CECO Environmental Corp (CECO) 2008 Q2 法說會逐字稿

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

My name is Carmen.

I'll be your moderator for today.

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

(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's call, Mr.

Dennis Blazer, CFO.

Please proceed.

Good morning.

Also joining us on the call this morning 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 June 30, 2008 net sales decreased from $59.2 million to $57.4 million.

Gross profit increased from $9.9 million to $10.8 million.

Gross profit as a percentage of sales also increased by 2.1% from 16.7% to 18.8%.

Selling and administrative costs increased $1.8 million to $8 million.

Operating income decreased from $3.3 million to $2.1 million and net income for the quarter was $1 million compared to $1.1 million in 2007.

Earnings per diluted share were $0.07 compared to $0.08 in 2007.

For the six month period ended June 30, 2008, net sales increased from $102.7 million to $104.3 million.

Gross profit decreased from $17.7 million to $17.5 million.

Gross profit as a percentage of sales decreased slightly by four-tenths of a percentage point from 17.2% to 16.8%.

Selling and administrative costs increased $3.6 million to $14.8 million.

Operating income decreased from $5.8 million to $1.3 million.

Net income was $0.5 million compared to $2.3 million in 2007 and earnings per diluted share were $0.03 compared to $0.18.

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

Thank you, Denny, and good morning everyone.

The first thing I would like to talk about is the addition of two new companies to the CECO organization.

I spent the last two days in Montreal with the people at Flextor.

Flextor is in the same business as our EFFOX subsidiary and, as we said in the press release, we intend to operate those two companies together as one operational entity.

The reasons this acquisition makes sense are that, first, there is very little overlap in the two companies' customer bases, and second, Flextor adds to our international business.

Flextor has customers in Europe and Israel, and throughout Latin America.

If you call the company's offices in Montreal, you will find that they can do business in English, French, Spanish, and Portuguese.

They are truly an international company and we intend to expand that capability.

We recently announced that EFFOX secured a project in Saudi Arabia and that we will build part of that job in China.

By combining EFFOX and Flextor, we are on our way to building the best organization of its kind in the world.

Next week, I will be going to California to welcome aboard the people at AVC Specialists.

AVC is going to operate as a subsidiary of Fisher-Klosterman and will report to the people at Buell, a Fisher-Klosterman subsidiary in Lebanon, Pennsylvania.

We see a lot of opportunity in the replacement parts business in the ESP market.

It is a market Buell is already in and this acquisition gives us a larger customer base in it.

AVC's business fits perfectly with that of Buell.

We've said before that we intend to continue growing by acquisition.

The targets we have in mind are equipment oriented companies such as Flextor and AVC.

Both Flextor and AVC enjoy higher margins than is the case in the rest of our organization on the average, so these acquisitions will help us in achieving our goal of growing our overall margins.

EFFOX, part of our equipment group, has had a particularly strong first half of the year and we expect the same going forward from Flextor.

With regard to our second quarter results, there is no doubt that economic conditions have effected our operations.

This has primarily been the case in our contracting operations.

In fact, we are ahead of or at plan in our equipment, parts, and engineering groups, but behind plan in contracting.

The bulk of this deficit continues to be the result of unreimbursed expenses on the large projects secured by H.M.

White in 2006.

We are still in the process of negotiating the final closeout of that contract.

We had hoped to reach an agreement in the second quarter, and obviously that did not happen.

We feel that it should be resolved before the end of the third quarter.

The Fisher-Klosterman continues to be successful.

FKI's Buell division received a significant electrostatic precipitator rebuild order last quarter.

Buell's refinery and petrochemical quoting activity and orders have exceeded our expectation.

The Fisher-Klosterman shop in Shanghai is becoming an ever more important asset.

They will soon be building, as I said before, product for EFFOX, and have already built and shipped product for CECO Filters.

CECO Filters now builds its products in the United States, India, and China.

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

Thanks, Rick.

As Rick mentioned, we're still in the process of resolving the large H.M.

White contract and that lack of resolution has obviously effected our results, and has disappointed both our shareholders and of course our management.

That being said, I want to assure you that we are doing everything we can to get that matter behind us.

But looking forward, we feel we are taking the right steps in what is going to be a continuing acquisition program, and taking the right steps in growing our existing businesses and making them more efficient.

In order to keep building our platform and executing our strategy, we're confident that CECO will have a bright and profitable future, and I'd like to discuss the position that CECO is in right now.

We have, of course, grown extremely quickly over a short period of time.

We have acquired six or seven companies.

We lose track because sometimes a sub is a sub of a sub, but we have acquired at least six companies in 18 months.

We now have established a platform in the United States, Canada, China, India, Chile, Brazil, and Mexico.

When I say a platform, we actually have facilities in all of those countries and offices.

Our SG&A, if you looked at our statement, was slightly out of control.

It's really a factor of growing as quickly as we did in a shorter period of time, and not having enough time to consolidate and get all the refinements and all the savings that are involved in that period of time.

Our margins, after a long period of time, have now begin to increase.

In the last quarter, if you look at our margins that's a substantial increase despite the fact that the H.M.

White job so far has cost us in excess of 1%.

If you add that in and you add 1% to the hundred odd million dollars we did in the six months, you can see how that affected our P&L.

Kirk & Blum is a 101-year-old company now.

CECO itself is a 40-year-old company and if you look at the age of this company that has reinvented itself, the way to look at our situation and to put it in its proper perspective is that as we reinvented ourselves, we were nothing like a biotech startup or any other type of startup company that was putting a lot of money into research.

In our case, our research was acquisitions and building a platform.

That platform is now firm and complete.

Those expenses that are behind us, not that we won't be doing more acquisitions and reincurring acquisition expenses, but we have a worldwide, broad air pollution company in one of the hottest industries in the world, with both people, places, and customers to become a very significant company.

So we're now, after many, many years and a lot of preparation, we are ready to launch.

If you look at the base of what we have built and understand the solutions that we can provide in a world that badly needs what we have to offer, we have built a wonderful, wonderful platform, and I don't think the future can be anything except bright.

I will turn this program over for questions.

If anybody has a question, moderate, you can start.

(OPERATOR INSTRUCTIONS) Our first question comes from Ted Kundtz from Needham.

Please proceed.

Hello, everyone.

I got on the call a little bit late so I missed some of what you might have said.

I had a conflicting call going on here.

This large contract, it sounds like you took another charge in this quarter for this and I thought that was all written off in the first quarter.

So I'm a little puzzled why it's passing over into this quarter, if it is.

It sounded like it was.

So if you could maybe explain that and maybe help us to concise this for us.

What are we talking about here in terms of the, sounded like another $0.5 million charge here in this quarter.

So maybe you could clarify this for us and where this whole thing stands, and what the dollar amount is we're talking about.

As far as the dollar amount, yes, you are correct, Ted.

Let me back up.

First of all, the customer is very happy with the job and that's an important fact.

It's also a fact that we're hanging our hat on.

We did take additional charges.

They basically involve the fact that we are still on the site.

There have been delays mainly around training of the customer's personnel to operate the equipment, delays that we frankly feel, they've been caused by the customer.

In other words, we're ready, they're not.

Beyond that, we are in continuing negotiations with the customer over the issues of the unreimbursed costs that were caused by customer delays, the fact that there was a strike by the customer's employees, and beyond that, issues of scope.

In other words, were we supposed to give them $10.00 worth of stuff, and they got $11.00, and we want to be paid for $11.00 instead of $10.00.

It's really no more complicated than that, but it is taking longer to get those negotiations settled than we would like.

I see.

So you have an ongoing expense here of training these folks.

So we could see that in the next quarter?

I said that last quarter.

Don't laugh, that's not funny.

No, I think we plan to be off that site within weeks, and really we're down to the point where we're not -- we have hardly any people there.

So it's not that.

So the charge this quarter will be minimal?

Excuse me, the expense this quarter that you've already put into this thing.

I would hope that this quarter what we will show is some income instead of the expense when we resolve the issue.

The issue that -- the additional charges that we took again revolve around the fact that we are negotiating now.

We had some hard extras, if you could call them that, that we negotiated with the customer, took some charges because some of those things we're not going to get, and then had the ongoing expense.

But that all revolves around our strategy because we have this large claim.

Claim is not the proper word because it's not legally a claim.

That would be the last step, but we have put all of that in the format that the customer requested that we present it, and it is in front of their people now, and moving through the process, which means the operational people, the purchasing people, et cetera.

And it takes time.

It takes more time than we thought it would.

Can you possibly size this for us?

Can I give you an estimate of what we hope to recover?

Yes.

At this point, I'd really rather not.

The order of magnitude of what we'd asked for is quite high.

If we were to get all that -- it's in negotiating.

And it would be booked as what?

Revenue.

Revenue and income.

Just as revenue with no cost associated?

Yes.

So there'll be a spike in your margins.

Will you isolate it out as to what it is when you report it?

What was the question?

Will you isolate it out?

When you do record it as revenue, will you give us some idea of what it would be to show us -- ?

It's going to flow right to the bottom line.

To settle that, we'll disclose it.

It won't entirely flow to the bottom line, because we have subs that will get some of the money, because our subs are on a pay when paid.

So our subs don't get paid unless we get paid.

So there is some of that.

There will be some expense related to the claim.

So it won't fall 100% directly to the bottom line.

Got it.

And then could you turn to just maybe to talk about the -- maybe you covered this, I apologize for not catching the whole call, but maybe just a little bit on the international outlook that you're seeing, and what kind of activity you're seeing overseas.

Well, we're seeing more and more.

The acquisition of Flextor, as I said earlier, and I'm happy to repeat it because I'm excited about it, the acquisition of Flextor gives us a whole new dimension, especially in the power industry, because Flextor's business, while they do some business in the United States, most of their business is not here, and they have a very strong presence in Latin America.

They have a legal entity in Chile.

They have a legal entity that's almost done being set up in Brazil.

They do business in both those countries and elsewhere in Latin America.

They fabricate through subcontractors in Latin America, so they make their products down there.

The market down there in power is behind where the market is in the US.

In other words, controls that are already typically in place here are not there, or are being put in place.

They are -- EFFOX and Flextor are dealing together now with international customers in the power industry.

As a matter of fact, when I was in Montreal this week, the Presidents of EFFOX and Flextor were speaking with a customer in Europe who wants me to go over there for a day and meet with them.

We're hoping to actually have the meeting here in the US when he comes here next month.

So all of that, and then as I said we're fabricating EFFOX product in China now, or we will be soon starting.

We're making CECO Filters products in China and have sold two projects already.

We fabricated the first one in India because we weren't ready to start up in China and then fabricated the second in China.

And all of that is growing at a pretty good rate.

We are extremely optimistic about our prospects in Europe, and Latin America, and in Asia.

That's great to hear.

Now, could you just address the last question and I'll get off.

Maybe the bookings issue.

The bookings, I don't know what they were for the quarter in total, but they looked like they were pretty healthy.

Well, our backlog dropped.

Dropped a little bit, but it didn't drop that much.

It dropped what, about $3 million, Denny?

Yes, $3 million, right.

So we're continuing to book at a fairly healthy rate.

We've kept the backlog up around in the high 80s.

We hope to keep it there going forward or maybe even to build it.

We've been doing it without hitting any grand slam homeruns.

There's no $50 million, or even $30 million or $20 million project sitting in that backlog.

It's all, we're hitting doubles and triples.

And it's been very healthy.

The people at -- EFFOX is on track to be a company that might be twice the size of the one we bought.

We have a good growth pattern.

Historically at Flextor, this is a company that built itself up to a $15 million business over a 5, 6, 7 year period.

Great group of people.

Young, energetic people, people who are used to doing business internationally.

Used to, you know, all the issues of even the traffic manager there is a young lady who, in their business, since most of their product leaves the country, there's a whole additional set of issues involved in getting product out of one country and into another, and it's a normal day at the office for them.

In fact, when I was speaking with their proposal manager who was actually a native of Brazil, and she was talking to me about how it is such an advantage to be able to call down to the customer, and the customer, in their culture they want to talk rather than email.

They want to speak to people and they really appreciate the fact that they're speaking in their language and not in English.

We feel that's a great advantage.

So we see our international business doing nothing but grow.

So you sound fairly positive that you can increase the backlog.

That's the one I'm getting that the bookings look like they're running pretty strong, and you would expect going forward to continue these 1-to-1 book to bill ratio.

Is that a fair statement?

The 1-to-1 would be, yes, to jump it exponentially is going to take some large projects.

Wasn't thinking exponentially, I was just thinking 1-to-1 with the increasing sales you got going, so you can increase the bookings.

When I look at EFFOX, we've been knocking the ball out of the park.

We're seeing a lot of refinery opportunities.

I was with the president of Buell and Fisher-Klosterman yesterday in Montreal, and we were at another facility where we do some subcontracting and building of our products.

We have the ability through this subcontractor to take something of any size, literally, to the port.

If it can fit on a ship, it can be made in this facility.

It's not our facility and put on a ship and shipped anywhere in the world.

And in the refinery business, that's an advantage.

We're discussing strategies to grab more of the pie in some of these projects.

Terrific.

Thank you.

(OPERATOR INSTRUCTIONS) There's no further questions at this time.

Okay, we'll give it another few seconds.

If nobody has any questions, we will end the conference.

I would like to add one additional comment, Phil, with regard to the recent acquisitions that we've made.

We have made five acquisitions in the last 17 months, and I think it's important for everyone to know that the last acquisition was partially funded by subordinated debt, which was provided by our Chairman, Phil DeZwirek, which certainly is a great indication of his faith in the Company and our future.

And I think that's an important point for people to keep in mind.

I'd like to add to that.

First of all, I have a very long history with CECO as it stands.

I was the founder of.

I've seen it grow from $200,000 to approximately $250 million or plus and over a fairly brief period of time, especially through our spurted growth through acquisitions, and we are proud of the fact that we remain outside of bank debt free for the last few years after spending a lot of time eliminating a lot of debt.

And when it came time to do these acquisitions, and when we're in a position, when the banks are in more trouble than the customers, the banks have run out of money, we try to do whatever we can through out banking facility and yet keep enough money to run a rapidly expanding business.

It was really both a pleasure for me to keep funding this company and keep whatever debt we have in friendly hands, which in this case happened to be myself, and ensure that CECO can continue to expand without having the limitations of a lot of companies in this present company, especially when there are so many opportunities because of the limitations on banking, and venture capital, and underwritings that the general market is not providing.

I feel that the opportunities for CECO are so great that whatever help we can get from friends, and family, and people who believe in us, that we will be able to continue our expansion program at a very advantageous time, which is now and the foreseeable future.

So hopefully everybody will benefit from this support.

So that's it.

We'll give you one more chance for a question having this little bit of knowledge, and then if not we will cut off the call.

The next question comes from the line of [Eric Passoro] from [Regent] Group.

Please proceed.

Good morning, gentlemen.

Mr.

DeZwirek, I would appreciate it if you could further address the financing in terms of, do you have a process whereby you're sort of shopping that opportunity to finance the company before you're committing to that financing?

We certainly did.

Well, first of all, we shopped with our bank, which was our first -- the first gate we went to.

It wasn't large.

It wasn't large enough to get an underwriting or any of that nature because the cost of doing it would have been way out of proportion to the size of the financing.

It was only $5 million and the legal fees, and the accounting fees, if you do it on an outside basis on a $5 million deal it could cost you the same as on a $50 million deal.

So that was a factor and just so -- Denny you can ratify this because you had the discussion, but we did ask our banks what, on a mezzanine financing, what interest rates they would charge us.

And was it 15% or 16%, Denny?

What was the number?

16% to 20%.

So in this current environment it was going to -- and this is of course a debenture that it's subordinated to all the bank collateral.

And the outside quote with 16% to 20% and this was done at 10%.

So I don't think we could have shopped much better than that.

Plus the warrants, though.

There's no warrants.

It's convertible.

Convertible, that's what it was, convertible at a stock price.

It was convertible at whatever the stock was on the day it closed, which is a higher price in the current market, I can tell you that.

In terms of forecast for the year, can you give us any guidance there?

We don't give guidance.

We hopefully, and certainly anticipate that we'll be doing a lot better than we are doing right now.

Thank you.

You have a follow up question coming from the line of Ted Kundtz from Needham.

I can always ask more questions.

Maybe you could just address the gross margin trends here a little bit.

They've popped up very nicely.

Is this kind of the range you can expect to see going forward, or do you see anything impacting that excess recovery from General Motors?

What do they look like?

I'm going to let Denny answer this because this is really Denny's question, but before -- I just want to say that as a matter of business principle and philosophy, we are trying to ascertain that every company that we acquire, unless it's an extremely special situation, has a higher margin than what has been our traditional margins.

And certainly that just kicked in, and Denny you can take over from there on that answer.

That's basically a discussion we've had on almost all the conference calls, and essentially our gross margin percentage is the result of product mix.

But as Phil said, all of our recent acquisitions, the five acquisitions we've made in the last 17 months all have higher margin percentages than our typical historical business.

Additionally, once we get this large project out from under our feet, that will have an impact upward on margins as well.

We can't really predict what the range will be, but we would anticipate that margins will continue to increase over the next 12 months.

And again, as I said, it depends on the product mix, which of our divisions are actually selling the most product in a particular reporting period.

But we do anticipate an increase.

That's good, and this large project really shouldn't be impacting margins anymore.

No, although as we said, it impacted margins --

It has, right.

It should be totally gone.

And significantly impacted our first quarter.

And Denny, just on the SG&A levels then, you kind of bumped up to a new level here and I assume that's just C&E again reflecting the acquisitions, et cetera.

We could just take a look at that in terms of, as a percent of sales it's not so bad.

It's really, you think you're hanging around this level?

And ideally, we'd get some operating leverage out of this as we go forward.

We definitely anticipate operating leverage as we go forward.

We are acutely aware of the need to focus on these expenses.

As I've said, we've done five acquisitions in 17 months.

We typically are not consolidators.

We don't go in and take our acquisitions, and roll them up into corporate.

However, there are a lot of opportunities for synergy.

Part of what is slowing us down somewhat, as we mentioned in the press release, is the Sarbanes-Oxley compliance.

A lot of money is being spent on that.

A lot of time and effort is being spent on that.

We are also incorporating a new information technology system and we have essentially postponed integrating the system piece of our acquisitions until we get the new system in place, and feel more comfortable that we can use that as our platform and start bringing these new acquisitions on board.

So we are heavily focused on this and are aware that we need to get that cost down.

Okay, but going forward from this level, you're sort of indicating it would move up a little bit because of these extra charges going through, the [sarbacks] which is going to continue for you.

The information technology platform, that could kind of flow through.

That could be more of a one time or several quarter impact.

I'm not quite sure --

I would anticipate that we'll plateau at this point.

I don't see any significant increase from where we are right now.

I think as we start to realize the synergies, it won't come down as quickly as we would like because of these other issues that we're dealing with, but I don't anticipate it'll go up higher before that.

Okay, are you talking on a dollar basis or a percentage of revenue basis?

A percentage of revenue.

Of course, we're still in inquisitive mode and there's always a chance that we'll throw another acquisition in there.

I know that, but excluding acquisitions, right.

Yes, yes.

At the base business here now.

Yes.

Great, thank you.

The next question comes from the line of Larry Szmarnik from Oppenheimer.

Please proceed.

Hi, it's Larry, Phil.

How you doing?

I might have missed this in previous calls or today, but the property for sale, is that still for sale?

The deal, would we sell it at the right price, the answer is yes.

Is there any deal on the table at the moment?

The answer is no.

The people who have been talking to us for years.

It's been going on for four years at least, have not been able to put their financing together, and at the moment we have no intention of moving from [Oakley].

So that property is still occupied?

Yes, that's our main plant.

I'm sitting there right now.

Didn't understand.

Thought it was empty.

No, it's not empty.

It's where we operate and a lot of the facilities around us are abandoned, Larry, and their value is a lot less.

This land is, in order to sell this facility we have to get enough out of it in order to buy another one or build another one.

With the real estate market being what it is today, realistically this thing is still on hold.

It's on hold.

As busy as we are at the moment, I don't want to move.

I got enough stuff going on.

I second that.

Anybody else?

And the next question comes from the line of [Mr.

Ken Welder] from Buckingham Research.

Please proceed.

Hi, this is Ted Wheeler.

Just, I'm a rookie on the call here, but I just I guess in hearing comments about having a platform ready to go and kind of well positioned in a terrific market, and then I think about a few acquisitions over the past few years, and I look at the revenues.

And it seems to me the organic growth is negative.

And if you're going to continue to make acquisitions, I guess I'm wondering is there a disconnect here?

Is there some timing issues or is there any need to sort of reassess a little bit considering, I guess, I think that the organic growth is not positive?

There have been two things that you have take into account.

As I said in my remarks, our contracting operations are not at plan for '08.

They are being affected by the general state of the economy in the US.

Secondly, when you look at our revenues, we had that large contract that we booked in '06, which primarily shows up in our revenues in '07.

It was about $50 million.

It was a little in excess of that and that contract is -- we have replaced that essentially with other business from either our acquisitions or internally.

And thirdly, we have had a downturn in the ethanol market.

We did book an order very recently, but the amount of new business that we are getting from that market is nowhere near where it was a year ago or even six months ago because of everything that's happening in that industry.

So as I understand it then, this comparative issue with the large contract may be behind us, and the ethanol business also might be at a low enough level that the positive things that are developing under the radar, so to speak, might become more visible and we'll see some growth.

Is that a way to think about it?

I think, yes, that's a good way to think about it.

Thanks for the color.

And we have no further questions.

All right, I want to thank you all for coming and listening, and you all know that if you need individual attention or ever need to contact us, we are available at most any time by phone or by appointment.

I'd like to thank you again all very much and call the conference call over.

Thank you.

This concludes the presentation for today, ladies and gentlemen.

You may now disconnect.

Have a wonderful week.