CECO Environmental Corp (CECO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 CECO Environmental Earnings Conference Call.

My name is Stacey and I'll be your moderator for today.

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

We will be facilitating a question and answer session towards the end of the 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.

Please proceed.

Good morning, I'm 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 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 2007 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 Conditions 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.

We will then open up the call for questions.

For the three month period ended March 31, 2008 net sales increased 7.8% to $46.9 million.

Gross profit decreased 15.2% to $6.6 million.

Operating income decreased from $2.5 million to a reported loss of $735,000.

Net income decreased $1.7 million to a net loss of $575,000 and earnings per diluted share decreased to a loss of $0.04 a share from earnings of $0.08 per diluted share in 2007.

And now I'll turn the call over to our Chief Operating Officer, Rick Blum.

Good morning.

It's important to note that our first quarter results were impacted by the fact that the large project that we booked at the end of 2006 encountered some problems, as well as customer requested scope changes, which caused us to incur significant additional costs.

We are currently in negotiations with the customer over various extras which we believe we are entitled to due to these changes in scope, the shut down of the jobsite due to a strike by the customer's employees, and other factors.

We anticipate that there will be additional cost recovery as a result of these negotiations, but do not feel it to be correct to book that revenue and profit until negotiations are complete and the appropriate documents are signed.

We believe that these negotiations will be completed at the second quarter, at which time the additional revenues will be recognized.

Additionally, our first quarter has always been the weakest quarter of the year with 2007 being a rare exception.

After the push in the fourth quarter to complete projects, and due to the way in which percentage of completion accounting works, many of our operations did not recognize as much revenue as we had anticipated in the first quarter.

That all being said, let me talk about some positives.

First, Effox continues to book business at a rapid rate and is also continuing to show good margins and good operating income.

As I have said before, this has been a spectacularly successful acquisition.

Secondly, Fisher-Klosterman, which has one month of results in the numbers you see is profitable and is going to become an ever more important part of the CECO family.

We are starting to pursue turnkey projects at Fisher-Klosterman utilizing the installation services of Kirk and Blum.

We expect that this strategy will help us grow FKI's revenue and income.

Internationally, we have begun to sell CECO Filters products in China and expect to manufacture them there soon just like we do in India.

Our new operation in Shanghai is pursuing a number of opportunities in the refining industry in China and in other parts of Asia.

We have also started the process of introducing the full scope of CECO's capabilities to those markets.

Additionally, we are in discussions with customers in Italy, have sold product recently in both Japan and Saudi Arabia, and have a number of opportunities in South America.

The bottom line of all this is that we expect the international component of our business to continue to grow.

I think that everyone should recognize that we are not managing this company on a quarter to quarter basis.

We are managing for the long term and for long term growth.

We are confident that that long term growth will continue.

Now, I'd like to turn the call over to our chairman, Phil DeZwirek, for his remarks.

Thank you Rick and Denny, both.

Ladies and gentlemen, I really want to comment again and it's being a little redundant on the first quarter results of '08, and as Rick said, as they compare to the first quarter of '07, which was really an anomaly in our historic performance.

We are back to our usual soft first quarter, although despite the softness bottom line, we still had record revenues.

And the bottom line and the gross margin, which of course affected the bottom line is primarily due to the one big order, which we keep talking about, which is entirely behind us and the only thing left of that order is some potential profits, possibly substantial, which are under negotiation.

And whatever comes from that job now will go to the bottom line.

Our 14% odd margin for the first quarter is certainly not typical of what we anticipate to be our annualized gross margin, which will be completely non-affected by the large contract, and al the new acquisitions we've done in the past year have margins significantly above our own historic margins.

So we do anticipate to see a considerable margin increase for the balance of the year and the future.

I'd like to compliment our management team on the successful way in which the four acquisitions that we've made over the last two and a half years have been integrated into the company.

What everyone needs to know is that we intend to continue this acquisition program actively and to start companies where there is more economical platforms for us to execute our horizontal or vertical integration strategy.

We intend to expand both these platforms.

Obviously, I cannot speak about anything specifically but you should know that we are in active discussions at this time and are in a position where many companies in the industry are also seeking us out as an acquisition partner, primarily to be acquired by us because they know our successful history of acquiring companies, being fair to existing management, and fully integrating them into our system.

As Rick said, we now have a physical presence throughout the Midwest, India, China, and more countries to come.

We're spreading our global business so that one area's business slowdown will have a lessening affect on our overall results.

This will be proven and is being proven in the future, and that's just to give you a little historic reference of the growth of CECO, which sort of gets to some degree lost in the shuffle.

In the last ten years since we've really established what is now CECO Environmental through the original merger of Kirk & Bloom and CECO Filters, and CECO Environmental was born ten years ago, we have gone from $12 million in revenue and significant losses to over $250 million in probable revenue in 2008 and significant profits, and our goal is, within the next ten years, actually probably, hopefully five years or less, we hope to double to the $500 million revenue level.

That is our goal and it is our goal to achieve that with higher gross margins, better controlled expenses, and a much more significant return to our shareholders.

Thank you, I'd like to turn the conversation over to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ted Kundtz with Needham & Company.

Please proceed.

Hello, everyone.

A couple questions for you.

First of all, Rick, can you give us a little more magnitude around the contract, the sizeable contract, we know who it's with, as to the impact of that on the first quarter, both in terms of revenue and what kind of impact did it have on your gross margins.

What would your gross margins have been without this problem, if you had been able to book it as expected?

I'm going to evade that question, Ted, because we really don't want to get into specifics on particular contracts.

Here's what I can tell you, and part of this is because we're in discussions with the customer now.

They have indicated to us that they realize that we are due some additional money.

What we're talking about is how much and I really don't want to elaborate on that more than at this point.

As far as how it affected Q1 or how it affected Q4 of last year, again we just don't feel comfortable discussing specific contracts.

So did you book all the costs associated with this project, but none of the revenue or profit?

We booked a lot of the revenue and yes, we booked all of the costs, and we don't feel that we can book revenue that's not signed off on, and it's that simple.

But did it have an affect on the quarter?

Yes, obviously, or we wouldn't be talking about it so much.

I was just trying to get the magnitude of it because your revenue lines came in quite a bit lower than my estimate, and so I just wanted to see what part that played.

And then you also mentioned a lot of weaknesses that you didn't expect in other programs, in other areas in the first quarter.

So maybe you can elaborate more on that as well.

Well, if you go back and look, some of the performance in our contracting operations, a slow down as everybody's aware of in the ethanol industry.

I'll talk about that for a minute.

Maybe I can preempt a question, but ethanol has this mandate to be at 15 billion gallons by, 2010 I think is the year.

Currently, we have to be under the government mandates at 9, and we're actually at 12.

So that and the fact that corn is $6.00 or somewhere near that has stopped building for a while.

Now, we have letters of intent.

To go from 12 to 15 you need 30, 100 million gallon plants.

We have letters of intent for ten of them.

Now, they're not in our backlog because a letter of intent is just that and nothing more, but we expect or anticipate that at some point those plants are going to go forward.

And I can tell you in Q1, we probably have about $9 million of backlog in that industry, but we recognize that's hard backlog.

That's real backlog, stuff that's going forward and will get built.

The plants are already underway.

We're kind of at the tail end of all those projects, but the amount of revenue we recognize from that in CECO abatement in the first quarter was miniscule.

GMD is another good example.

GMD has a significant, for their size, backlog.

They have a backlog that's about half a year's work for them and we've owned them since November.

We recognized hardly anything in the first quarter.

The projects are ongoing but it's the nature of how you account for them, especially when you have, in their case, they're using some outside fabricators still.

That pretty much--

Those are the two big areas where you thought you could have gotten some more revenue and didn't.

We got maybe a little less revenue out of Fisher-Klosterman.

It's profitable.

It's going well but probably a little less revenue of their backlog, because when we got them we got, what, $14 million of backlog came with them.

But we sure didn't recognize that much of it in the first quarter.

Can I interrupt for a second?

Can I be heard?

Okay, I just want to say, this is Phil DeZwirek, in addition to what Rick just said and of course your question was appropriate as to what was weak, but I'd like to add on a little more optimistic side that the areas that are strong, particularly the power industry, we have areas that are much more stronger than we anticipated in anticipation to how weak some of our areas are.

The strength in new areas we're in by far outweighs the weakness of areas which we have begun to have less of a focus on, and ethanol certainly is one of them.

So we have more than supplemented any weak areas with strong areas, and that is one of the beauties of the diversity of the system we built.

That's a very good point, Phil.

Just to elaborate on that, this guy was at the AIS Tech show in Pittsburgh, which is a steel show, and I was also at a power show in Baltimore.

In April, we booked a couple of significant steel and aluminum projects.

We are booking business in the power industry at a really rapid rate, mainly through Effox.

We also anticipate in May to book some significant business in the refining industry through Fisher-Klosterman.

This is an industry we have never been in and we starting to see synergies there.

I've got emails in my in-basket this morning where our people at CECO Filters and the people at Fisher-Klosterman are collaborating, going after asset plants in other countries and also going after refining opportunities, because CECO Filters is now in the mesh pad business.

So that kind of goes along with the FCC Cyclones that Fisher-Klosterman builds, or Buell builds.

Also, the foundry business, the project that we're negotiating for in Italy is a foundry project.

I'm going to be at the Cast Expo in Nevada next, it's a week from Saturday that it starts.

I'll just be there a day, but that's another area that seems to have a lot of momentum right now.

Okay, well that was kind of leading to my next question, where you guys are going with the things that are looking strong.

Phil, you mentioned a $250 million targeted revenue this year and that applies $67 million per quarter for the balance of the year for the next three quarters.

And is that a very realistic number?

Is that kind of your assessment?

I think it's within the ballpark.

I mean we never really like, we don't project numbers, but it's a number that we're working around.

You threw one out there, so I just wanted to pick up on it.

I feel comfortable.

Okay, we can start to see this pretty significant ramp, then, starting in this particular quarter.

If you know the nature of our business, and I certainly know you do, I can't tell you what quarter.

We have blow out quarters.

We have fair quarters.

Look at us year to year and we really have great expansion on an annualized basis.

Could you just comment then on what percentage is international now, and what percent do you see that growing to?

International, Ted, was last year, was at 9%.

We don't really have any projections as to what it might be.

We have a lot of potential jobs and quotes out there, but we can't really tell you what we anticipate, although we do expect that it will grow.

What was it in Q1?

I don't know.

We don't calculate it on a quarterly basis.

The international from last year included a fairly large project in Canada, a very successful large project.

Where we're going to see growth is going to be international work outside of North America and outside and in Mexico, where we have an operation now.

Whether one considers Canada to be international business I guess depends on how you look at it, but the operation in Shanghai--

I think we should go on to more questions.

Okay, and just my final question on bookings.

It looked like you booked about $52 million, $53 million in the quarter and indications are that booking trends are very strong and that number could be moving up.

Is that kind of the tone we should take away from here?

Yes, I would think that--

That's a number that should be going up.

Okay, thank you.

(OPERATOR INSTRUCTIONS) With no more further questions in the queue, I'd like to turn our call back over to management for closing remarks.

There are no additional questions?

We have a follow up from Ted Kundtz with Needham & Company.

If no one else is going to ask one, I'll be happy to.

Maybe just circle back to the gross margin focus and the target margins that you guys have out there.

Obviously, these are not your target margins which you hit this quarter, and I think they're in the upper teens or even close to 20%.

Could you comment a bit on that and where you expect to see those, how fast those could rebound?

Rick, give him your overall--

Our long term goal is to, and maybe not that long term, our goal is to have 20% gross margin, 10% SG&A expense, and 10% operating margin.

You're heard me say that many times.

Obviously, we're not there.

If you look at last year we were at 17% gross.

As we add businesses and as we take advantage of what we can do now that we have Effox, and FKI, and GMD, and Fisher-Klosterman Buell, and Fisher-Klosterman Buell China, I would anticipate that those margins will move higher than they have been historically, because these companies are historically higher margin companies than what CECO reported in 2007.

Now, whether we're going to get to 20%, time will tell, and we always have that project mix issue that can come into play with that.

When we look at the ethanol projects, and we've said this before, oxidizer projects don't return 20% margin due to the nature of the amount of materials that go into them.

You just cannot mark it up that much and win the job.

But I would anticipate that we're going to be moving toward that target.

Okay, moving towards it.

No timetable on that for us, but I would expect, given that your current mix now, you could get there fairly quickly because you got the right of mix of businesses in there.

We would hope.

However, if the ethanol dam opens up, that'll affect margin percentages.

We also, in the companies that we have acquired, I'll just use FKI as an example, their business in refining, their business in specialty cyclones and in classifiers is good margin business.

Effox continues to be good margin, but back to FKI, their business in what we call APC, which is precipitator rebuilds and bag houses, is traditionally not as high.

It's not a 20% margin business.

So if we get a bunch of business there, and we are pursuing business in those arenas very aggressively and have some very good prospects, all of that can affect it.

It can drive up the top line, but affect that margin percentage line, but affect positively the bottom line which is the real objective.

So you have to take all of that into account when trying to project where we're going to be.

Okay, good enough and I want to compliment you on your good control of SG&A.

That seems to be in very tight control.

We've acquired a lot of SG&A.

We're looking at it all the time.

We're looking for obviously any savings, but when we've gone in and acquired these companies, these have not been consolidations.

These are good companies with good people, a lot of talent, and what you have to remember about our SG&A it's got all that sales, and all that project management, and all that application engineering talent in there.

And you cannot grow the company without growing that cadre of people.

You can maybe do little things on the accounting end, some consolidations, but having, FKI is a good example, all the sales, engineering, and project management people that were at FKI the day before we acquired them are still there, and we need them there.

So there's not really a lot of savings in that area.

Yes, it looks like you're doing a very good job in keeping that cost in control.

Ted, thank you for recognizing that.

Yes, it was below my number and we like to see that.

So you did a fine job there, and you're absolutely right, keep growing those folks.

Okay, that gave me a good sense.

Thank you.

Your next question comes from the line of [Larry Sternemach] with Oppenheimer.

Please proceed.

Hey Phil, you had said you were speaking to, lots of negotiations for other companies, acquisitions, and I think you said people contacting you interested in CECO.

Did I hear you correctly?

No, people contact us bring us deals.

Investment bankers show us literally sometimes a deal a week or at least a deal a month.

Bringing you companies to integrate rather than companies that would integrate you.

Yes, companies for us to acquire.

Okay, just wanted to make sure I heard you right.

With no further questions in the queue, I'd like to turn the call back over to management for closing remarks.

Phil, did you have any other comments?

Just briefly, again, I'd like to compliment our management team and all of our employees for a decent quarter under these business conditions, and especially considering that we had this one big contract that may or may not be profitable.

We don't know.

We were presuming we were going to get some negotiated settlement and if you take that out of the contract, as Ted suggested, I'm sure we didn't come up with a number, but you can be sure that our number would be considerably higher both on our gross margin and probably eliminate all of our loss, if not a good part of it.

I mean nobody knows the number, but going forward I just want to make the point that all the costs of that one big job that skewered our year are behind us.

There are no contingencies.

There are no future costs.

Anything that comes in through us once we pay the share to subcontractors will go directly to our bottom line.

The margin on what's left to come to us isn't 5% or 10%.

It's up close to 100% if not 100%, which certainly will help our margins a little.

And that's just specifically on that one job, but everybody today is looking at today how companies are going forward in this somewhat confused economy, and I'd like to say that going forward we are extremely positive, especially internationally, to a great extent domestically.

The strongest part of the country happens to be the Midwest right now.

Economically, the areas that we are located are considered to be the strength of the American economy and partially due to high farm incomes and everything related to the productivity in the steel industry, in the mining industry.

All of that are areas in which we're strongly focused.

So we feel very confident that if companies are to be assessed on the basis of how they look going forward, we feel very comfortable in our shoes right now.

Thank you.

Thank you, everyone.

Thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect and have a good day.