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Executives

Kevin McGrath - IR

Peter Burlage - President and CEO

Hank Schopfer - CFO

Analysts

Fanyl Fable - Detexis

Brian Drab - William Blair

Dick Ryan – Dougherty

Bill McCann - Brown Advisory

David Cohen - Midwood Capital

Sunil Sabah

Peerless Manufacturing Co. (PMFG) F4Q08 (Qtr End 06/30/08) Earnings Call September 9, 2008 10:00 AM ET

Operator

Welcome to the PMFG Incorporated fourth quarter fiscal year 2008 financial results conference call. My name is Marsha, and I will be your coordinator for today’s call. At this point all participants are in listen only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Kevin McGrath of Cameron Associates. Please proceed.

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 and fiscal year ended June 30th, 2008. During this call non-GAAP financial measures will be discussed. Reconciliation's to the most directly comparable GAAP financial measures are included in the company's earnings release for the fourth quarter and fiscal year 2008, which is available on the Investor Relations page at the company's website at www.peerlessmfg.com.

Before I turn the call over to Peter Burlage, 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 the 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 uncertainties. Accordingly there are or will be important factors that could cause the company's actual results to differ materially from those indicated in the 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 items 1A, risk factors in part one to our annual report on Form 10-K for the fiscal year ended June 30th, 2008, which we intend to file later today. Company undertakes no obligation to publicly update or revise any forward -looking statement.

Inclusion of any statement in this conference call does not constitute an admission by the company or any person that the events or circumstances describe in such statements are material. With that said, I will now like to turn the call over the Peter Burlage, President and CEO of PMFG.

Peter Burlage

Thanks, Kevin. It is my pleasure to welcome all of you to our conference call. Joining me today is Hank Schopfer, our Chief Financial Officer.

I want to first make a few introductory comments regarding our business activities, our recent acquisition of Nitram Energy, and then Hank will provide you with our financial results for the fourth quarter and fiscal year 2008.

PMFG had a strong performance for the fourth quarter and full year with revenue up 56% and 87% respectively. Our earnings per diluted share on a non-GAAP basis increased more than 15% and 218% respectively. Hank will provide more details on our financial results later in the call. The growth in both of our business segments was solid.

Environmental system segment revenues for the fourth quarter and full year increased 18.5 and 118.6% respectively. The increased demand was primarily driven by increased global demand for natural gas peek power generation, as well as natural gas fired combined cycle power generation, EPA mandated NOx emission standards, and increasingly stringent emission targets worldwide.

Specifically, we are seeing solid business pipeline activity in our areas of combined cycle power plants that are seeking multiple unit auctions, growing demand for biofuel and renewable fuel power generation, and significant activity with [peaker] power generation. PMFG has extensive experience with these types of projects, and we believe the demand for these segments will continue to be strong.

Separation/Filtration System segments revenues for the fourth quarter and full year increased by $118.2 and 68.4% respectively. Our Separation/Filtration segment continues to benefit from the growth and global gas transmission and pipeline expansions, the increase demand for equipment to facilitate, two facilities located in Canada, particularly to the tar sands region, new gas processing plants in the Middle East, and nuclear power plants that continue to invest in life extension, as well as new generation of power.

Here again, our business pipeline activity remains strong. In particular, we have seen a noticeable uptick in the demand for nuclear projects around the world with Europe, China and the U.S. at the forefront of the activity. PMFG is a leader in the nuclear plant steam separator business, and we believe this experience positions us well to capture growing number of nuclear plants that are expected to be built in the coming years.

The other area in the Separation/Filtration segment that we continue to see strong activity is in the gas transmission, and this is occurring on a global basis. The scale of the projects is growing as companies and countries seeking to secure reliable supply of gas for their energy needs. Emerging markets like China, South America and India continue to be very active areas for PMFG. We are pleased that both segments of our business have been performing well.

New orders in the fourth quarter continued the trend, we experienced in the first nine months of this fiscal year, and our outlook remains positive for the markets we serve. We are also pleased with the geographic market expansion in our sales channels. Backlog at the end of June was approximately 107 million, positioning us well to continue our growth in the fiscal 2009.

The underlying fundamental is driving demand of our products, and services have not changed in our opinion, and we remain quite positive about the growth opportunities over the next several years.

With that said, and as we have stated in the past, it is important for investors to understand that timing of our orders has always been a big factor in our business and we do not see that changing.

Now a few comments about the acquisition of Nitram Energy. On April 30th, we announced the acquisition of a privately owned Nitram Energy, Inc. for $63 million in cash. Nitram is headquartered in Orchard Park, New York and owns manufacturing facility in Wichita Falls and Cisco Texas.

Nitram is the parent company of Burgess-Manning, Inc., Bos-Hatten, Inc., and Alco Products. Burgess-Manning manufactures custom designed gas liquid and gas solid separators, a vast line of silencer products and pulsation dampeners. Bos-Hatten manufactures shell and tube heat exchangers while Alco Products manufactures hairpin style specialty heat exchangers.

This business principally serve the oil and natural gas, chemical, petrochemical and power generation industry and fits with our company's vision of making energy safe, clean and efficient.

We are very excited about the combination of Nitram organization with PMFG and the integration process is proceeding as planned. PMFG and Nitram represent the combination of two leaders in the separation and filtration industry in addition to their respective leadership in environmental and silencing products.

Each company is prominent established, profitable and growing significantly. We have already begun to see the benefits of the combination of these two companies in the marketplace as we leverage the substantial cross-sell opportunity into each of our established customer bases.

On the management side, PMFG gains an impressive team of experienced industry professionals and we are pleased to say that all of the key personnel are remaining with the company. For our shareholders, we believe the acquisition will create additional shareholder value in the years to come.

That concludes my review of our two business segments and our recent acquisition of Nitram Energy. I would like to ask Hank to now share with you the key financial results for the fourth quarter and 12 months of fiscal year 2008 and then I will return with some closing remarks.

Hank Schopfer

Thank you, Peter. Let me take a moment to summarize our financial highlights for the fourth quarter and fiscal year 2008. As Peter said earlier, we completed the Nitram acquisition on April 30th. Since the date of acquisition, we have included Nitram's financial results with those of the company in the fourth quarter and fiscal year 2008. Our fourth quarter results include purchase accounting adjustments related from this acquisition.

In the first quarter of fiscal year 2009, we completed the 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 2-for-1 conversion.

Revenues for the fourth quarter fiscal year 2008 were $40.9 million, an increase of $14.7 million or 56.1%, compared to revenues of $26.2 million for the fourth quarter fiscal year 2007.

Net loss for the fourth quarter of fiscal year 2008 was $1.4 million, or $0.11 per diluted share, a decrease of $5.4 million, or $0.42 per diluted share, compared to net earnings of $4 million, or $0.31 per diluted share, for the fourth quarter of fiscal year 2007.

In the fourth quarter of fiscal year 2008, the company recorded fair value adjustments of $6.4 million to Nitram's backlog and $4.8 million to Nitram's inventory with estimated usual lives of approximately seven months.

In the fourth quarter of fiscal year 2008, the company expensed $2.7 million related to the backlog and $2.3 million related to the inventory. 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.

In the fourth quarter of fiscal year 2007, the company sold its former headquarters facilities and recorded a $3.5 million pre-tax gain that was classified as a reduction to operating expenses. The gain on this sale increased fourth quarter of fiscal year 2007 net earnings by $2.3 million, or $0.18 per diluted share. Net earnings for the fourth quarter of fiscal year 2007, excluding the gain on the sale, was $1.7 million or $0.13 per diluted share.

Revenues for fiscal year 2008 were $140.5 million, an increase of $65.4 million, or 87.1%, compared to revenues of $75.1 million for fiscal year 2007. Net earnings for fiscal year 2008 were $8.4 million, or $0.64 per diluted share, an increase of $2.5 million, or $0.18 per diluted share, compared to net earnings of $5.9 million, or $0.46 per diluted share, for fiscal year 2007.

For fiscal year 2008, on a non-GAAP basis, excluding the expenses related to the fair value adjustment of Nitram's backlog and inventory, the company would have recorded net earnings of $11.7 million or $0.89 per diluted share for fiscal year 2008. Net earnings for fiscal year 2007, excluding the gain on the sale of our former headquarters facility, was 3.6 million or $0.28 per diluted share.

Separation/Filtration Systems segment revenues for the fourth quarter of fiscal year 2008 were $31.2 million, an increase of $16.9 million, or 118.2%, compared to revenues of $14.3 million for the fourth quarter of fiscal year 2007. The Separation/Filtration Systems segment operating income for the fourth quarter of fiscal year 2008 was $1.7 million, an increase of 200,000, compared to operating income of $1.9 million for the fourth quarter of fiscal year 2007.

Separation/Filtration Systems segment revenues for fiscal year 2008 was $79.5 million, an increase of $32.3 million, or 68.4%, compared to revenues of $47.2 million for fiscal year 2007. Separation/Filtration Systems segment operating income for fiscal year 2008 was $10.2 million, an increase of $3.6 million, compared to an operating income of $6.6 million for fiscal year 2007.

Nitram's operating results, since the April 30, 2008, the date of acquisition, are reported in the Separation/ Filtration segment and include expenses of $2.7 million and $2.3 million related to fair value adjustments of Nitram's backlog and inventory, respectively. On a non-GAAP basis, excluding the expense related to these fair value adjustments, the Separation/Filtration segment would have recorded operating income of $6.7 million and $15.2 million for the fourth quarter and fiscal year 2008 respectively.

Environmental system segment revenues for the fourth quarter of fiscal year 2008 were $9.7 million, a decrease of $2.2 million or 18.5%, compared to revenues $11.9 million for the fourth quarter, fiscal year 2007.

Environmental system segment operating income for the fourth quarter, fiscal year 2008 was $1.4 million a decrease of $1.3 million, compared to an operating income of $2.7 million for the fourth quarter of fiscal year 2007.

Environmental system segment revenues for the fiscal year 2008 was $61 million, an increase of $33.1 million or a 118.6%, compared to revenues of $27.9 million for fiscal year 2007.

Environmental system segment operating income for fiscal year 2008 was $13.8 million, an increase of $8.8 million compared to operating income of $5 million for fiscal year 2007.

In June 30, 2008, the company reported $14.2 million of cash and investments, and $60 million of debt, total assets of $167 million, working capital of $42.3 million, and a current ratio of 1.77 to 1.

As Peter said earlier, the company’s backlog was approximately $107 million at June 30, 2008, as compared to approximately $97 million at June 30, 2007. Our June 30, 2007 backlog included a $30 million environmental systems order, which was completed in the fourth quarter of fiscal year 2008. This concludes my remarks about the financial results. I will turn the call back over to Peter for some closing comments.

Peter Burlage

Thank you, Hank. We continue to be excited about the growth opportunities that exist in our global market place and remain optimistic about the future. The natural gas business is thriving, and we are seeing strength in our environmental business in North America and internationally as Western Europe and certain countries in the Middle East have increased their environment regulations.

We continue to see the worldwide growth and demand for energy and the associated infrastructure needed to meet that demand. On the environmental side of business, we are well positioned to serve every increasing need by industry to control pollution emissions. These trends play well to our strength, and gave us confidence about the future growth opportunities of PMFG. We will now address your questions. Operator, please proceed.

Question-and-Answer Session

Operator

[Technical Difficulty] and that is pretty consistent Nitram's backlog when we acquired them.

Unidentified Analyst

Okay.

Peter Burlage

As far as the international breakdown, I do not think we have an itemization of the, what portion of that international versus what is domestic on the backlog, but the international sales has been strong. We recently announced those two major sales in, out of the UK office for Separation/Filtration equipment into the Middle East. So, that market has continued to grow at a pace that is similar to what we have been seeing here in North America.

Unidentified Analyst

Okay.

Hank Schopfer

International, domestic revenues were 57%, domestic last year 43%, international which is a same as it was the year before.

Unidentified Analyst

Okay. Do you expect that mix to be changing going forward? Is international growing more rapidly for you folks or you just doing a lot of business domestically as well?

Hank Schopfer

I do not see that that makes change in that much. If you look at each segment, it is changed in a little bit within that. In other words, our environmental business, its growth is predominantly here in North America with the addition of gas power generation projects that are going on.

Our Separation/Filtration is probably seeing a higher rate of growth outside of North America, but the two offset one another and we have been seeing continued movement of both the international and domestic movement just changes a little bit between different product segments.

Unidentified Analyst

Okay. Could you talk a little bit about the LNG market and which are opportunities there? So it becoming, I do not know what percentage of your revenue is counterpart by that particular segment, but that seems to be have a little higher growth rate and I just wanted to have your thoughts on that?

Peter Burlage

If you look at just liquid fractions and the vaporization processes their separation equipment used in both of those. We also, obviously, the transportation of the natural gas to those LNG facilities especially in the Middle East, is a big part of our business in that region.

In the United States, it provides an opportunity for us at the vaporization of the new equipment, which is installed there, depending on the region. For example, the coal point region out on in (inaudible) East Cost, last year when they expanded that facility not only did we get separation equipment there, but we also installed SCR systems on their heat unit set, we are vaporizing the ammonia, the LNG is came off.

So opportunities are in, the pipeline is going in and out of these facilities, the storage units near these facilities as well as the unloading process and the liquid fraction process, both of them in the compressor protection as well as pipeline protection, we have our separation equipment in there.

Unidentified Analyst

Okay. What percent of your revenue is going into that segment, do you know that?

Peter Burlage

I do not have that breakdown. As an estimate, I would say it is approximately 10% and then this is regarding on the Separation/Filtration side, approximately 10% of that would be going into there.

Unidentified Analyst

Okay.

Hank Schopfer

I think domestic is 63% and international 37%. I think I may have told you 63%, 37%.

Unidentified Analyst

63% was domestic revenues last year, fiscal '08, yes?

Hank Schopfer

Yes, fiscal change in year-over-year.

Unidentified Analyst

Great, okay. Then just a question on gross margin trends. Could you comment a bit on that, I think the gross margins came in about 31.9% on a pro forma basis of course and what trends do you see in gross margins going forward?

Peter Burlage

I think in the last half of our fiscal year, we were faced with some gross margin challenges as our steel prices took off at a pretty high pace of increase and that has caused us to lose a couple of points on where we would like to be on our margins. We see that in the last of approximately six weeks to two months, now we have seen the steel prices leveling off, the rate of increase has come down there.

We have very limited exposure to our steel prices because the duration from the time of final quote to the point of where we placed an order for those components is relatively short, but when we are on such a steep curve that we experienced there in the last two quarters of the year and buying our steel was hard to keep ahead of that curve.

Going forward, we see that price being little more stable for this fiscal year 2009 and our other costs associated with labor, we saw some big increases in labor costs at the beginning of the last year but we have not experienced the same type of pressure for our labor in our facilities that we have saw at the beginning of last year.

Hank Schopfer

Of course [Ted] with the increased volume throughput is we have outsourced a higher percentage of our production which is a higher cost for us.

Unidentified Analyst

Yes.

Peter Burlage

Yes. Then the bigger the subcontract component of what we do is, has been significant over the last two quarters to meet the demand.

Unidentified Analyst

Okay. Consequently putting some pressure on margins as well, is that what you are saying?

Peter Burlage

The margins that we get on subcontract manufactured.

Unidentified Analyst

Is lower.

Peter Burlage

As well as profitable as what we do for our own performance.

Unidentified Analyst

Got it. Right. Okay. So that makes changes, that affects your margins. Looking forward, do you think margins can be drifting upward here is that what we should takeaway from this?

Peter Burlage

It will be in that range. The mix and stuff, you are going to be in the 32 plus or minus or 32, 33 may be 33.5% is something that we get in it. It is going to depend a little bit on product mix and the market conditions, but you are going to be in that range.

Unidentified Analyst

Okay. Well, thanks very much. Let me turn it over to some other folks. Thank you.

Peter Burlage

Thanks, [Ted].

Operator

Your next question comes from the line of [Fanyl Fable from Detexis]. Please proceed.

Fanyl Fable - Detexis

Hi, good morning. Congratulations on good quarter and progress on the Nitram acquisition. Some numbers to, some questions to flush out the numbers, and I think when you filed your Nitram historical results, the Nitram did approximately $39 million in six months ending March 1st, and so I am just trying to see what exactly for the fourth quarter was the contribution of Nitram versus your Separation and Filtration business. So…

Hank Schopfer

$40 million, it was $40 million, and the fourth quarter was a contribution from Nitram and revenues.

Fanyl Fable - Detexis

So that means, your Separation and Filtration did $17, approximately $17 million, right? So that is uptick from the last quarter. Anything big driving that jump from last quarter, because I believe you had a big contract which is rolling off, which rolled off basically in the third quarter?

Peter Burlage

Correct, yes, in the third quarter that roll off, now which is just the backlog of our Separation business that is going out. I mean the other thing was big over the previous year, and from a quarter of standpoint there is lot of product shift. I mean that is a traditional Peerless' performance in the fourth quarter and our Separation /Filtration business. If you look back the history of the revenues, our fourth quarter has always been a strong quarter for that segment of our business.

Fanyl Fable - Detexis

Okay. Any specific reason, which drive specifically that performance in the fourth quarter?

Peter Burlage

I think it is more of the seasonality of the construction of the pipeline systems and stuff.

Fanyl Fable - Detexis

Okay.

Peter Burlage

You see a lot of orders that get place right around the beginning of the fiscal year, the calendar year and typical cycle time for those types of units are six months later you see, and so the combination of that and construction gets you the typical fourth quarter spike for the Separation/Filtration equipment.

Fanyl Fable - Detexis

Sure, yes that makes sense. Then the operating expense is, and again probably there is some impact of the acquisition numbers, but when I look at the operating expense, I do see uptick of couple of percentage points over the last quarter, going up to 23% from 21%. Any specific reason for that and what is a good way to think about that going forward?

Peter Burlage

The operating expenses -- it consists of the three components, it is selling and marketing, its engineering and project management, and it is G&A.

Fanyl Fable - Detexis

Right.

Peter Burlage

Now the selling and marketing and the engineering are going to be closer tie to the volume increase. G&A cost, we have had some higher G&A cost with the Nitram acquisition that is come along, but we typically think of those expenses in that 20%-21% of revenue range in the aggregate.

Fanyl Fable - Detexis

Going forward?

Peter Burlage

Yes.

Fanyl Fable - Detexis

Okay, that is helpful. Then, again on this adjustment of $5 million on inventory, as well as backlog in this quarter, what is a good way to think about that going forward?

Peter Burlage

It amortizes over seven months from now and we have two months in the fourth quarter and we will be picking up some, the remainder of it in the first quarter fiscal '09 and then in the second quarter fiscal ’09. Now those two are amortized over actually the way the backlog works and the way the work in process inventory works, but you can almost think of in terms of straight line type of amortization. That is gone, so it will be with us for us the next 5 months, and then it will be – should be gone.

Fanyl Fable - Detexis

Okay. All right, may be, if you take a step back in here, and try to see, you mentioned in your press release that this is basically due to the purchase accounting, right, impact?

Peter Burlage

It is purchased account, yes, in purchase accounting, we assign an, actually appraisers (inaudible) that do appraises in purchase accounting, but we have assigned a value and this is under general accepted accounting principles but assigned a value to Nitram's backlog and of course that backlog would flow through our P&L over a period of about 7 months. So under on an appraisal valuation, it was, I think $6.4 million was assigned to that intangible asset, and we are amortizing it over the seven month life.

Fanyl Fable - Detexis

Okay, because when you filed, the Nitram historical numbers, there also you had a pro forma adjustment of $7.2 million or so, and that was related to the intangible assets though, so that is to the asset adjustment right?

Peter Burlage

Yes. Actually, both of those adjustments, if you look at Nitram by itself, both of those adjustments would be Nitram.

Fanyl Fable - Detexis

Okay. So what is the good way to think about that adjustment going forward then? That is a totally different adjustment, because that is from the intangible assets. Is that right?

Peter Burlage

Well, I am sorry, I will make sure I understood, amortization expenses something that would go, it is about $200,000 a quarter at that stage with us.

Fanyl Fable - Detexis

Okay. That makes sense. In terms of the backlog, so previously you have talked about in terms of think the way to think about future is your next fiscal year numbers have typically quite closer to 1.8 to 2 times the backlog. Is that the numbers still relevant?

Hank Schopfer

I think if you just historically look at, we do not provide actually forward-looking information on that, but if you historically look at Peerless and go back and look at the backlog at the end of the prior fiscal year and you look at the revenues for the following year, a 1.6 times to 1.8 times is historically where falls on the backlog.

Fanyl Fable - Detexis

1.6 to 1.8, okay. That is helpful. Thinking more on the macro side, natural gas prices probably have seen some weakness this quarter and I was just curious, if you have been seeing any impact of that in terms of your proposal activity?

Peter Burlage

Not as of, recently we have not seen any impact of that yet. It is an interesting phenomena because the natural gas power generation side of the business strives on the lower cost, so our fuel gas gets our SCR systems and stuff like that benefit from a little bit weaker natural, gas but the pipeline, infrastructures that are there for the demand could be impacted by the lower cost.

As of current situation, we have not seen any turndown of any acute need of the proposals, uses their first place that you start seeing that, is that well ahead where they start back and off on the drilling or the separation at those wells and stop, start locking it in and we have not seen that yet.

Fanyl Fable - Detexis

Okay. Is there any impact of the overturning of the Care regulations?

Peter Burlage

No, the Care regulations have a predominance impact on Southfield power generation which is not something that Peerless involved itself with hardly at all. I mean it is focused mostly on the large coal fire type applications.

What we are seeing and what we expect to see in the long run on this is that states will now be required to put in their own plans for achieving their emission standard, that are required by the Clear Air Act and the expectations are those that actually will become more stringent than the Care rules as well as more specific to the types of equipment that we serve.

So Care was never perceived for us to be a strong driver of business in the retrofit market because of its focus primarily on coal fired applications. It is now as we states are going to be required to do their own implementation plans, we see an opportunity there for us to retrofit more gas power units that may have not been part of the Care cycle but our immediate term there is no impact at all for the Care rule changes.

Fanyl Fable - Detexis

Okay. Also just curious as I think about the growth options for the company, of course Nitram is a big acquisition. What is a good way to think about that going forward?

Peter Burlage

As far as other acquisition opportunities, I think we have got some strategic needs that we will look at, our constraints in engineering is one of those areas. We would like to add some additional environmental type products to go along with the markets that we are presently serving. So looking in those strategic areas and trying to find the right fits what we are going to be working on.

Fanyl Fable - Detexis

Okay. Thanks very much.

Operator

Your next question comes from the line of Brian Drab from William Blair. Please proceed.

Brian Drab - William Blair

Good morning.

Peter Burlage

Good morning, Brian.

Hank Schopfer

Good morning, Brian.

Brian Drab - William Blair

I think he covered most of the questions there. I wish here is a couple. Can you talk a little bit about what the impact of foreign exchange was to the top line in the fourth quarter?

Hank Schopfer

I think it was pretty nil within foreign exchange Brian. We feel our sales mostly, obviously, domestics and dollars and our internationally, usually we buy and sell in either euros or pounds.

Brian Drab - William Blair

Okay.

Hank Schopfer

Our US office, I do not think there is any orders taken out of here that were not US dollars that we did buy and sell in US dollars. Our UK office takes orders in pounds or euros and they protect themselves from making sure that they subcontract in the same currency.

Brian Drab - William Blair

Okay. So no effect to the bottom line and you are saying also no effect to the top line in translating your foreign revenue back to dollars?

Peter Burlage

No. Earlier in the year, we did on a contract that was out of US I think was in euros. We made some money on that. However, if you go back and look at Brian probably over the past 12 months, when the pound gained on the dollars we had some translation gains here, but I do not think in the fourth quarter was the currency fairly stable.

Brian Drab - William Blair

Okay. If you look at and I am not sure how good your window is into this, but the order rates and backlogs of some of your major customers, may be GE and Westinghouse and others, do you feel like those order rates and backlogs are at healthy levels and what growth trends are you seeing?

Peter Burlage

We have about some major customers of ours that gives us a great vision view rate into their backlog and what is going on, and they are all still have a strong backlog and still go into backlog increasing it. So right now with our major customers that seems to be the, there has not been any slowdown there.

Brian Drab - William Blair

Okay. Sounds good. That is all from me. Thanks a lot.

Operator

Your next question comes from the line of Dick Ryan from Dougherty. Please proceed.

Dick Ryan - Dougherty

Hey, Peter. Hey, Hank. I stopped offline on the Q&A so I apologize if this is a duplicate. In the backlog, $107 million compared to a year ago we had the big orders sitting in there, is there any sizeable orders in the $107 million?

Peter Burlage

Nothing more than 2, 3, 4 million size orders. There is nothing.

Dick Ryan - Dougherty

Nothing like last year?

Peter Burlage

I do not think there is anything over may be $5 million as the biggest.

Dick Ryan - Dougherty

Okay. Concerning the order pipeline, if I recall typically at this time of the year we start getting into a more fertile period where some of the orders drop. Is that do you think that is going to hold this year or has the economy caused any issues from your order perspective?

Peter Burlage

No. I think, historically for those elephants, hunting season is typically in our second quarter, sometimes early in the second quarter, sometimes really late in the second quarter. Last year and the year before, we knew that $40 million was come to us as early as the beginning of the third quarter that it took a couple of months to get it instinct and negotiate it.

So we expect that market still be, it is going to happen in the same second quarter period when some of those of jobs will be left. They are competitively big, so it is not that we are going get them, but the orders that are out there and the pipeline looking at second quarter type of odd dates.

Dick Ryan - Dougherty

Okay. With the combination of Nitram, can you talk about anything you have seen yet probably still early but cross selling opportunities and also on the capacity constraint issues the people factor?

Peter Burlage

On the cost-selling side, we have seen some pretty good opportunities with our constraint in our environmental business at the boiler manufacturers, the HRC manufacturers, Nitram has a real good product that is used for silencing condos, (inaudible) HRC where we are leveraging up our strength with some of those customers who are selling that products as well.

So we are seeing some of those OEMs type accounts that it held up. Inversely, the Nitram key customers that are present packagers, we are seeing an opportunity to talk to them about some additional process type kits that we can provide them. So there is cross selling going on there.

Dick Ryan - Dougherty

Good.

Peter Burlage

Sorry, the other part of your question was?

Dick Ryan - Dougherty

Regarding the capacity constraints, what people factor?

Peter Burlage

Yes, I mean the good news is we add additional capacity, the bad news is that was filled to its capacity as well. I mean they were running full and they had their shops sold out for a quite a while. We are getting some, we are picking up a little bit of throughput through some of the lean aspects they are going being able to streamline certain types of work through different plans.

The additional capacity really was there because their facilities are full with their work and ours is full with the work that we had booked. So it is a matter of adding additional labor to get any additional throughput at these facilities.

Dick Ryan - Dougherty

Can you do that without an acquisition or the avenues to increase that capacity?

Peter Burlage

Yes, I mean finding those skilled workers is the key part of it. Only one of our facilities, actually two of our facilities are running apart from second shift. So we have not script the capacity of the manufacturing facilities just getting labor resources there. Fortunately we can find subcontractors is a work if we can fulfill that work ourselves. It is at slight price premium to do that.

So we are continuing to build or even evolving a trend while there that may have the will and skill but they do not have the certification. So we are training and developing those for certification. So we picked up that program and added it to the two facilities that were Nitram facilities so and we have been able to add the trained resources there.

Dick Ryan - Dougherty

Is that causing you to change your strategy going after some of the business you see out there and?

Peter Burlage

I do not think it changed our strategy as long as we can, we just know what our capacity for our self performing is and we use our subcontracting to fill the rest of the opportunity. So in our cost of products separation side of the business, we have not run into the engineering constraint yet. On the environmental side of the business that is more of an issue, engineering across the management is more of a constraint force than manufacturing.

Dick Ryan - Dougherty

Okay.

Peter Burlage

That side of the equation too as the market is pretty tight for engineers but we are still being able to fill those positions, just taken a pretty strong effort line, our ability to recruit and get people in here.

Dick Ryan - Dougherty

Okay, good. Great, thank you.

Operator

Our next question comes from the line of [Bill McCann] from Brown Advisory. Please proceed.

Bill McCann - Brown Advisory

Hey, good morning.

Peter Burlage

Good morning, Bill.

Bill McCann - Brown Advisory

Good. You have experienced a little change over the last couple of years. Obviously, you have figured out how to run this company in a more dynamic environment. I have a couple of questions. Someone asked a question earlier and you responded talking about the weaker natural gas price.

I have done a lot of looking around and fair talking to both the purchasers of power generation equipment and the vendors, and it seems from what I have heard is that they are much more comfortable with all this field gas coming on comfortable in the fact that they are going to be amply supplied, and relatively inexpensive supplies at least compared to the $13, $14, $15 gas we were seeing some time ago, and what I am being told is that there is going to be a greater propensity to go with natural gas.

Which leads me to a question and I peakers because not only from what I hear pick up along the way, not only is there a demand for peakers because of this supply of gas but also on fuller and wind projects they tend to need backup peaker plants. So with that said, and looking back at this $40 million order you had a couple of years ago, what I am picking up from the guys who are getting ready, the long lead time guys who are getting ready to build these things, that there are going to be other $40 million or bigger projects out there. I wondered if you are seeing at your level yet or if what I am hearing is maybe just talk?

Peter Burlage

No, I think I was trying to refer to you before is that we see some peaker power plants, some of these elephants we were referring to with expected award dates here in our second quarter with and there is a multiple projects out there, but it is like I said in a competitive market. So I mean we will try to gain our share of it and take as much as we can handle, but there is competitive customers out there. These projects are going forward.

In the past, we have seen and get to this stage and then things because of changing economics they stop and do not go forward, there are peaker power, but you are absolutely right and the assessment that these plans are going forward and there is quite a feeling going specifically for the shortages that they are in some geographic areas due to the power consumption, but also the peaker power needed to take the swing when the wind power or solar power is not there.

There is no way of storing that capacity on in the grid somewhere so you have to have the peaker capability to do that. So, those units are expected to be awarded in our second and probably will spill over into the third quarter a little bit just like it did two years ago, but that is expected to have quite figures. There is numerous projects out there for this fall.

Bill McCann - Brown Advisory

So it would based on the research reports, I have seen in the backlog you reported from the smaller projects, it does not look like there is a lot of revenues at there and people projections. Would you comment on that?

Peter Burlage

I am sorry you are asking the revenues?

Bill McCann - Brown Advisory

In other words, if I look at the research reports that are out there and the revenue projections people are using.

I do not see a lot in there given the backlog that you have stated already, there is not a lot in there or may be not anything in there for these elephants that potentially coming down the rope?

Peter Burlage

I think that is pretty accurate assessment of it Bill. These things come along and that is the concept of the lumpiness of our business. We will have an opportunity for couple of these big projects that are coming there and they will pick it up and move us up for a big spike for four quarter, and then there is a rate between when that is replaced again.

So the $107 million backlog we have now is basically, there is very little large project in that time, and there is not any large if you call large over $5 million. There is no large project than that. So we get the couple of large projects and obviously that backlog is going to go up significantly, but it will work through its cycle and then when the replacement other will happen at a timing that may be certainly. When the market says it is necessary, does not really something follows with the quarters and with the fiscal year.

Bill McCann - Brown Advisory

Well, we are worried about the couple year down the road when we get there. Along the same line to different, however in product line nuclear, guys that are having very long lead time vendor in the nuclear area are starting to see a lot more business than they have seen in the long time. I mean order to magnitude larger, are you starting to see this yet and because it seemed to me given your capacity constraints from the industries capacity constraints, you want to start seeing this in the steam dry area relatively soon?

Peter Burlage

We project this steam dryer manufacturing to really pick up for us at the end of our fiscal year, the orders. They have been part of the people that are procuring these types of things have been building our packages, a lot of them started with just two units and now we are bidding on four and six and eight unit type. They continue to try packs these together to get the best pricing they can get for long-term delivery cycle.

So, we would had expected some of these projects to have been awarded already but they have continued to hold back trying to package them together in order to leverage up their spend as much as they can. We expect them to really be come in hitting our shop floors at the end of our fourth quarter.

Bill McCann - Brown Advisory

Good. One last product area; in line with my first question that goes along with the observation there are going to be ample supply, lot of this is coming from these different Shales Barnett, now Marcellus appear in the North East. If I look at the Nitram product line, it appears that you have now more products that are closer to the well head and I was wondering if you are seeing any impact of that in your business yet.

Peter Burlage

You are right. There is a little more of that together, but Peerless brings today equation that we have the engineering expertise that we can package those components in two more complete systems and we will be selling systems as opposed to just components for that market.

I mean it is a market that they haven been doing well and then for the last couple of years, they have seen more and more business and add factor, again they are very tied into the compressor manufactures where we were more, Peerless is more associated with the transmission line companies, so they are a little further up the stream than what we have traditionally have been, including some liquid-liquid separation products that can go right at the wellhead.

Bill McCann - Brown Advisory

Great. I am going to try some [mix-up] of my own simple way and see if I am on the right track. It appears that you have significant opportunities for business out there at a time when other parts of the economy are slowing down and taking the pressure off of the acceleration in your labor costs and your materials costs, so actually some slowdown in the broad economy is probably welcome in your situation, given the fact that there is going to be a lot of business out there in the segments that you are serving.

Peter Burlage

Yes. No, the specific filt products that we are going to buy are competitively, I mean, there is a shortage of plants and shelves and has for the type of equipment that we are building. So I do not know if there is a slowdown for demand for filts, I think, what we will see is probably some shortened lead times from some of our vendors, but I do not think we will be seeing much in a way of a cutback in some of the core pricing of this equipment because there is such a demand globally in the oil and gas market.

Bill McCann - Brown Advisory

You are not seeing the ramp that you could not handle the way you were seeing in the first two quarters of the year, is what you are saying.

Peter Burlage

Yes. I think that you are saying that the rate of increase…?

Bill McCann - Brown Advisory

Right. The rate of increase is falling down and therefore does not impinge your profitability the way it laid out a year ago.

Peter Burlage

Yes. You are right. With the rate of increase, the scale has gone down drastically over what it was the first six months of this year. I think you are still speculation as to just what will the Chinese steel mills coming back on line due to the market and what will the slowdown if the China economy does slowdown. Will it have an impact on the steel prices to keep it flatter?

Yes. The rate of increase has flatten out to very slow in compared to what it was for the first six months, but I think that none of our projections nor any of the experts has projected a downward trend to the fuel prices.

Bill McCann - Brown Advisory

One last micro point on the labor side; I know throughout your industry and some other welders have been difficult to get that seems to me that, I think I did some checking, it takes about 18 months to get a certified welder. Have you gone through a long enough period now where building up greater supply of certified welder that may help out that shortage or is that just the [pipe drilling]?

Peter Burlage

Not for building up a greater supply. One of the things that we have seen as lot of our manufacturing facilities were located right in the heart of the Barnett Shale is that that industry is not taken away any additional welders and to some extent some of them are willing to come back and work inside of a controlled manufacturing facility instead of working on the back of their truck.

So, two years ago when we saw that the workers are heading towards those pipelines was a challenge for us to maintain our workforce that we had. That pressure has gone away. Are there still people that are out in the field servicing that the pipeline industry there are still out there, but we have not seen further deterioration in the work.

So, new welders coming into the area, I mean we have seen some increase in welder resources showing up in our plant area because just like after hurricane goes through we get this migrant worker aspect where welders are moving to this region because the price they are paying here is greater than what is happening in some other parts of the United States, but we have not seen the welders that are out there not moving off. We have not loss welders to the pipeline industry in a good six months.

Bill McCann - Brown Advisory

That is great. There is a lot of dynamics in your business and I think you are doing a really good job to get your arms around it and good luck.

Peter Burlage

Thank you.

Hank Schopfer

Thanks.

Operator

Our next question comes from the line of David Cohen from Midwood Capital. Please proceed.

David Cohen - Midwood Capital

Hi guys, actually I have one very quick question. Can you give some measure of the profits contribution from Nitram in the quarter? In the future can you incorporate Nitram, some P&L impact exclusively in the press release from Nitram. I know you said it was $40 million of sales, but that is obviously nowhere in the press release. So, whether it is gross profit, operating profit from Nitram in the quarter that you can provide?

Hank Schopfer

No, we do not have that right now, but I will tell you that if you look at the the performance stone for stuff that we saw from Nitram, that is been pretty consistent, except that these two purchases are non-GAAP items or these GAAP on these non-GAAP basis is adjustment to the backlog and the adjustment to work in process, both related to Nitram.

David Cohen - Midwood Capital

We can back that out.

Peter Burlage

…negatively impacting for the two months of the fourth quarter. Going forward, we do not see anything different about Nitram.

David Cohen - Midwood Capital

So, what was this historical gross margin ignoring purchases?

Peter Burlage

It is very comparable.

David Cohen - Midwood Capital

That was arguably $35 million gross profit contribution?

Peter Burlage

No. I would say it was probably more in the 32% to 33% range.

David Cohen - Midwood Capital

Okay. All right, thank you.

Operator

Your next question comes as a follow up from the line of [Sunil Sabah]. Please proceed.

Sunil Sabah

Hello. I wanted to circle back on a couple of things. I believe that you will be filing 10-K or 10-Q today, is it right?

Peter Burlage

10-K today.

Sunil Sabah

Okay. Does that include the pro forma results also because I know you filed nine months results for Nitram and then two months up in this quarter, I was just curious, you know, what is the good way to think about pro forma numbers for '08 including the Nitram acquisition?

Peter Burlage

Yes, there will be a pro forma information in there and once you have had it and had a chance to go through this, you got some further questions, just give me a call, but yes, there will be pro forma information in there.

Sunil Sabah

Okay, sounds good. Thanks very much.

Operator

There are no further questions in the queue. I would now like to turn the call back over to Mr. Peter Burlage, President and CEO. Please proceed, sir.

Peter Burlage

Yes. Just want to thank everyone for their interest and participation today. I hope that we have been able to answer your question thoroughly. Just a reminder, we are always available, Hank or I if you have specific questions that pop up over between calls. We will answer to our best of our ability. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.

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Source: Peerless Manufacturing Co. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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