CECO Environmental Corp (CECO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 CECO Environmental conference call.

My name is Betsy 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 toward the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like the turn the presentation over to one of your hosts for today's call, Mr.

Dennis Blazer, CFO.

Please proceed.

Good morning.

Welcome to the CECO Environmental fourth quarter and year-end 2007 conference call.

I am Dennis Blazer, CFO, also joining us on the call 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 a 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 a variety of factors that could cause business conditions and results to differ materially from what is contained if 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 2007 form 10-K and in particular the discussions contained under item one, Business 1, item 1A, Risk Factors, item 3, Legal Proceedings and item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operation.

Now I will do a quick review of our financial results 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 December 31, 2007.

our net sales increased 64% to $68 million.

Gross profit increased 40% to $11.5 million, operating income increased 14% to $2.8 million, our net income was $1.8 million, a 51% increase over 2006.

Earnings per diluted share increased 33% to $0.12 from $0.09 in 2006 and for the 12 month period ended December 31, 2007, net sales increased 74% to $236 million, gross profit increased 68% to $40 million operating income increased 109% to $12.6 million and our operating margin percentage increased from 4.5% in 2006 to 5.4% in 2007.

Net income on a GAAP basis was $6.3 million, an increase of 104%.

Net income on a non-GAAP basis was $7 million, an increase of 204% over 2006 non-GAAP net income.

GAAP earnings per diluted share were $0.45, an increase of 87.5%, non-GAAP earnings per diluted share were $0.50, an increase of 256%.

With regard to our non-GAAP disclosures, CECO reported results for the 12 months ended December 31, 2006 included $663,000 in net non-cash income from the valuation of warrants.

CECO reported results for the 12 months ended December 31, 2007 included non-cash interest expense of $740,000 related to the requirement of subordinated debt.

Now I will turn the call over to our Chief Operating Officer, Rick Blum.

Thank you, Denny.

Good morning, everyone.

2007 was certainly an eventful year.

We increased our revenue by over $100 million from last year's record level.

More importantly, we increased our operating income by over $6.5 million from what also was a record last year.

The year had a number of highlights, but I want to start by concentrating on our acquisitions.

Effox has now been with us for just over a year.

By any measure, this has been a spectacularly successful acquisition.

We acquired GMD on October 31 of last year.

As I said in last quarter's conference call, GMD fits perfectly into our horizontal and vertical integration strategy.

We intend to turn GMD into a turn-key company rather than one -- rather than one which simply supplies equipment.

The latest news is the acquisition of Fisher-Klosterman.

To say that we are excited about this new acquisition would be an understatement.

Fisher-Klosterman brings with it new technology and expertise such as high efficiency cyclones, classifiers, electrostatic precipitator parts and service and scrubbers.

In addition, it gives us a presence in a number of new industries, the most important of which are petroleum refining and petrochemicals.

Finally, as the icing on the cake, this latest acquisition gives us a physical presence in China.

We intend to use that new facility along with continuing Fisher-Klosterman's efforts to sell its products in China, to begin to sell other CECO Environmental products and services in that market.

As I have told you before, that I have wanted to have a facility in China to manufacture cy -- fiber beds like the one we have in India.

We now have it.

Speaking of new facilities, our parts group is in the process of opening a new facility in Salt Lake City to serve the western market.

We don't talk about the parts group very much, but they continue to grow and to make good margins.

Our booksing -- our bookings so far in 2008, and I am including Fisher-Klosterman in this total, total approximately $36 million.

Our backlog going into 2008, and again I am including Fisher-Klosterman, was approximately $97.5 million.

Twice a month we hold a marketing conference call during which our business development people review the major projects we are are chasing.

These are by no means all of the projects we are pursuing, but generally represent projects that are either in new industries or multi-divisional.

Last Monday there were 115 projects on that list and the total value was over $220 million.

The targets on that list include customers in the gypsum, steel, brick, chemical, pet food, tire, aircraft, foundry, cement, automotive, ethanol, rail car and many other industries.

When we add Fisher-Klosterman's prospects to this list, the number will be greater and the list of industries will grow.

Now I would like to turn the conference call over to our Chairman, Phil Dezwirek for his remarks.

Thank you, Rick.

And welcome, everybody, to our conference call.

I would like to start out by congratulating our management team on our best year ever.

In two short years, we have gone from revenue of $81 million and $3.5 million of operating income to revenue of $235 million and $12.5 million of operating income.

This is an extraordinary performance.

As a matter of fact, it puts us amongst the fastest growing companies in America.

And we are growing, as you can see, not only at the top line, but also equally fast at the bottom line.

As I told you last time, our board of directors has instructed management to pursue our horizontal and vertical integration strategy and to look for both acquisitions and start-up opportunities that will put us in new lines of related businesses.

It is also our objective to expand geographically and to continue to expand internationally.

Of course, I can't get more specific about acquisition activity.

However, I can assure you that our activity in that area continues to be very vigorous.

It is our objective to grow CECO Environmental into a $500 million company within the next three to five years.

We will do that by growing the businesses we already own, starting new businesses and where that is appropriate, and continuing to vigorously seek suitable acquisitions.

We will continue to be one of the fastest growing companies in America.

Again, I'd like to congratulate our management team on the record year.

This is merely a start.

The best for CECO is yet to come.

Gentlemen, I think we can turn it over to you.

Are we ready to turn the floor over to our guests?

Yes, we are.

Yes.

Okay.

Anybody have a question, we are open to you.

(OPERATOR INSTRUCTIONS).

Your first question comes from Ted Kuntdz from Needham.

Please proceed.

Yes, hello, everyone.

A couple of questions for you.

One, Rick maybe you could give us a little more color.

You went through those industries fairly quickly, just in terms of the outlook for new business coming up.

Could you talk about anything, any areas that are showing particular strength?

And maybe just give us a little more color on the international opportunities as well and what you hope to be able to do overseas this year.

Let me start with the international because that's the thing I am, well not most excited about, but it is certainly is growing.

Last year, Ted, 9% of our revenue came from outside the United States.

With the acquisition of Fisher-Klosterman and the acquisition of this facility in Shanghai, we obviously expect that to increase.

We also -- Fisher-Klosterman has a very active international business initiative, something they had begun maybe a year ago, and it is starting to bear fruit.

They have some really good people who are concentrating in that area.

Not the least of which is their chairman, I guess is his title, Bill Heumann.

He is driving that along with some other people.

Denny and I had the opportunity to visit the plant in China in December.

It is a great facility.

It has 20 -- this may not mean anything to you, but it has 26 feet under the hook of cranes, and basically that means they can build anything, they can build stuff there we probably couldn't build here in Cincinnati.

We are continuing our efforts in Mexico.

We have our office down there now.

So we have boots on the ground there and are doing a couple of projects down there.

So all of that is going to continue and we see it especially in Fisher-Klosterman's case because that, one of their product lines through Buell is what is called FCC cyclones, that stands for fluidized catalytic cracking and it goes into the refining industry.

There's a lot more refining activity as you know, overseas than there is in the United States and the United States is essentially maintenance and rebuilding.

Overseas there are new facilities are being built.

Here in the states, the industries that are hot, if you will, are power which is red hot, steel is doing well.

We are seeing a lot of activity in cement.

We are looking at activity in refineries and petrochemicals that Fisher-Klosterman brings to us.

Again, they're -- I was at Lebanon at Buell last week, and one of the things that they were telling me is that the good news, if there is good news about the price of gasoline and decrease in demand, is that some refineries are getting a chance to take a breather and do some maintenance and retrofit they have been putting off.

So it is creating opportunities.

There are obviously some industries that are soft.

I think everyone knows that, but those and some others are the areas where we see activity.

Okay.

One other, biomass, ethanol.

That is also an area where we think we are going to see a lot of activity relatively soon.

Fisher-Klosterman is already involved in a cellulosic project and we intend to utilize Fisher-Klosterman, GMD and of course, CECO abatement which has been in the ethanol industry for a long time, to continue to grow our presence in that.

There has been a slow down in ethanol, but that slow down is going to come to an end.

That is what everybody is telling us because of the new legislation.

Okay.

Terrific.

Could you -- on Fisher-Klosterman, their revenue run rate was what, $35 million last -- on a 12 month run rate.

Yes.

And they're growing at what, something in the mid to high teens?

They were at like, 28 the year before.

Okay.

Can you give us any guesstimate as to -- I know, I think you mentioned at one point there's a contract kind of they're working through as well.

Any sense of what they could contribute to this year?

That would be hard to do.

Fisher-Klosterman concentrates in cyclones, catalytic cracking cyclones, classifiers that go in the mining and quarries and then they have an APC unit that does, that did a large project at a power plant out in the Dakotas somewhere last year.

That is one area where we see a lot of opportunity for growth.

There are a lot of Buell electrostatic precipitators out there in the American power industry that need to be rebuilt and especially with their new financial strength having been acquired by us, they are now qualified to do larger projects.

Okay.

Can you give us their backlog separately or not?

Yeah, I can.

They entered the year, I only have it at the end of '08, with about $12 million of backlog.

Okay.

Okay.

I know you paid about $15 million for them.

And so, the other question with I had was on the SG&A line.

I don't know if you could give us any help there in terms of, that number came in a little bit higher than we were looking for in the quarter.

I know there's some Sarbox in there and that probably -- that probably hit you, and just wondering if, going on going forward basis with -- with Fisher combined in there, I don't know what their SG&A or what their model looks like, maybe you could help -- maybe if you could address that, that would be useful to give us a sense of where their margins were, and their operating expenses were.

Their margins are definitely higher than our overall average margin.

And again, it's -- our margin percentage comes out basically because of product mix.

But typically, their margins are higher and coupled with the fact that our large automotive project is pretty much finishing, we would anticipate that our gross margin and our operating margin would start to increase in Q4.

With regard to SG&A, we had about $575,000 of expenses for SARBANES-OXLEY compliance.

We became an accelerated filer on June 30 of this year.

So we only had about six months to scramble to get ready for it.

Additionally, when you have an exceptional year like we had, commissions and incentive comp are typically higher and a lot of people exceed those thresholds in the fourth quarter.

So, that was an additional expense.

Also added to the year for SG&A is ten months of Effox and a full year of had HM White, which we didn't have in 2006.

So there are many variables have caused that number to spike up like that.

Right.

Yes, I was just trying to get a sense of a run rate going forward, to Denny on that, if --

I think, FKI typically has about $4 million in selling and administrative expenses so as we go forward, we will be adding that number.

Okay.

Terrific.

Terrific.

Okay.

Great.

Thank you.

Your next question comes from [Larry Szmarnik] from Oppenheimer, please proceed.

Hi, guys.

A couple of questions.

The gross profit in the fourth quarter was up 40% and operating income was up 14% while gross profits for the year was up 68% and operating income was up 109%.

Is there a way to kind of figure out that disparity, why would that be so different?

What did you say the fourth quarter numbers were that --

Gross profit up 40% and net operating income up 14%.

While the gross profit for the year was up 68%, operating income up 109%.

The gross profit in the quarter was impacted by the large automotive project that we were, that we have talked about, and the gross profit was actually up 40% from 11.5.

It was at $8.2 million a year ago.

And basically, it is a product mix issue and it relates to the large automotive project that had lower margins on it that's basically finished now.

So we should look for more of the annualized numbers or the quarter numbers?

The annualized numbers would be a better thing to look at as we go forward and actually, as we said, with the addition of Fisher-Klosterman, which has typically higher gross profit margins and the fact that large automotive project is rolling off which has lower gross margin percentages that you should -- we would anticipate that that number will go up.

Okay.

And just on the kind of the macro side, are you feeling, seeing any of this slow down in the U.S.

or globally and on the cost side, how are we doing?

That's it.

I will listen.

On, as I said before when I, when Ted was asking the question, in the U.S.

we are seeing some industries that are soft and some industries that are going in the other direction.

Internationally, we are seeing more and more and more opportunity.

I mean this, we are not, we did not acquire a facility in Shanghai to build product and ship it back to the United States.

We acquired a facility in Shanghai because we see opportunities in the air pollution control business in the Chinese market that could be phenomenal.

Does that answer your question?

Yes.

Your next question comes from [Chad Woodson] from Paradigm Capital.

Please proceed.

Hi, could you guys possibly comment on what order of magnitude and gross margin difference we will see in the business we will see in the Fisher-Klosterman business versus prior business?

It is difficult to say.

Again, you have product mix issues.

Generally, I can tell you that in CECO, what we refer to as our equipment group has higher margins than what we refer to as our contracting group.

It is the nature of the businesses.

Fisher-Klosterman fits in to our equipment group.

They have now become a part of that.

But again, it gets down to product mix.

There are parts of our equipment group that have lower margins due to the fact that so much of the equipment is purchased materials like, for example, on an oxidizer, if it is stainless steel and you have the ceramic media that's very, very expensive, the mark ups on that are not as high as on the part that we actually build ourselves or, we build the whole thing, but the -- you can't mark up material as much as you can mark up labor.

That's what it comes down to.

So it would be difficult to give you a number.

Okay.

Thank you.

Your next question comes from George Stubbs from Environmental Business.

Please proceed.

Yes.

Thank you.

Are any of your operating subsidiaries op -- active in the mercury emissions control area and if so, how would they be affected by the recent court decisions striking down EPAs rule.

We are active.

We -- in mercury emission control, we have - we are performing a project right now where that is part of the criteria.

And as you probably know, basically the, the methodology is injection of activated carbon in the airstream.

But it is not the only criteria for the performance of this project.

In other words, it is not the only issue.

We are not, there are some companies out there that are where that is their whole business.

It is simply part of the skill set that we bring to the table when we approach a project.

GMD is the company performing that project, and they have what they call their totally enclosed treatment system technology which is simply a methodology for injecting the carbon into the airstream to get mixing you need to effect -- effectuate the reactions that you need.

Okay.

So you would anticipate very little impact from this court decision which may delay some activities for some of these companies.

No, I would anticipate no impact, not even --

Thank you.

Your next question comes from Ted Kundtz from Needham.

Yes Rick, I just wanted to follow up with you on the -- on that large automotive contract.

You said it was basically finished.

Was it finished in the fourth quarter or did you finish it up in this quarter?

It was 90% done at the end of December.

Okay.

Okay.

It is pretty much completed now.

Yes.

Okay.

I know you do percentage of completion.

Were there any changes in your estimate from that or did you come in pretty much on track?

We came in lower.

Lower expenses?

No,.

Lower margins?

Yes.

Oh, okay.

That will be reflected in the first quarter?

No.

No, you've already reflected it in the fourth quarter.

Yes.

Got it, okay.

Okay, because your margins were a shade lighter than I thought, but it could have been due to that.

Okay, and then thirdly, did you have -- in terms of large contracts like that, I don't think there's anything you are working on quite that size, but is there -- can you talk about some of the maybe larger contracts that you have or potential large contracts that you see coming up.

I don't know if you can give us any sense of the types of size of business that you are bidding on, or that you can see coming down the pipeline.

Probably right now largest single contract that we are pursuing is a little north of $20 million.

We have a lot of prospects in the $5 million to $10 million range which is project -- they are projects that we are more -- they're kind of in our wheel house.

Let me put it that way.

We have letters of intent, but we don't count letters of intent as bookings in the ethanol industry that -- to be in the $15 million range.

Okay.

Until they pull the trigger, we don't announce it.

Right.

Okay.

We will, but we just have to wait.

Yes, but you think those are kind of near-term potential.

I think those are -- excuse me, '08 bookings.

'08 bookings, yes, great.

Okay.

Like I said, when I mentioned that in the call and I said that there's $220 million of revenue on the marketers list, the marketers last year were involved in 15% of our sales, less than 15%.

So the rest of our -- they are not our only selling activity.

That's -- I may have given a wrong impression that, hey, we have a $220 million pipeline.

We have a lot bigger pipeline than that.

That's kind of the high visibility pipeline if a project is in the scope, of for example, GMD has expertise in (inaudible) control.

Our marketing team would not be involved in that.

And yet, GMB is executing a project in that arena that's $4 million or $5 million right now.

Okay.

Historically, if you look back last year what your pipe -- what this high visibility pipeline would have looked like, what was it and how much of that business did you end up ultimately winning?

I think it is a little higher than the was.

Okay.

Because we are -- we are penetrating more arenas.

So until two weeks ago, we had never been, we have not done anything in refining.

Now we are, obviously because of Fisher-Klosterman.

The -- our win rate on stuff like that can be in the 25% to 30% range.

Okay, okay.

Just one thing more occurred to me.

Is there any way you can quantify what that automotive contract cost you in the fourth quarter?

You said it came in a little under what you thought.

Any idea what, how that affected your gross margins?

It lowered them.

By how much?

We'd have to, the problem with that, Ted is that we are reluctant, quite frankly, to talk about specific results on specific projects because the customers know who, the customer in that case knows who they are and it is information we with would rather not divulge.

Okay.

Good enough.

Thanks a lot.

Your next question comes from Bill Gregozeski from Capstone Investment.

Please proceed.

Hey, guys.

Nice work on getting the bookings up in the fourth quarter.

Was any or any of that related to the (inaudible) going back through?

No, not yet.

That's another, that's another industry that, that we intend to penetrate.

That is an industry that that marketing group that I am talking about is working on.

We have one forest products project now that we are completing that was probably a $5 million project.

The (inaudible) being reinstated, or whatever they did for it, we were at a forest products trade show that we exhibited in.

And there is a lot of activity, and we are pursuing it.

We have more capability now in that arena.

So we look to see some increases in business there.

Okay.

And then, when you were talking about the ethanol, is that -- are you looking just for the cellulosic ethanol, or are you expecting to see a return in like the corn-based ethanol?

They're not done building corn-based plants.

We are talking, we have more oxidizers on ethanol plants we believe than anybody else in the United States.

We have besides that, we do not just sell them the oxidizer, we do everything through the drier for working for other people and all of the duct work and we do the installation.

The activity there is somewhat slowed down, but we have commitments, as I said before, letters of intent for plants that is are going to go this year.

We don't book them until they turn into firm orders, but we have customers that is have lined up to make sure that they're going to be able to get the equipment.

The feeling we have from the people we are talking to is that, because of the high commodity costs, you are going to see some slow down for a while.

But the other side of that coin is simply that it has been mandated that we make more of is that stuff in this country and the capacity has to be built in order to fulfill that mandate.

Cellulosic ethanol is in its infancy.

There are people pursuing that right now.

Fisher-Klosterman has technology that applies there, and I believe is getting, and will get business there.

GMD has technology that will apply there also.

This whole biomass thing of ,what are we going to do with all of this stuff, is another area where we see a tremendous amount of opportunity and that we are pursuing vigorously.

Okay.

As far as the, with the SG&A for the quarter, was the higher bonuses and commissions, how much did that come above what you guys were expecting?

Because I remember last year you had the bump in the fourth quarter and you were going to kind of start accruing during the quarters during that.

So I was wondering how much of that was above and beyond what you had anticipated at the beginning of the year.

Well, I am not going to give you a specific figure, but you can only estimate an accrue on a quarterly basis based on the results of the quarter and when you have significant performance like we did, and especially with a record fourth quarter, you are always playing a little bit of catch up on that accrual.

Okay.

So it wasn't anything out of the ordinary that was an extra bump in this quarter?

No, it is typically, you will see all of our fourth quarters have an increase in SG&A, especially when our revenues and margins and profits are going up like they are.

Uh-huh.

Okay.

And then could you tell me what your debt level is now, just so we can try to figure out what your interest expense is going to be going forward?

We are at about $4.7 million of debt on our credit line, but then, to that you need to add the additional $15 million that we just used to finance FKI, so we are just a little bit under $20 million.

And our current rate is LIBOR plus 2, which puts it at about 5% right now.

Okay.

Are you going to work to pay that off right away, or hold the cash for acquisitions?

No, we will pay the debt down right away, and then if we have another acquisition, we will just go back and borrow it back, but we are not going to accumulate cash.

All right.

Thanks, guys, nice quarter.

Thanks.

Your next question comes from Eric Duncan from (inaudible) Securities.

Please proceed.

Hi, gentlemen, good quarter.

I just had a quick question.

It seems like the Fisher-Klosterman acquisition is a promising one.

Has that deal officially been closed or when do you expect, in what quarter do you expect that to start to contribute to earnings and financials of CECO.

Yes, it was officially closed, the effective date is March 1, so we will have one month in the first quarter.

Uh-huh.

Basically ten months for the year ended 2008.

Okay.

And then a follow up question there, obviously I just learned from the last caller that $15 million of it was financed.

What will your shares outstanding be, or is that affected in this transaction?

Our shares outstanding right now are about 14 million as part of the acquisition price, we issued $1 million worth of stock which was 98,000 shares.

Uh-huh.

Okay.

Good.

That was my question.

Thank you very much.

Okay.

There are no questions at this time.

No other questions?

Okay.

Okay.

Are we clear or is there another question?

(OPERATOR INSTRUCTIONS) We have a follow up question from Mr.

Eric Duncan.

Please proceed.

As long as nobody else is going to ask any further questions.

I was curious, the stock price is certainly a little bit lower.

Have you guys considered a stock buy back at all?

Not at this time, but if the stock price goes much lower or even stays around here, it is something to be considered.

We think it is certainly more a function of the market than it is of our performance.

I don't have to tell you guys what's going on out there in the with real world and it is getting a little ridiculous.

I mean we are, we are selling at over $1 a share in EBITDA, we are selling less than 7 times EBITDA which is a ridiculous, a really ridiculous number for us but it is, in terms of general market conditions, I mean, you can't, you can't go against the tide.

But if the value remains like it is and the cash is put to ease or better use buying our own stock than maybe even buying another company, it is something to be considered.

And I guess a follow up question to that, I know you have done some additional investor relations activity, been to some conferences and things along those lines, how has the response been at some of those events?

We think the response was pretty good while we were there.

Although again, the last conference we were at was at that time when the market was just beginning the, one of its serious downward steps, and we can't tell if it is because the stock continued to decline or whether it was because of our performance at these conferences or the market.

I really attribute it to the market because almost everybody we met with sort of admired our growth rate and how fast we expanded, how well we managed our expansion, how deep our management is, how we eliminated our debt.

How we now have continued and we told them at that time we would continue on the acquisitions trail and have since acquired FKI.

As I said earlier, those acquisitions will continue.

I mean, we do both -- we will growth both organically and through acquisitions and because of, because of again, to be repetitive, because of the general market conditions we are in, it is pretty hard to measure what the results of anything are.

Because I don't care if you are, if you are Google or CECO, you are not getting good results no matter what conference you go to.

It is a difficult environment in deed.

Thank you very much, I do appreciate it.

Keep up the good work.

Thank you.

Thank you.

There are no questions at this time.

All right.

We would like to thank all of you for attending.

If you have further questions or follow up question, you all know you can be free to call either myself or any of the other participants at any time.

We are always available.

Thank you again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a wonderful day.