CECO Environmental Corp (CECO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 3 2007 CECO Environmental earnings conference call.

My name is Michelle and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr.

Dennis Blazer, CFO.

Good morning, and again, welcome to the CECO Environmental third-quarter 2007 conference call.

I am Dennis Blazer, CFO.

Also joining us on the call today will be Phillip DeZwirek, CEO, and Richard Blum, President and Chief Operating Officer.

Before we begin, I would like to caution investors regarding forward-looking statements.

The U.S.

Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand the Company's future prospects and make informed investment decisions.

Any statements made today that are not based on historical fact are forward-looking statements.

Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain.

We therefore caution the listeners that there are a variety of factors that could cause business conditions and results to differ materially from what is contained in our forward-looking statements.

For a description of some of the factors which may occur that could cause actual results to differ from our forward-looking statements, please refer to our 2006 Form 10-K, and in particular the discussions contained under Item 1, Business; Item 1A, Risk Factors; Item 3, legal Proceedings; and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Now, I'll do a quick review of our financial results, which will be followed by comments from Mr.

Blum and Mr.

DeZwirek, and we will then open up the call for questions.

We are very pleased to announce another quarter of strong performance.

For the three-month period ended September 30, 2007, our net sales increased 73% to $65.3 million.

Gross profit increased 84% to $11.2 million.

Operating income increased 141% to $4.1 million.

Operating margin increased as a percentage from 4.4 to 6.3%.

Net income on a GAAP basis was $2.2 million, a 100% increase over 2006 on a GAAP basis.

On a non-GAAP basis, net income was the same $2.2 million, which was a 214% increase over the 2006 non-GAAP.

GAAP earnings per diluted share increased 75% to $0.14 from $0.08 in 2006, and non-GAAP earnings per diluted share increased 180% to $0.14 from $0.05 a share in 2006.

CECO's reported results for the three months ended September 30, 2006 included $409,000 in net non-cash income from the valuation of warrants.

Now, for the nine-month period ended 9/30/2007, net sales increased 79% to $168 million.

Gross profit increased 82% to $28.9 million.

Operating income increased 172% to $9.8 million.

Net income on a GAAP basis was $4.5 million, an increase of 137%.

Net income on a non-GAAP basis was $5.2 million, an increase of 333% over 2006 non-GAAP income.

GAAP earnings per diluted share were $0.33, an increase of 120%.

Non-GAAP earnings per diluted share were $0.38, an increase of 280%.

CECO's reported results for the nine months ended September 30, 2006 included $663,000 in net non-cash income from the valuation of warrants, and CECO's reported results for the nine months ended September 30, 2007 included a non-cash interest expense of $740,000 related to the retirement of the subordinated debt.

Now, I will turn the call over to our COO, Rick Blum.

Good morning.

We are happy to talk to you this morning because once again we are reporting our best quarter ever and our seventh consecutive record quarter.

We have now generated in just nine months about $3.8 million more operating income and about $1.4 million more net income than we did in all of 2006.

Our new order flow continues to be healthy.

We have booked about $163 million in new business through the end of October.

In October alone, we booked over $20 million of new business.

The majority of the decline in our backlog since the end of the second quarter is due to the fact that the large project that we booked last December, the one worth over $50 million, is now over 60% completed.

If you take that job out of our backlog numbers, our backlog is now about $30 million higher than it was at the end of 2006.

As you all know, on October 31 we made another acquisition.

The newest member of our CECO family is GMD Environmental in Fort Worth, Texas.

GMD designs and manufactures many types of air pollution control equipment for a wide variety of industries.

It is a company that we have known and sometimes competed with for many years.

They have a great reputation, a stellar track record, and management is that extremely well thought of in our industry.

I have talked before about our strategy of horizontal and vertical integration.

GMD fits perfectly into that strategy.

During our last call, I talked about gross margin percentages.

I also explained that what we consider to be important is operating margin, and that our gross margins will fluctuate depending on product mix.

Even though we recognized a lot of revenue from the large H.M.

White project in the third quarter -- and remember, that project was taken at a lower than normal margin -- our gross margin percentage for the third quarter was above 17%, and the operating margin percentage for the quarter was just north of 6%.

So far this year, the gross margin percentage is now 17.2% and the operating margin percentage is now 5.9%.

Every part of our business is doing well, and we continue to see opportunities from a wide variety of industries.

In the last few weeks, I've been at a forest products plant in Alabama, another plant in Alabama that makes fibers used in the production of composite materials, an automobile plant in Tennessee, and at a sulfuric acid conference in Montreal that was attended by people from all over the world.

I point this out simply to give you an idea of the diversity of our customer base.

It goes back to that concept of horizontal integration.

The more planks that we add to our platform that we are building, the more diverse our customer base will become.

Now I would like to turn the call over to Phil DeZwirek, our Chairman.

Thank you, Rick, and welcome, everybody, to the call.

I would like to start out by congratulating our entire management team on another fine quarter and on record results.

As we talked about at our last conference call, we have eliminated nearly all of our debt due to the secondary offering we did in May of this year.

And going forward, our Board of Directors has instructed management to continue to pursue our horizontal and vertical integration strategy and to look for both acquisitions and startup opportunities that will put us in new lines of related businesses.

I cannot get more specific, but I can tell you that our activity in this area of acquisition and startup is intensifying.

Again, I just want to congratulate our management team on their record performance and assure everyone in the investment community that our objective is to continue to grow this Company.

It's a company that I have been associated with from its inception many years ago and have helped grow from a very small business that did $200,000 in its first year into one that will now do over $200 million in revenue this year.

And we will become much larger and hopefully much more profitable.

I would like to open the floor to any questions.

(OPERATOR INSTRUCTIONS) Ted Kundtz, Needham & Company.

A couple of questions for you.

Rick, could you talk about the -- a little bit more color on the pipeline of activity that you're currently seeing?

Are you talking acquisitions, are you talking --?

No, I'm talking about just the pipeline of current business.

New business --

Yes, new business activity.

It is coming from everywhere.

We have done -- I told you in October we booked about $20 million.

None of it was ethanol -- maybe $200,000.

It came from the power industry.

It came from the auto industry.

It came from just all over the landscape.

Okay.

Is the activity picking up?

Is the number of bids you have on a proposal -- I'm not quite sure what measures you guys use to look at activity, but I assume it would be kind of bids out for proposal or something like that.

Are you seeing much more of that activity as well?

Do you have more bids out there?

I would say that is about the same as it has been the last few months -- very high.

Very high, okay.

And what percentage of those are you winning?

That is a hard question to answer.

That depends on the industry.

But I would say we probably win maybe 20% of what we go after.

Okay.

Now, could you guys give us a sense of what maybe the gross margins or the operating margins would look like X the General Motors business in there?

What kind of impact that has on both your gross and your operating margins?

Well, we don't want to get really specific on that.

As we've implied in several previous conference calls, the G.M.

margin percentage at the gross margin level is significantly lower than our typical contract.

However, it doesn't bring with us the SG&A and the (multiple speakers) overhead, so it is still accretive to the operating margin.

But to break those two out, I do not think we'd really want to disclose that kind of information?

Okay, but would the operating margins be higher without the General Motors business?

Yes, absolutely.

They would be higher?

I did not know what they (technical difficulty) on the operating side whether that has an impact.

How long do think that is going to run through?

It is about 60% complete right now.

It will probably be 90% to 95% complete by the end of the fourth quarter.

So a little bit of spillover into (multiple speakers).

I would say closer to 90.

Right.

By the end of the fourth quarter.

So a little bit of spillover into Q1 and then it kind of phases out.

Okay.

Can you guys give us any sense of what your sort of target margins would look -- are for going into '08?

No, I don't think we can really project that.

As we have said over and over again, the margins are really impacted by product mix.

It just depends on how much product mix is generated from our equipment group versus our contracting group.

And it is just very difficult to predict what that mix will be at any one point in time.

We know typically it will be in the range from 16 to 20%, which is historically what it has always been.

But to get any tighter than that is pretty hard to do.

Denny, maybe you just could give us a little color on the tax rate.

It was a little higher than I thought in the quarter; it was 45%.

Yes, the tax rate is 44%.

Part of that is due to nondeductible expenses.

For example, we had the $740,000 interest expense on the extinguishment of the sub debt, which is not deductible for tax purposes.

And there are several other permanent timing differences like that that cause our effective tax rate to be 44% now.

We anticipate going forward in 2008, that number will come down.

It will probably be closer to 40% next year.

Okay, so the fourth quarter, it is going to be around the same?

Yes.

Okay.

Around 40, 44%, you said?

Yes.

It may come down a little bit depending on the total revenue and net income.

It is kind of a variable calculation.

Okay.

Perfect.

Thank you.

Barry Sine, Oppenheimer.

Could you just give us a sense of the major industries that you served during the quarter?

I'm assuming obviously that auto is going to be number one with that GM contract.

Could you kind of rank them in order so we get a sense of the activity that you're doing?

Auto, power, ethanol, forest products, foundry, steel, and everybody else -- chemical.

Okay.

And just to clarify, Rick, I think one of the comments you made previously regarding ethanol, it is well-known that there is a significant slowdown in the ethanol industry.

It sounds like you're seeing some of that in your order book, but you're more than picking that up if I look at the growth in overall orders with other industries.

Is that a fair assessment?

It certainly was last month.

Yes, that is absolutely true.

On the GM contract, just kind another way to get at the questions I think Ted was asking.

I believe that a significant portion of that business is really just pass-through revenue, where you're just including on your income statement the products that you're buying for GM.

Can you give us a sense of how much of that contract is pass-through?

That contract is probably 90% subcontracted, as opposed to pass-through.

But, for example, the equipment we are installing and providing is in a building that is worth a lot less than the equipment.

So the guy who built the building is our subcontractor.

So 10% of it is your work, 90% is subcontracted?

Yes, approximately.

And that is going to significantly impact the margins, because subcontracted work has a lower gross margin than your work?

Exactly.

Understood.

But it is -- as I said, that contract is now actually 62%, to be precise, completed at the end of September.

And our gross margins overall obviously were very good.

And my last question.

Could you give us a sense of what you're seeing in terms of international activity, both in terms of the revenue that you recorded during the quarter, how much of that was international, where was it, what type of industries?

And then the same line of questions for the orders that you saw coming in.

Well, we're doing two things primarily internationally right now.

Busch International, our subsidiary in Pittsburgh, is executing three projects, two in China and one in Russia.

Both of those are steel or aluminum rolling mill facilities.

Kirk & Blum is also working on one of those China projects with a chip collecting system.

And then CECO Filters is selling fiber-bed filters all over the world.

We just announced that our operation in India got a significant order.

That is -- the sulfuric acid industry, which is one of the primary places where fiber beds are used, is literally a worldwide business.

And it is a -- the conference that I was at in Montreal -- as a matter of fact, Phil attended it also -- people come from all over the world, and so we have opportunities everywhere.

And rough percentage of how much of the revenue in the quarter was international?

Do you have a number for that -- a feel for that, Denny?

Maybe -- generally 5% of our business is overseas.

And in terms of the orders coming in, is that roughly the same or is the international becoming more important?

It is probably staying about the same.

And in international, we count Mexico.

And if you counted Canada, it would be even higher, but I guess that kind of depends on your point of view.

And we are seeing an increase in India --.

Yes, we're seeing increases in India.

We have a full -- a guy on the ground, an office in Mexico now.

We are expecting to book additional business in Mexico.

We see a great opportunity there.

GMD has a good track record in Mexico.

Years ago, I was making a sales call in Mexico and I ran into Jerry Reier.

He is the guy who is the president of GMD, the company we just acquired.

We happened to stumble upon each other in Mexico City.

But they have a very good track record down there.

Just to clarify the comment on Mexico and Canada, you include Mexico as an international, but the Canadian orders show up as domestic?

That is kind of how we look at it, I guess.

And I just thought of one other --

We're doing one significant job in Canada right now.

I just thought of one other question.

On GMD, you have not disclosed the purchase price?

Yes, we did.

We filed an 8-K filing.

The GMD total purchase price was $3 million.

All right.

Thank you.

(inaudible), Thomas Weisel.

The first question is on (technical difficulty).

We're not able to hear that.

(technical difficulty)

We cannot hear her.

My first question is on GMD's acquisition.

Can you just give you some idea what are industries that they serve and where they (inaudible) locations (inaudible) for you product in that specific area and if (inaudible) diversifying yourself through acquisitions?

Are you asking us about GMD?

Yes.

And what industries they serve?

Yes.

GMD primarily serves the metals industry, but they do some work in the cement industry.

They have a really good track record in emission control systems for cupolas, and that is one of the reasons that we were very interested in them.

Does that answer your question?

Yes.

Larry (inaudible), Oppenheimer.

Excellent quarter, but my questions have been answered.

Thank you.

Ted Kundtz, Needham & Company.

Rick, I just wanted to go back through your outlook for the business, in general, what you guys are seeing.

Are you seeing any kind of changes in any -- you sort of indicated that business is pretty steady as you go.

But I just wanted to see if you have any more color, maybe, by some of the different industries that you mentioned were most important to you.

Are you seeing any of them getting stronger or weaker?

In terms of activity for you guys.

I just wanted to get a sense if you're getting any indications on capital spending plans out there and what people are doing.

That is a question I would have to answer by kind of going industry by industry.

If I look at the chemical industry and sulfuric acid in particular, there's all kinds of building going on all over the world, and we are chasing a lot of that.

That is why we were in Montreal.

If I look at the domestic automotive industry, what we see is no new plants, obviously, but a lot of money being spent as plants are retooled or reconfigured because actually of the downsizing.

If I look at the transplant automotive industry -- since I have been sitting here, I watched part of a phosphate (inaudible) coat line that is going to a Japanese plant in Indiana go down the street here.

It went past our window since we started the call.

So we are seeing good activity there, and there is -- they have more plans.

We're seeing a lot of activity in forest products.

We're still seeing some activity in ethanol, though it is obviously going to slow down, but the plans are still there.

Then the rest of our business comes from so many places, it is -- oh, the steel industry and the power industry.

Excuse me, the power industry is going crazy.

The steel industry is very strong, and there are new plants scheduled here in the U.S.

and elsewhere.

Then the rest of our business comes from so many corners, it is hard to (multiple speakers).

So it sounds like everything else -- every business is doing better or remaining very strong except for the ethanol side.

I would say that is true, yes.

And how much does ethanol represent?

Of our revenue?

Of your revenue.

This year, so far --.

15%.

15%, maybe, yes.

And the ethanol in our backlog is less than 20%.

We probably have about 15% of our backlog is ethanol.

But those are booked projects.

Those are projects that are going forward.

Right.

Exactly.

Right.

That sounds very healthy.

That's great.

Thank you.

(OPERATOR INSTRUCTIONS) Bill Gregozeski, Capstone Management.

With the ethanol that you were just talking about, that 15 to 20%, is that all of backlog -- the 100 million -- that is -- 15 to 20% is ethanol still?

Yes.

Do you guys think all of that is going to go through?

Yes, I do, because you have to remember that the equipment we provide is practically the last thing that goes in.

So those plant have been or are in the process of being built?

Yes, right.

Exactly.

We do not get orders for plants that somebody is planning.

We get orders for plants that are being built.

They have spent an awful lot of money before they get to us.

Okay.

As far as your bookings and revenue, it looks like your bookings were about $45 million in the quarter, where you did about $65 million in revenue.

It seems like your bookings have been slowing relative to what you've been recognizing as revenue, even taking out the GM contract.

I mean, you've been talking --

They have gone up and down a little bit.

Maybe for the quarter, you're correct, but as I said when we started, if you look at our bookings -- if you look at our backlog, our backlog at the end of '04 was about $97 million.

If you take out the GM project, it was about $44 million.

Now, our backlog is about $74 million if you take out the GM project, because there is about $20 million of it left.

Okay, so there is no concern that you will be able to more than I guess replace the GM contract with new business for next year?

No, there's no concern at all.

Not only that, I think we already have -- for someone to say or think that our book-to-bill is negative is incorrect.

It was in the third quarter, though.

It may be tomorrow too for the day.

But for the year and for our ongoing business, it is not.

Okay.

All right.

Thanks.

Gentlemen, you have no further questions at this time.

Is that it?

No other questions?

All right, gentlemen.

Thank you very much -- and ladies -- or whoever else might be out there.

Thank you very much for coming to our conference call.

We hope you are as satisfied with our results as we are, and we are just as optimistic going forward.

Thank you once again.

If you have the questions, there is always the normal ways of getting through to either myself or Rick or Denny or anybody else at the Company that might provide some information that you may need.

So thank you and we say goodbye.

Thank you, everyone.

Bye bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.