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Flow International Corporation (FLOW)

F3Q08 Earnings Call

March 6, 2008 1:00 pm ET

Executives

Charles M. Brown – President, Chief Executive Officer, Director

Douglas P. Fletcher – Chief Financial Officer, Vice President

John S. Leness – General Counsel, Corporate Secretary

Analysts

Sid Parakh – McAdams Wright Regan

Chuck Murphy – Sidoti and Company

Chad Bennett – Northland Securities

Alan Robinson – RBC Capital Markets

Richard Hoss – Roth Capital Partners LLC.

Greg Eisen – ICM Asset Management

J.D. Pagent

Chad Webson – Paradigm Capital

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to Flow International’s Third Quarter conference call. (Operator Instructions) I will now like to turn the conference over to John Leness, Secretary and General Counsel. Please go ahead sir.

John Leness

Thank you. I’m John Leness. With me this morning are Charlie Brown, Flow’s President and CEO, and Doug Fletcher, Chief Financial Officer.

This call will include forward looking statements as defined by the Private Securities Litigation Act of 1995. During the call we will provide selected financial and performance results for the third quarter of fiscal 2008. Any statements about future events, trends, risks and plans should be considered as forward looking. These are based on current expectations only. Actual results may differ from these forward looking statements and are subject to risks and uncertainties as are detailed in our filings with the Securities and Exchange Commission.

Flow takes no obligation to update any forward looking statements whether as the result of new information, future events or otherwise.

With that introduction I will turn the call over to Charlie Brown.

Charlie Brown

Thank you John. Good afternoon ladies and gentlemen and thank you for joining us. Today we released our results and filed a 10Q report for the third quarter of our fiscal year 2008. We are pleased to report an excellent quarter in both revenue growth and improved profitability.

For the third quarter, ending January 31, our revenues were $66.3 million representing 18% growth versus last year including a 17% growth in system sales and a 22% growth in spares sales.

Breaking down the system sales further, our core standard systems revenue for North America, which we track closely, was up 18% for the quarter. The trailing fourth quarter growth rate for this business was 15%. Our world-leading 87,000 psi or 87K Hyper-pressure waterjet systems are leading the way to this consistent growth continuing to exceed our highest expectations. This proprietary product line remains unmatched by any competitor worldwide.

Our standard system sales in Europe and Latin America combined were up over 36% on increased penetration in all markets. In local currencies our standard system sales in Europe increased by 16% and far more than that in Latin America.

These results were achieved even though the 87K product line is still very early in its ramp up in those markups.

Our aerospace business had minimal growth in the quarter but it is beginning to pick up momentum and we expect sequential growth in Q4. Even though delays in some major commercial airline programs have caused orders for our product to be pushed out we continue to be optimistic about our aerospace business and we expect several large orders will lead to improved revenue levels in the coming quarters but the specific timing of these orders is difficult to predict.

In Asia we have also begun to see improvement in our business. Revenues were up 72% from last quarter to a level comparable to last year’s third quarter. In our last earnings call we said we believed that sales had bottomed out in this region and this has proven to be true. To restore this region to consistent strong growth we recognized that we needed to strengthen our management team and take actions to improve our competitive position.

In that light I am happy to announce that Brad [Hillem] has joined Flow this week to be the managing director of our Asia business. Brad will be located in the region and brings over 20 years of international experience with deep background in Asia and with leading growth businesses.

As announced six months ago, we have narrowed the focus of our applications business to exclude any non-waterjet related automation projects going forward. This business grew 4% in local currency during the quarter and we have shipped out of the factory the last non-waterjet order.

Our consumables, or spare parts business, grew 22% for the quarter with performance consistent across all segments and geographies. This recurring revenue stream consistently represents more than ¼ of our business and our online ordering capability is becoming widely adopted by our customers.

In total our 18% growth rate for the quarter once again reflects our diverse revenue stream. Standard systems up 18% in North America and 36% in Europe and Latin America. Spare parts up 22% worldwide. Asia was flat but showing promise and aerospace was flat but poised for a pick up.

It is this diverse revenue stream that continues to give us confidence in our ability to consistently grow our top line revenues at least 10% annually.

Our year-to-date revenue growth rate stands at 12% and it now appears that we should be at least at this level for the full year.

Now I’ll turn it over to Doug for further financial commentary.

Doug Fletcher

Thanks Charlie. As Charlie mentioned we had good results in the quarter on strong revenue growth and improved operating leverage.

Let me touch briefly on backlog. Our backlog as of January 31 was $36 million, which is up from $34 million at the end of the last quarter and $31 million at the end of the last fiscal year.

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