your specific questions.

Well once again we had a very good quarter. Sales strengthened in our primary markets due to a large part to a large back log we had at the end of the fiscal 2007 year. We had a lower than expected tax rate in the quarter due to a reversal of net operating losses in foreign markets driven by improved profitability at our Italian business units. Orders were strong across the business platforms with solid increased with management group and process solutions group. Romaco had large orders entered just after the quarter end. I am pleased to report that all business segments contributed to the year-over-year improvement. Romaco is becoming a steady contributor to our performance now with three straight quarters of profitable performance.

The net effect of higher sales, lower teases, foreign currency gains and benefits from earlier restructuring programs was that we were able to deliver $0.80 in diluted earnings per share. This was higher than our last guidance for the quarter which was $0.54 to $0.64 cents per share. Operational improvements are raising profit levels and the higher profit levels across all business units allows for a more normal effective tax rate. Chris Hix has a slide that he will use to discuss in a few minutes that will detail the elements of our above guidance performance in the quarter.

We expect to close on a small acquisition this month. This business is located in Switzerland, has revenues slightly in excess of $10 million dollars and the company is [Maybags]; a manufacturer of filter dryers, mixing systems and other products that can complement our process solutions group. The company will be acquired through our GMM joint venture business located in India. We also migrated our industrial pump business sites to a new ERP system that is used by the rest of fluid management group. This has gone fairly well. As usual there are a few bugs to work out but we are now operating solely on the new business system. Work is now underway to move European business units to the same ERP system. This will begin with our process solution groups locations located in the UK followed by Germany and Italy. The benefit will be a unified system with standard reporting allowing us to manage the business better and gain operational efficiencies. EBIT margins improved to 13.4% another positive sign that are business managers are delivering profitable growth and managing to keep most of the cost savings from earlier restructuring programs. I am please to now be in a position where we can more proactively talk about our [inaudible] agenda.

Take a look at the next slide, slide 3 - We are pleased to announce that we increased the cash dividend by 15.4% this is the second increase in two years. This is a reflection of our improved profitability and consistent cash flow. The dividend will be paid on February 15^th to shareholders on record as of January 25^th. Today we also announced that we will have a two for one stock split in the form of a share dividend. This recognizes the large increase in stock price over the last two years and will provide a greater level of trading liquidity. The shared dividend will be issued on February 28^th to shareholders of record on the 4^th of February.

Slide 4 demonstrates the strength we are experiencing in our end markets and the success we are having with newer growth streams. Those of you that have followed the company realize that we tend to ramp up sequentially throughout the fiscal year. I am pleased to see the stronger start to this fiscal year. Sales in the quarter are up 12% on a year-over-year basis and 7% adjusting for product line disposals and foreign currency. Orders are up an even more impressive 20% or 12% after adjusting for product line disposals and again foreign currency changes throughout the period. With orders ahead of sales in the quarter we saw the back log increase to another record level of $214 million dollars. Orders and sales are up due to strong end markets along with new product introductions and additional cross selling opportunities as we take a wider basket of products to existing customers. I will touch briefly on some of the new product successes when we review the individual business segments.

Moving on to Slide 5 - EBIT margins in the quarter were very strong, considering the normal pattern for Robbins & Myers is to ramp up throughout the fiscal year. We start this fiscal year with EBIT margins at 13.4% a full 390 basis points ahead of the prior year. We had a good mix of business. The aftermarket growing at Romaco and strong sales from the energy segment of fluid management group along with improvements associated with the operational improvements and the implementation of clean processes and continuous improvement programs throughout the organization.

Moving on to Slide 6 – [inaudible] earnings per share for the year on a year-over-year quarter basis.

Moving on to Slide 7 - You can see that we are making steady progress as we improve operating results. Trailing four quarter EBITDA improved throughout fiscal 2007 as well as the start of fiscal 2008d driven by successful restructuring programs along with healthier end markets. The first quarter adjusted EBITDA of $27 million dollars represents a 45% year-on-year increase. The senior management team, the business leaders and virtually all of the employees helped make for a successful transformation from a holding company to a more engaged operating company. We still that there is much more to accomplish but I have to say our employees now understand they are part of the success and they enjoy being on the winning team.

Moving on to Slide 8 - The great news with fluid management group is that our orders remain strong up 24% in the quarter on a year-over-year basis. We continue to benefit from strong demand in the energy sector with oil and directional drilling activity driving our orders upwards. The recently introduced ERT power section product line has become a preferred solution for the Miami customers as our product line allows customers increase there rate of penetration in there drilling activities.

Sales grew by 10% in the quarter and a favorable product mix allowed the business segment to expand EBIT margins to 25.5%. The segment was able to convert 48% of the incremental sales into profit. Major effort from many manufacturers is to consolidate ERP systems. We have been able to migrate the industrial pump business unit onto the same ERP system as used by the rest of fluid management. Not without some pain along they way but we are not on a single system that will allow for greater efficiency’s as we coordinate the supply chain management, production scheduling, financial reporting and other activities. Our view on the fluid management markets continues to be bullish. Energy remains solid and industrial applications should continue to do fine in this environment.

Moving on to Slide 9 - We have worked with a major food processing company to develop a new application for progressive cavity pumps that will handle high volumes of food and ingredients with varying consistencies. Our new design is patent pending, reduces the time for cleaning and reduces the risk for contamination. This is just one example of our technologies and application expertise at work. Orders have been placed for try units and many more units will be ordered upon successful completion of this trial period.

[Inaudible] Slid 10 will have a view on the process solutions group. Process solutions has a lot wind in the sales from end markets such as chemical processing. Orders were up 19% in the quarter driven in large part from new orders for industrial mixers and engineered systems. Sales in the quarter were up 9% or 3% excluding the impact of currency. We’ve had some bottleneck issues at some facilities and we are working through these issues so that we can convert the strong order activity into sales in a shorter period of time. Adjusted EBITDA margins are up 120 basis points to 11.2% in the quarter. Note that this comparison excludes the positive impact of a $5 million gain on a facility sale in fiscal 2007.

We continue to believe process solutions group holds promise for improved profit levels as we execute and manage larger projects in a better way and as we continue to leverage and share resources across the group. We are making progress in pulling process solutions group together as a single entity but we still have some way to go.

During the second quarter we expect to close on a small acquisition that will complement our existing portfolio of products. This will be purchased through our Indian joint venture. Process solutions group is improving. We still have some work to do to raise profit levels to our expectations. Strong end market conditions are supportive.

Passing to Slide 11 – You will see some of the key elements of the [Maybag] acquisition. This is a Swiss based company that manufacturers filter dryers, mixing systems and also has magnetic drive technology that could be used by other Robbins & Myers business units. [Maybag] will be acquired through GMM a 51% owned Indian public company. Revenues are around $10 million and we were able to acquire the business at a very attractive price. Something less than five times EBITDA. We feel the acquisition holds opportunities for sales in new geographical regions and we also feel margins can improve as we begin to source some components from India.

Now I’ll move on to the Romaco group. Romaco is really one of the turnaround stories. Orders have improved in the quarter as we received a large number of projects and orders just after the quarter closed. Sales are up a solid 26% or 18% excluding currency and product line disposals. We have simplified the business in the last few years and the underlying products are performing nicely. This is the first time in three years that Romaco has been profitable in the first quarter and as we look forward we believe there is ongoing profit improvement potential as we work on lean initiatives, supply chain management and introduce new products.

We’ve also begun the consolidation of our manufacturing and assembly work with our FrymaKoruma operation where we will consolidate the bulk of the work on a single site in Switzerland.

Now looking at Slide 13 – We’ve had a number of new designs for equipment introduced in the last few months to address changing forms of drug delivery systems. Our capabilities in sashay and blister packaging technologies have introduced us to customers that were exploring new ways of delivering medicine. This expertise and reputation have allowed us to introduce a new packaging system to a former contract packager in India. This one now packages dissolvable oral strips that deliver medicine to patients.

We have a unique process to fill single use disposable syringes that are used by the military and can be used for applications in developing markets such as Africa. Romaco has leveraged its customer intimacy and application know how to develop new packaging for diagnostic strips. These would be test lab strips, something that would be used for blood sugar counts used in the fight against diabetes. And, we have developed new sterile process systems to provide solutions to customers such as Allegan as they produce sterile eye drops. While Romaco has had its issues in the last few years we have continued to focus on smart solutions for our customers.

Moving on to Slide 14 – We’ll take a look the objectives for 2008. Our objectives for this fiscal year remain much unchanged from the earlier periods. We will continue to build on our operational expertise implementing lean throughout the entire organization. We feel there is still benefit to be gained by reducing complexity. The introduction of common ERP systems will be a key enabler but there remain opportunities with product rationalization, supply chain management and other areas to leverage our capabilities across the various business units and we remained convinced that we need to be a bigger player in Asia. Management changes will support this group growth initiative. We have a lot of positive momentum and we tend to take advantage of this in the months ahead.

Moving on to our guidance on Slide 15 – You will see that we are confident in our future. The end markets are working in our favor and we have the positive momentum from the past few years. As a result we are increasing our guidance for the full year from $3.55 to $3.75 per share. But, you will note that if you’re following along with the slide show on the slide we do show $3.50 to $3.75. The correct number is $3.55 to $3.75 as was stated in the earlier announcement. This increase reflects the strength experienced in the first quarter, the anticipated lower effective tax rate and operational execution of the current plan. Guidance for the second quarter is now set at $0.78 to $0.88 per share, a big increase over the prior year. We are set to have another record year at Robbins & Myers.

Now looking at Slide 16 – We’ve got some summary comments. I have to say that I continue to be impressed with the management team and all the Robbins & Myers Company employees. We have changed a lot of things in our business and many of you can appreciate the strain we tend to put on our employees as we make strategic changes. To their credit we have been able to execute our restructuring plans without major mistakes. We have reduced our cost structure and have maintained a careful eye on satisfying customers to that we maintain market share. Our primary end markets make up 80% of our sales and they are doing well. The prior restructuring efforts have provided a improved costs structure allow us to be more competitive in various markets.

We are better positioned than this company has been for a long time, maybe better than ever. We have a good balance sheet and a capital structure that will allow us to profitably grow our business and our employees are up to the challenge. We will continue to focus on continuous improvement but we will spend a greater amount of time with our key customers in order to better understand their changing requirements so that we are better positioned to be their preferred supplier. And, our balance sheet supports growth both organically and through acquisition. The management team has done a great job. They are capable of taking this company to a new level, a higher level of performance.

At this time I’d like to turn the presentation over to Chris Hix and ask that he take you through some of the financial highlights. Following these comments we will open up the phone lines for your questions. Chris?

Christopher M. Hix

Let’s all turn to Slide 18 and cover a few points on the first quarter income statement. Pete discussed the top line growth and record backlog in his remarks so let me draw your attention to first quarter gross margins an area of increasing focus for our company. Gross margins expanded 130 basis points on a year-over-year comparative basis demonstrating the benefits from business growth and our improved cost structure. During the quarter we also experienced a favorable mix of products with higher profitability. On the other hand we continue to have opportunities to increase profitability through improved execution of customer projects especially within our process solutions group. These higher gross margins contributed to the 390 basis point increase in the adjusted EBITDA margins which was also helped by operating leverage of our SG&A costs. During the quarter we also received approximately $1 million of pre-tax benefit from the effects of currency exchange rate changes on trade payables and receivables which is reflected against the SG&A line on our income statement.

For more detail on EPS performance let’s go to Slide 19. In October we issued first quarter guidance of $0.54 to $0.64 per diluted common share. Our first quarter operating performance principally strong cost controls, good market conditions, a favorable profitability mix of products sold during the quarter and higher interest income enabled us to exceed guidance by $0.06. A lower tax rate which we will cover on the next slide also contributed and a favorable change in currency exchange rate which includes the $1 million affect on trade payables and receivables discussed earlier contributed $0.07. So, the $0.80 we reported is more like $0.73 on a quality of earnings basis.

Turning to Slide 20 – You can see that at the start of the year we expected an effective tax rate in the high 30s in fiscal 2008 which was an improvement from the low 40s we had last year. Our first quarter rate turned out even lower than we expected because we achieved higher profits in countries with lower tax rates and we were able to utilize our net operating loss carry forwards in Italy. Our 35.4% rate in the first quarter might have been even lower except for a write down we took on our Italian deferred tax assets when the Italian government announced lower tax rates at the end of December. For the full year we now expect a mid 30s effective tax rate.

Wrapping up on Slide 21 – You will note that we made some year-over-year improvements in working capital. The increase in the total value of the net working capital from $106 million to $111 million is affected by currency exchange rates and the growth of our business. Measuring our net working capital as a function of sales which neutralizes these effects shows a decline from 17.2% of annualized first quarter sales last year to 16% this year. Notable progress has been made in inventory and supplier payables while we continue to see opportunities for improving our credit and collections practices. We are working closely with our field finance personnel to improve skills in this important area and expect to begin to see improvements later this year.

At this point I’ll turn the call back over to you Pete.

Peter C. Wallace

We’re now ready to open up the phone lines to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ned Armstrong of FBR Capital Markets. Please proceed.

Ned Armstrong – FBR Capital Markets

My question entailed the process solutions arena and I heard you mention some very strong chemical markets but nothing about pharmaceutical markets and that led me to ponder whether it was just the performance was based on overwhelming strength in the chemical markets that overshadowed the pharmaceutical or whether there’s still maybe some spending weakness on the pharmaceutical side.

Peter C. Wallace

I guess the way I’d address that Ned is that it’s really the overwhelming strength that we’ve seen in the chemical side. We’ve seen some pretty nice projects come through in pharma historically in our reactor portion of the business we’d end up seeing about a 50/50 split between chemical and pharma and that is hued much in favor of chemical in this past year. So, it’s really the strength that we’re seeing in chemical versus a falling off the cliff of pharma.

Ned Armstrong – FBR Capital Markets

Is that underlying strength in chemical really more the shift in capacity towards the Middle East and Asia we’ve seen over the past couple of years? Or, is there something more than that like market share gains or now product gains?

Peter C. Wallace

I’d say it’s probably more of the former Ned where there are significant projects still taking place principally in China for chemical and then there’s still ongoing investment in India for the pharmaceutical portion of the business and those continue to go forward. As you know we are supporting growth in China through our joint venture in China as well as exports coming out of both Europe and the US. So, we’re really benefiting around the globe still from that migration of customers going into Asia.

Ned Armstrong – FBR Capital Markets

Now, on a more detailed basis Chris do you have the break out of depreciation and then separately amortization and then capital spending as well?

Christopher M. Hix

I think in the press release we would give the historical or the D&A for the quarter. Ned, do I understand your question correctly?

Ned Armstrong – FBR Capital Markets

I was thinking depreciation and then separate from depreciation the amortization and then the capital spending as well.

Christopher M. Hix

I think the last couple of years our amortization –well, first of all our D&A is running at about a $16 million run rate which is I think fairly similar to last year and that’s overwhelmingly depreciation versus amortization. Off the top of my head I would say that the amortization is maybe a couple of million of that. And, what we had stated earlier was that we expected cap ex of $20 to $25 million and I don’t think we have an update to that figure for the year. I think we’re still sticking to the $20 to $25 million.

Operator

Your next question comes from the line of Andrew DeAngelis of Keybanc Capital Markets. Please proceed.

Andrew DeAngelis – Keybanc Capital Markets

Just first of all I guess in terms of the growth that you guys saw within process solutions and fluid management, I guess on an organic basis, was slightly less than I would have expected given the healthy end markets. Is that just due to the nature of comparisons that you had year-over-year? Or, are you seeing any pockets of weakness out there that might attribute to some, I guess detrimental type growth?

Peter C. Wallace

Actually, we feel pretty good about the growth on a year-over-year basis. If you take a look at some of the comparables, fluid management in particular has been growing 20% a year for the last couple of years. So, that gets to be a little more difficult to keep on showing increase year-on-year. Certainly, in the process solutions group we’re feeling pretty good in that whole bit. We stated earlier that the fluid management orders were up a full 24% and fluid management typically does not have much currency impact in those numbers. So, we’re feeling pretty good.

Andrew DeAngelis – Keybanc Capital Markets

I guess just in terms of the guidance, I know you guys adjusted the tax rate incorporated within the guidance. On a pre-tax basis it actually seems like kind of the midpoint of your guidance range didn’t change much, if it actually went down somewhat. Could you comment on the pre-tax midpoint of your guidance range?

Peter C. Wallace

Andrew, as you know we don’t provide guidance beyond an EPS. I think what we tried to do in our guidance is reflect the fact that we did have a payrolled first quarter and obviously the tax rate has changed. We’ve tried to bake that in as well. And then, there’s always a discussion about how do you treat the soft fx benefits that you get in there. But, I think we’re obviously on the right trajectory in the year rate and the guidance as we go into the second quarter. And, we’ll get another chance to evaluate this as we proceed through the second quarter with results three months from now.

Andrew DeAngelis – Keybanc Capital Markets

Last one – could you maybe give some granularity in terms of the margin progression that you expect within both process and Romaco maybe given mix issues and order timing in terms of when it hits the sales line in terms of the sequential margin progression in both those segments.

Christopher M. Hix

I guess I’m still sticking with a lot of the comments that I’ve made over the last few quarters. Within process solutions I still think the range throughout the business cycle and profitability should go from 10 to 15%. We’re obviously in a fairly good part of the cycle right now so we should be getting on up towards the upper end of that range meaning closer towards the 15%. We still have a fair amount of work as we alluded to in our discussion. It’s a more complex business than what we find in the fluid management business. We just have a number of units, and cultures, and product lines and areas and issues to address. But, as we do that we’ll be closing in on the 15%.

I’d expect that you’re going to find that throughout the course of the year especially based on the very high levels of backlog that we now enjoy, you will continue to see a march towards that number. I’m not suggesting that we will have a 15% for the entire year but I would hope that we’d start moving towards those numbers as we start exiting the fiscal year.

When you get into Romaco it’s much the same story there again. You know, we’ve singled 5 to 10%. I’m very pleased that we started out this first quarter well in the black. It’s been a long time since this group has been profitable certainly in the first quarter. So, I feel very confident that we’ll be closing in on a 10% exit rate as quickly as possibly the end of this fiscal year.

Operator

Your next question comes from the line of Mike Schneider of Robert W. Baird. Please proceed.

Mike Schneider – Robert W. Baird

First maybe we can just start with the fluid management division can you give us some color now because rig counts domestically are certainly not up 20% and you guys are running at those types of order rates. Can you give us a sense geographically where the orders are coming from? And is there some type of new application that you guys have begun to enjoy, at least within the energy division that would explain this continuous strength just by the fact that obviously rig counts even on a global basis are barely up.

Peter C. Wallace

There are probably a couple of things that are impacting there. One, we have had very good success with this product line that I had mentioned in the earlier remarks that being the ERT product line. This is a power section product line used in the drilling activity. It allows us to deliver a lot more torc than the conventional design, so users of this can increase the level of penetration in the drilling activity, sometimes going up to twice as fast. So, end customers see how quickly people can get in and out and the speed of the jobs and they are starting to specify our product by name and we are starting to get more people, like it or not, that are going to come to us to be buying the product so we do think we are taking some share in some of those product lines.

On the balance of it bear in mind that we are more oil related than gas related and some of the other peers in this space might be having a little bit more difficulty and might have more gas exposure. Our gas end of the business is weaker than our oil side. We mentioned before that Canada was a weak spot for us and that continues to be a weak spot for us but the strength of oil in the US as well as our international markets continues to do quite well. We are also doing pretty well with the directional drilling and specifically the horizontal drilling of directional drilling as people are going into the shallow wells and shales and activities of that sort. So, we’re doing quite well in those areas Mike.

Mike Schneider – Robert W. Baird

Well maybe you can then just comment domestically Pete. Again, the rig count even in the oil space are not up this dramatically. Are you taking market shares because lead times are lower at your plants? Is it pricing? Maybe you could just comment I guess competitively what has changed for you other than the new product application that you mentioned?

Peter C. Wallace

It’s more the new product applications. I can’t say that we are necessarily taking a lot of market share in other products the other products beings the Allen Holt pumps and some of the wear prevention products. As you know the oil patch is very much a service space and we do quite well with our service so we might be eecking out a little market share here and there. We have had some success with some of our pipeline closures we’ve got greater acceptance with our newer designs. So it is a little bit here and a little bit there and I think that is the bulk of it.

The only other thing to note is when we take a look at rig count there are a number of ways to look at this. If you are using the same rig and yet you’re going down much deeper you are going to burn through a lot of our products then if you are going through in other applications. The number of rigs is one measure yes but then the actual amount of footage that people are drilling and all of that has another bit of criteria and I don’t know all of the bits and pieces that would be impacted in that part of it.

Mike Schneider – Robert W. Baird

Okay then I will ask the seemingly age old question now about capacity within energy. Where are you? And, how much more can you stretch the current capacity?

Peter C. Wallace

Well we finally got to the point where year-on-year you have been asking the same question and I kept coming up with the same answer of 20% and after growing 20% after 20% after 20% we are now to the point to where we are bringing in some capacity. The good news is that we have been able to use the lean initiatives to free up a fair amount of floor space so any addition that we are doing we are talking about putting within existing confines of our facility. So it is not brick and mortar or anything like that. It is bringing in a few pieces of critical equipment and just going forward from there.

So, we have gone ahead and taken a look at our capacity. We’ve got our own internal plans and we are staying current with the capital. The capital this quarter was up a little bit over the prior year and that is just reflecting the fact that we have placed on order and we are staring to receive some of the capital principally around the fluid management capacity areas.

Mike Schneider – Robert W. Baird

Okay. Then, final question obviously the industrial sentiment has changed quite dramatically even just in the last four weeks. Can you describe for us how your orders progress through the quarter and I guess what your most recent view is even as you exited December and completed the these first couple of weeks of January and some of your most basic industrial businesses.

Peter C. Wallace

I will give it to you more anecdotally just taking a look at the December orders I have had a number of correspondences coming across my desk where we have had some major wins in December. I’d say December will turn out to be probably stronger than what we have seen in the first quarter.

Operator

Your next question comes from the line of Craig Johnson with Mirage Research. Please proceed.

Craig Johnson – Mirage Research

This is actually Craig Johnson with Mirage research. I have a couple of questions regarding your lean manufacturing initiatives. A lot of companies similar to yours are now implementing different lean manufacturing initiatives across the board helping improve on cost controls for the spaces you were talking about. Peter if you could look at a year from now what would you like you lean manufacturing initiatives to accomplish for the company?

Peter C. Wallace

What we’re trying to do with our lean operation is try to improve the through put in our operations. The lead time is a key enabler for us to go ahead and start stealing market shares. So the biggest thing that we are really after is improving through put, eliminate scrap and things of that sort. Cost reduction will be a benefit as we go forward but that is not the primary driver. For us it really is all about making sure that we improve the through put responsiveness for the customers.

Craig Johnson – Mirage Research

So you think that through put is still a concern that you guys are working on day-by-day?

Peter C. Wallace

We work on our lean – always is becoming a way of life. Continuous improvement is becoming part of the culture here and it is not just in the shop it is everywhere throughout the organization so we are working on that day in and day out.

Craig Johnson – Mirage Research

Is it pretty much across the board because you had mentioned Romaco has a lot of leanness in their crop [inaudible] is that coming in concentrating on Romaco or is it pretty much across all three of your divisions?

Peter C. Wallace

Every one of our business leaders understands the importance of lean and has embraced it and they are all taking this up with a vengeance within their perspective units.

Craig Johnson – Mirage Research

Right now what systems or solutions are using to accelerate those initiatives?

Peter C. Wallace

We are using a number of things. We have got some support from a very limited group of consultants. In addition to that we have just gone out and done the right thing. We have hired people that are well trained in the lean disciplines and we are using that to go ahead and educate and work with our work force. We are using universities to support some of the training efforts so we have a myriad of different initiatives going forward.

Craig Johnson – Mirage Research

Final question - over the next six to twelve months, obviously your stock prices have been doing very well, congratulations on record numbers today. Where would you like to see this company headed? What are your top three objectives for Robbins & Myers over the next six to 12 months and where are they are headed?

Peter C. Wallace

It is pretty basic we are a manufacturing company and we are into profitable growth. That is what we are after. So we will continue to watch all the key metrics, the ones we report on a regular basis.

Operator

(Operator Instructions) Your next question comes from the line of John Franzreb of Sidoti & Company. Please proceed.

John Franzreb – Sidoti & Company, LLC

Most of my questions have been answered at this point but I just wanted to go back on some of the new market opportunities you have in the process solutions group. We’ve talked in the past about gas desulphurization part that you have going on and what’s going on in bio diesel – can you kind of give us an update there on what’s happening?

Peter C. Wallace

A lot of our efforts everybody has been staying with current with the ethanol craze and everything else. I think that’s cooled off a little bit people start to look at the economics of ethanol. We continue to do fairly well with some of the spin offs though. We take a look at bio diesel, recycling motor oil, recycling vegetable and things of that sort. Some of the large corn processing companies as well as some of the people specifically in the bio space continue to award us some pretty good business.

I highlighted in my comments that the PSG, the process solutions group benefited from both the industrial mixers and engineered equipment and a lot of the engineered equipment would be targeted towards the bio diesel, the bio mass applications. So, we will continue to see some pretty nice activity coming across there.

John Franzreb – Sidoti & Company, LLC

So, there’s not as much concern given that we’ve seen kind of fall off enthusiasm on the whole bio diesel outlet that you’re still getting good order growth from that business?

Peter C. Wallace

We’re still seeing it. We’ve got other areas that will come and go and that fill in and things like that. And again, desulphurization tends to be very large projects so they’ll come in and bio diesel the same kind. We’re pursuing both so you’ll see a give and take as you go throughout the year. But, I think the real strong this is that we’ve got a number of newer initiatives going forward so we should start to hit on more things.

John Franzreb – Sidoti & Company, LLC

Also, in you prepare comments you mentioned something about bottle neck issues in PSG. Can you just run through what those issues might be?

Peter C. Wallace

It’s a little bit of the old growth pain if you will. We’ve increased our business significantly in some of our business units. As we try to ramp up with lean and everything else we’re uncovering some issues. The specific issues would be the fact that we were not doing a proper job of scheduling our jobs. We might have used the old idea of infinite capacity on many of our machine centers. So, we kept on loading things up onto the same machine and you get through the schedule and you realize, “There’s no way we can do that.” At that time, it’s too late to go ahead and do a proper job of sourcing that out to others or redeploying throughout our other existing plants and operations.

So, many times it’s very basic things that. Getting our arms around sales and operations planning, sitting down and really taking a look at a detailed scheduling program. And then, working hand-in-hand with a lot of the value stream napping that we’ve done to set up better manufacturing cells to better handle the manufacturing capacity that comes through the facilities.

John Franzreb – Sidoti & Company, LLC

Is this an initiative that your IT initiative can solve? Or, is this something where you’re going to have to reorganize the factory floor layout?

Peter C. Wallace

IT initiatives can be supportive. Good news – bad news is a lot of the things we’re talking about are really basic things that have just been left unchecked for too long and we’re just now starting to uncover this as we start to stress the operations with additional volume coming through. So, I say this is a very positive way because this will force us to be that much better and therein lies the opportunity for improvement that I still continue to see in businesses like processing solutions.

Operator

Your next question comes from the line of Peter [Winnerler] of Formula Capital.

John Franzreb – Sidoti & Company, LLC

My question comes specifically in regard to fluid management, that side of the business. With oil at basically record levels is there any ratio or spread that you guys have between the price of crude and how that affects orders and sales? And, can you just briefly comment about your expansion plans into Asia?

Peter C. Wallace

As you say the correlation with the oil prices and the things like that I’d say three years ago we use that as one of our presentation charts because we had very close correlation between the price of oil and our activity throughout our Robbins & Meyers energy segment. Now that the numbers have blown through what everybody thought was possible, those numbers are probably less of a leading indicator or tracker for a business environment.

A lot of our customers we sit down and talk to them. Their products are predicated on oil prices more on the $40 a barrel range. So, we’ve got such a huge amount of headroom above that $80, $90, $100 I don’t think it really makes that much difference as to the amount of activity that we’re going to see in the short term. We have a service support long term demand in the sector but in short term I don’t think it really changes too much. I think that the limitations on growing either faster are probably more around some of the abilities for ourselves, for competitors or even our end customers to properly track employees to keep up with the growth and demand as people try to explore and find new ways of recovering oil.

Your other question had to do with Asia. We do have a joint venture in Delilah China where we’re manufacturing for the most part products that would be the fluid management space. They’re more industrial in nature and yet we did set that organization up so that we could get involved with some of our energy products as well. So, that will be coming. We’ll also an additional management support in China now and he will be taking a look at growing our overall structure. Our sales effort and everything else in China.

At this point in time we’d be working with a lot of the major service providers, the national service providers that you would generally be familiar with. We go their coattails when we go into areas like China but there are big opportunities to work with a local Chinese firm as well and we’ll be addressing that as we go forward.

Operator

You’re next question comes from the line of [James Sound of Debelli]

[James Soun – Debelli]

I just wanted to follow up on your comment Pete on your margin guidance. If you exit the year with a 10% margin Romaco where do you think you can take that over the next three to four years at Romaco?

Peter C. Wallace

I’m going to almost beg off a little on that one Jim. I don’t mean to cage you on this but, it’s one of those things where we’ve gone through a fair amount of change within Romaco and as we start to play around with the business model as we are which is getting away from being a manufacturer of everything that we do and really becoming more of an engineered solutions provider where we are responsible for designing equipment, assembling equipment, manufacturing critical components but really getting more into sourcing outside some of the non-critical areas. I think everyone’s getting a different view as to what the possibilities are within the group.

We’ve got that going forward and the other big initiative that we have and it’s across each of these businesses segments is an after to grow the aftermarket business. We’ve had some success through Romaco and in fact that’s one of the reasons whey we had the profitability in the first quarter – we had more success in some of the aftermarket sales. And, we’re coming up with more programs and platforms to really go after and really pursue that in a more aggressive way.

So, I’d say the 10% upper range that I gave in the past is what we sort of new initiatively about the business. I’d say as we push forward with our overall growth plans we’ll have a better view on that probably as we end the next quarter or get into the later part of the year.

[James Soun – Debelli]

Okay. That doesn’t sound like you’ll peak at 10%. This could be kind of more of a mid level range for you?

Peter C. Wallace

I’d say, just to be fair on this, a lot of the competition in pharmaceutical packaging – if you’re looking at companies doing much better than 10% you’re not looking at many of them. That doesn’t mean we can’t do a lot better because we’re going to be approaching it differently than they are. But, it’s been a fairly difficult market. You’re generally talking about bigger ticket items. They’re going to marquis customers with a lot of purchasing power and strength. Everyone gets a little bit weak kneed in their pricing as they get into those larger projects, on and on, and on. Those are all the excuses we’ve all heard and what we really try to do is come up with business models that will allow us to get around some of the prior mindset or myopia that everyone had on this business.

When you take a look at the equipment instinctively you said, “This is worth something.” And, you should be able to see better profitability and yet we need to continue to see if our model changes will allow us to go ahead and take the profitability north of those expectations.

[James Soun – Debelli]

I think that you didn’t give the margin growth that you think the fluid management group can do. And, can you talk about the other two segments? What do you think your margin potential is in that business?

Peter C. Wallace

If you run the numbers the group just continues to just amaze me. It’s throwing off 40 to 45% incremental profitability on incremental sales. I mean, if you run the math on that and you throw in some growth you can do your own forecasting and it gets to be almost a ridiculous kind of number. What I’ve stated in the past is I’m quite happy while I always want more profit, so the management team that might be listening on this webcast don’t get the wrong impression – I always want more profit but what I’m most interested throughout fluid management is to make sure we’re doing enough of the customer face activities to make sure that we’re maximizing the top line growth. And, if we’re doing that and delivering anywhere from the 26 to the 28% operating profit I’ll be a pretty happy guy.

So, on the fluid management side it’s more about top line growth. Making sure that we’re maximizing and properly investing in our sales growth opportunities which is a bit different story than something like the process solutions group business. The story there is we want to improve and increase our customer face activities but we still feel that there’s still some opportunities to bring about a more cohesive group where we can go ahead and bring up the profitability at which point in time we’ll be more inclined to go ahead and reinvest more into customer face and sales growth initiatives.

[James Soun – Debelli]

I know you gave a margin goal of about 10 to 15% process. But, you think process could reach and touch the margins that fluid management is enjoying?

Peter C. Wallace

I’d say it would be difficult. The businesses are different. When you take a look at process solutions it’s more of a capital intensive business. Big ticket items just historically and in my own experience it’s difficult to get the margins you might receive when you have a product line that’s seen as more of a dispensable item. The fluid management product line while there the big sales for us they’re really small dollars for a lot of the end customers that we’re working with. They don’t hit the radar, their important, it’s all about service and everything else. When you get in and you get into the multi million dollar reactor systems job it’s big enough that it gets a lot of visibility and it is just more difficult to get the kind of profit levels than you might on something that would be less capital intensive in nature.

Operator

Your next question comes from the line of Allen Metroni of Silver Lake Asset Management. Please proceed.

Allen Metroni – Silver Lake Asset Management

The acquisition you referenced, you said it had lower margins obviously than your current process solutions business. How long do you think it will take to get those margins up to corporate level?

Peter C. Wallace

We did not really mention anything on the margins. We did mention that we bought them for a primo price and you can do a little bit of an assumption that maybe the margins are a little bit lower.

Christopher M. Hix

Actually the comment just that the margins are already approximating the process solutions group average. So, right out of the shoot Allen it’s pretty much in line.

Allen Metroni – Silver Lake Asset Management

Can you talk about other acquisitions? What else do you have down the pike? What are you seeing?

Peter C. Wallace

We’re ramping up activity. Like a lot of companies we’re viewing a lot of things but we’re being, I don’t think ultraconservative, but we just want to make sure we’re getting on the right type of opportunity. We don’t have anything that’s immanent. We’re not out here ready to announce the next big one. We’re still in the building phase, collecting all our thoughts and ideas and being a little more proactive going after targets and listening to people with their own ideas.

Allen Metroni – Silver Lake Asset Management

Where do you think you are in the pipeline then? I know you’re further along than you were a year or two ago and now you’re balance sheet is helping you out in terms of the size of business you could look at.

Peter C. Wallace

If we came across one that looked like it had a strategic fit. I think we’ve got the wherewithal to start jumping on it immediately. A lot of it is just that we have not been able to find the one that we’ve fallen in love with on a strategic basis.

Allen Metroni – Silver Lake Asset Management

Can you give us a sense of how big those orders were from the Romaco post in the quarter? Because your book-to-bill for the quarter was about 1.1 anyway in Romaco. A decent number, I think the highest number you’ve had in a while.

Peter C. Wallace

Any number I give you will be meaningless unless you take it in context with the total month and everything else. But, I will say that some of these orders that came in were multi million dollar orders.

Allen Metroni – Silver Lake Asset Management

From a modeling perspective you’re SG&A – it typically starts at high levels of revenue in the first quarter. Do you expect that pattern to continue in terms of a percent of revenue, the SG&A to be the highest in the first quarter?

Peter C. Wallace

I’d say that we still have plans in place. As we really embrace this growth initiative and the whole customer facing mentality and everything else we do have some investments that will hit the SG&A line. And, depending on whether or not we’re able to free up resources from other activities and do it as a net no addition or not we don’t know. But, in some of our plans we do have some costs built in to go ahead and further the cause, to go ahead and continue to accelerate the top line.

Operator

At this time we have no further questions in queue.

Peter C. Wallace

Very good. Well, on behalf of Chris and myself I’d like to thank everybody for their interest. We had a great quarter and we look forward to reporting, I believe the end of March is our next scheduled conference call. Thank you much.

Operator

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

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