CECO Environmental Corp (CECO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter CECO Environmental earnings conference call.

My name is Ahmed, 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 this 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's call, Mr.

Dennis Blazer, CFO.

Please proceed.

Good morning.

I am Dennis Blazer, CFO.

Also joining me 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 US 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 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 condition and results of operation.

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

Blum and Mr.

DeZwirek.

We will then open the call for questions.

For the three-month period ended September 30, 2008 net sales for the quarter decreased from $65.3 million in 2007 to $55.2 million.

Gross profit increased from $11.2 million to $12 million.

Gross profit as a percentage of sales increased by 4.6 percentage points from 17.1% to 21.7%.

Selling and administrative costs increased $2 million to $8.7 million.

Operating income decreased from $4.1 million to $2.4 million.

Net income was $1.2 million compared to $2.2 million in 2007.

Earnings per diluted share were $0.08 compared to $0.14 in 2007.

For the nine-month period ended September 30, 2008 net sales decreased from $168 million to $159.5 million.

Gross profit increased from $28.9 million to $29.4 million and gross profit as a percentage of sales increased by 1.2 percentage points from 17.2% to 18.4%.

Selling and administrative costs increased $5.5 million to $23.5 million.

Operating income decreased from $9.9 million to $3.8 million.

Net income was $1.7 million compared to $4.5 million in 2007.

Earnings per diluted share were $0.11 a share compared to $0.33 a share in 2007.

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

Thank you, Denny and good morning, everyone.

One of the strengths of CECO Environmental is that we have a very diversified customer base.

I like to tell people that we work in every industry from food to foundries.

The acquisitions of EFFOX, FLEXTOR, AVC and Fisher-Klosterman have helped us to broaden that customer base even more.

The major industries that we have gained more access to through these acquisitions are power, refining, mining, and the chemical industry.

As we look forward to 2009 we know that some of the industries we serve may be affected by economic conditions.

We also know that not all industries will be affected to the same extent and that some will even thrive.

Our tasks will be to take advantage of the opportunities we find in the industries that are doing well, to build market share in the sectors of the economy where things are not so good and to take advantage of the opportunities presented by new regulations as they are promulgated.

We also intend to concentrate even more on the energy management portion of our business.

The bottom line is that we intend to take advantage of the diversity of our customer base in 2009 and position our company for even greater success in the US in 2010 as our markets grow.

Our acquisitions have also given us more presence in international markets, and that is a presence we intend to grow.

To give you an example, in early September I attended a meeting along with the presidents of both EFFOX and FLEXTOR, at which we met with a large international company specializing in the power industry.

They had people there from Switzerland, the United States and Brazil.

We discussed opportunities in Europe, Latin America and many other parts of the world.

We feel strongly that in that industry and some others such as chemical processing, we have good opportunities for growth internationally.

To give you an example, while we make and sell fiber bed filters in the US, China and India, we have never had much of a presence in Europe.

We recently signed an agreement with a European country that will give us a presence there.

We also intend to direct more resources toward our operations in China and India and our office in Mexico and to grow them as quickly as possible.

We feel we have barely scratched the surface of what we can accomplish in those countries.

While it has had no effect on our third-quarter results, the issue of the unreimbursed expenses on the large contract we secured in late 2006 continues to be unresolved.

The customer has asked to audit our expenses, and that process is just now being completed.

We hope to have the issue resolved soon and in a positive manner.

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

Thank you, Rick and Denny.

And welcome, everybody.

I feel that we are positioning ourselves as well as we can considering the current economic outlook.

All of the acquisitions that we have made have helped, just as Rick explained to you, to diversify our customer base and thus to strengthen us for what lies ahead.

And as times improve, hopefully our stock price begins to reflect the real value of our company we will be able to resume our acquisition program and continue to build our platform and execute our strategy.

In the interim we will take advantage of our strengths, continue to improve margin as we have done by growing the equipment side of our business and grow our international business so to position ourselves for the future.

We are profitable now.

Our margins are increasing.

We intend to reduce SG&A.

We intend to build profit and shareholder value.

I would like to open the floor for questions.

(Operator Instructions) Ted Kundtz, Newman Company.

A couple questions for you.

Could you talk about kind of the order trends you are seeing now and what you think the recessionary impact could have on those trends?

We are seeing -- we had a very good bookings month in September.

We had a average or maybe a little bit below average bookings in October, and November has started off very strong.

It is spread through a number of industries.

We are seeing, if I look at where we are working right now, our top 10 list is power, still automotive believe it or not, refining, still ethanol believe it or not, foundry, chemical, steel, mining, aluminum and energy management.

Right now those are our top 10.

Okay, and those are all growing?

No, I don't think automotive is going to have some -- there is -- with all this cataclysmic events in the automotive industry what is going to be created and is starting to be created are some opportunities as they retool plants to move cars hither and yon and make a different car at different plants.

We are seeing opportunities like that.

We are working on the biggest transplant that is being built right now and looking at opportunities at two more that are coming out of the ground.

But I would say the long-term in that area is not good.

Power still seems to be growing.

Refining is growing.

Steel is going through some issues because the prices, as you know, are falling so quickly.

We are doing better in mining I think because we are penetrating it more.

That is one of the things we got when we acquired Buhl as part of FKI.

And energy management is growing.

Putting that all together, Rick, what would you say the bookings -- were the bookings in the quarter, where they -- were you running at a like a one to one book to bill ratio, roughly in the quarter?

Yes, (multiple speakers) our backlog is staying pretty steady.

Staying pretty steady, okay.

Given what you see now and I guess it is hard to really get a big picture about the impact of this recession, but do you think, Rick, you can maintain that kind of a steady state here?

Yes, I think so.

I think we are going to -- it is like we are going to have to concentrate on the industries that are strong.

I feel that we now have a much more diversified customer base than we did a year or two years ago, and I think that makes the task easier.

If industry A is not spending money, then let's go work on industry B where they are.

(multiple speakers) spans the footprint.

Okay, now gross margins jumped up very significantly.

They are higher than I had anticipated.

You are kind of at a new level.

I don't know if it is a record level for you guys, but 21.6%, it is really nicely up there.

Do you think -- is that sustainable?

Is that a sustainable number?

As long as -- what is happening is that the equipment side of our business is becoming a higher percentage of our revenue.

As that becomes a higher percentage of our revenue in general our margins should be better.

Okay.

If you looked at us as just simply as the contracting group and the equipment group, the equipment group is now a bigger part of our business than the contracting group.

So it should have a positive affect on margins.

Okay.

Do we expect -- do you think margins can move even higher from these levels?

Is that a possibility?

I think it is a possibility, but as I've said many times in the past, margins for us are a product mix issue and (technical difficulty) issue within the equipment group.

How big is the equipment group?

Can you tell us that?

As a percentage.

Q3 was half our revenue.

Okay.

Q1 it was 34% of our revenue.

Okay, all right.

Q2 it was somewhere in between.

Great.

Okay, terrific.

And you mentioned or Phil mentioned talking about getting the SG&A under control.

Could you talk about the steps you are taking there and what your targets would be in that area?

I assume that would be as a percent of sales, maybe even a -- I don't know if you are talking about an actual decline in spending dollars, or is it a decline in the percentage of revenues you were targeting.

And I'm not sure what you are targeting so maybe you could address the SG&A efforts there.

I'm going to let Denny talk about that first.

Ted, as we mention in our press release, the big increase in SG&A has come from the acquired companies.

We've acquired five companies in the last 18 months.

Almost all of the increase you are seeing there is coming from that.

We bring on management when we acquire these companies because part of our strategy when we acquire a good company is we not only acquire the technology and the customer base, we acquire the intellectual base of the management, as well.

So what we are currently planning on doing is implementing a new computer system, which is intended to go live in January.

And once we get the platform to the level where we are comfortable with it, we will start adding and integrating these new companies onto the single platform.

Obviously when you acquire companies each of these smaller companies have their own HR departments, their own accounting departments, their own accounting systems, their own payroll systems.

So there is a lot of opportunity for synergy there.

But as I said, five companies in 18 months is -- they are queued up, and lined up ready to make this transition.

So we're going to take them one at a time.

EFFOX will probably be the first one that we bring on stream because they were acquired in March of 2007, and we will continue to bring the other ones on stream in subsequent order as they were acquired.

In terms of a target as a percentage, we had said that our long-term target is to get SG&A to 10%.

That is partly a function of revenues.

So we need to increase revenues on the one side as we cut SG&A expenses on the other side.

I don't know that we will see 10% in the near term, but that is still our longer-term target and I think there is a lot of opportunity for reducing cost.

Some of the costs we talked about incurring on a one-time basis last year have gone away now.

We have a little bit of incremental cost now for Sarbanes-Oxley just because of the audit requirements now that we didn't used to have.

But basically that has leveled off.

We are working on the internal control issues that were identified as that process and re-mediating those concurrently.

So we see a lot of opportunity to really dig into this number and get the SG&A down.

Okay.

For modeling purposes I have kind of kept it flat dollar wise.

Is that -- but you are saying you can actually think you can reduce the dollar spent on SG&A going forward.

In the longer term.

I think keeping it flat for maybe the first two quarters is reasonable.

Right, okay.

But I think when we get into third and fourth quarter of next year we ought to be able to start chipping away at the dollars, as well.

Okay, terrific.

And just lastly maybe just talk about the integration.

You mentioned you made a lot of acquisitions recently.

How is the integration of them coming?

You mentioned the new computer program and your plans there.

How about the rest of the businesses being integrated into your organization?

On the personnel side, the HR side that has gone very well.

The employees obviously have all been hired and become CECO employees.

There are always some differences in benefit programs and those types of things that we are looking at and consolidating.

And trying to get a more consistent platform there.

On the management side of things, the managers of all these divisions that have attended our quarterly managers meetings.

They have all been well received by our other managers.

Everyone is working well together.

They are identifying synergies between the units.

So the integration is going very well.

Operationally it has been very pleasant, Ted.

We took FLEXTOR and really made it a subset operationally of EFFOX.

As a matter of fact, we now go to market as EFFOX/FLEXTOR.

That is why I was down with [Mike de Santos and Jack Neisser] at that meeting in September.

They are selling together, they are working together, they literally have a -- they have a proposal review meeting on Skype every morning at 9 a.m.

They are operating as one company.

It is working well.

AVC is operating as part of one of Fisher-Klosterman's divisions, the Buell APC division.

Again, that is going very well.

FKI is doing well.

They are booking good amounts of business and good profitable business.

They are part of the reason our margins have gone up.

I would say overall there have been very few problems.

Terrific.

That's good to hear.

And then just finally, you alluded to the automotive contract, the negotiations there.

It sounds like they are still going on.

I thought they were going to be completed in the third quarter.

So did I.

So the review is still going on, and you expect that to be concluded when, this quarter or soon, like weeks or you don't know?

If I controlled the process I would tell you.

What I can tell you is very simply this.

The customer came back to us and said all right, we want to audit you because we want to make sure you are not telling us your cost was $100 and it was actually $50.

So they have almost completed that process.

We will then sit down with them and discuss how this is going to be resolved.

Okay, and it is hard to really pinpoint a timing on this, is that correct?

It is hard to pinpoint a timing on it, but I think they want to get it done prior to the end of the year, and so do we.

So that's the target, all right.

The plant is running.

Great.

There are new issues at the plant, like hey, this doesn't work.

Right.

Okay.

That's not an issue.

And your expense associated with that is now over; that is completed?

Any expense that we intend to spend we have already booked.

Got it, terrific.

Okay.

Thanks very much.

(Operator Instructions) Larry Schumaker, Oppenheimer.

Just a couple questions.

The SG&A has been rising you say because of the acquisitions.

How quickly do you think that will be gotten under control, and SG&A as a percent of sales next year what do you expect that to be?

And one more question.

You want to start with that?

Yes, start with that.

The other one is not related.

I think most of it has been answered in what Denny said previously that by the third quarter it will begin to reduce.

And as to what percentage of sales, what percentage it would be of sales.

It might be a year from now.

It would be more dependent on sales, but we do have -- we are looking for actual cash reduction by the third quarter and if sales increase, then of course the percentage will decrease.

So you don't have an estimate on it?

We don't have an estimate because we don't know what our sales are but we do know we are going to try and reduce it dollar wise, and the affect percentagewise overall will depend on sales.

Right now we've got bookings equivalent to last year, so we are considering the economy.

We are off to a terrific start.

So it should decline percentagewise?

It should decline but that doesn't mean it will decline.

But our goal is for it to decline.

Got it.

The other question was about the GM contract, but I think you've pretty much covered that.

Thank you.

Good luck.

You have no further questions at this time.

I would now like to turn the call back over to Mr.

DeZwirek for any closing remarks.

No, again I would like to thank everybody for attending.

I want you to know that we are very proud of the fact that we've been able to maintain our bookings so strongly through what is a widely publicized weak economy.

I think it is shown that both our globalization and policy of vertical and horizontal integration is working.

We, of course, as we've said have to temper the SG&A.

But a lot of our SG&A expenses are actually acquisition expenses because management and necessary management came around, came along with every operation we bought.

Quite often we buy what are called mom-and-pop operations, where the managers are both the sellers of the businesses are both the founders and the managers, and it is important that we keep them on during a transition period for as long as we can.

They normally are more expensive than somebody who would replace them in a more normal position.

So I really think if you look at our SG&A and if you do a bit of analysis you can probably crop off some expenses as if they were acquisition costs.

But being that as they are, the fact that our for years I've been on these conference calls and have listened to analysts hit us with mainly one question, when are you going to increase your margins, can you possibly get up a point, can you get up maybe 20, well I think we showed this quarter and I think hopefully if our mix remains constant we have our margins have jumped considerably.

We are over 21%, not just 20%; when you do over $200 million a year in business every percent becomes $2 million and it is pretty important.

So I think we've answered one of the main critiques of the company, which was its margins.

You always do face a problem, and the problem we are facing is getting SG&A either under control or increasing our top line, which is of course our everyday goal.

So that percentage goes down, but I think management wise and corporate wise and effective in this environment, we've managed to show a nice profit.

Our debt is very much under control, and I would like to congratulate management on their job and hopefully for our shareholders whatever has been happening has been discounted.

And we will return to our proper place in the market.

So thank you, again, one and all for coming.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.