CECO Environmental Corp (CECO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the CECO Environmental first quarter 2009 earnings conference call.

My name is Mary, and I will be your coordinator 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 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, Chief Financial Officer.

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.

Any statements made in today's presentation that are not based on historical fact are forward-looking statements.

Such statements are based on certain estimates and expectations, and are subject to a number of risks and uncertainty.

Actual future results may vary materially from those expressed or implied by the forward-looking statements.

We encourage you to read the risks described in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2008.

Except to the extent required by applicable Securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today, whether as a result of new information, future events or otherwise.

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

Blum and Mr.

DeZwirek.

We will then open the call for questions.

For the 3-month period ended March 31, 2009, gross profit increase by $2.4 million or 38%, from $6.3 million to $8.7 million.

Gross profit as a percentage of sales increased to 21.9% from 13.4% in 2008.

Operating income increased $1.5 million to $0.8 million from an operating loss of $0.7 million in the first quarter of 2008.

Net income increased by $1 million to $0.4 million, compared to a net loss of $0.6 million in 2008.

Income per diluted share was $0.03, compared to a loss per diluted share in the prior year quarter.

And net sales decreased by $7.1 million, or 15% from $46.9 million to $39.8 million.

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

Thank you, Denny.

Good morning, everyone.

We are very happy with our first quarter results.

It is the second best first quarter we have ever reported.

There are a few things that I would like to point out to you this morning.

The first is that our gross margins are improving.

This quarter we are reporting a gross margin percentage of 21.9%.

Our gross margin for all of last year was 19.9%.

More business coming from our equipment group has been the primary factor behind this.

But we are also working hard to improve margins everywhere.

A second point is the fact that we are continuing to grow the international component of our business.

At our last conference, I reported that almost 15% of our backlog was for projects located outside of the United States.

As of the end of the first quarter, over 18% of our backlog now consists of such business.

In the first three months of this year, we sold equipment in 16 different companies -- countries.

Key markets were Saudi Arabia, Sweden, China and India.

Additionally, we have booked significant business in Latin America this year.

We also have a number of active proposals that we expect to close in a number of South American countries.

Two of the largest components of our backlog, the power and refining industries, are sectors that made up almost none of our backlog two years ago.

We are pursuing these industries both here in the United States and abroad.

This month, we are sending people to a large power industry show in Europe.

Last month, we sent people to a refining industry conference in the Middle East.

Next week we'll be at -- we will be in the electric power show in Chicago.

There's been much talk about CO2 capture, especially since the election of our new President.

CECO has supplied equipment to more than one pilot facility where CO2 capture methods are being evaluated.

We will pursue this vigorously.

While the five largest components of our backlog are power, refining, chemical, ethanol and steel, we are still pursuing and booking business in a wide variety of industries.

We tell people that we work in everything from food to foundries.

We booked significant business in the first quarter in the food, ethanol and automotive industries.

We see opportunities in renewable fuels, biomass and gasification.

When we did last quarter's call, I had just left a renewable fuels conference.

Last week we were in a biomass show in Portland, Oregon.

In October, we will participate in a gasification show in Colorado.

We feel that we have some unique technologies, especially scrubbers and high-efficiency cyclones that will be in demand as these developing industries grow.

We are concentrating very hard on building our business in China.

We are having more and more success selling fiberbed filters there.

We are also in the process of building our representative network in that country.

Also, there are huge opportunities in the power industry in China.

They continue to build plants at a rapid rate.

Now I'll turn the call over to our Chairman, Phil DeZwirek.

Thank you, Rick.

And good morning, everyone.

Like Rick, I am extremely pleased with the first quarter results, especially in the current economic environment.

I am also pleased to tell you that our program to reduce SG&A expenses is well underway.

And just as importantly, we are reducing factory overhead in our manufacturing facilities.

We will make sure that our expenses stay in line with our volume of business.

Rick mentioned -- Rick mentioned this during our last call, but I'd also like to reiterate that with the new Administration in Washington, we expect to benefit from more stringent EPA and OSHA regulations, and from more vigorous enforcement of existing regulations.

And I'd like to congratulate all the people at CECO for these results and for the fine job they're doing.

I would like to open the floor for any questions you may have starting now.

(Operator Instructions) Our first question comes from the line of Dale Pfau from Cantor Fitzgerald.

Good morning, gentlemen.

Good morning.

Good morning, Dale.

Congratulations.

Thanks.

I was very pleased to see the bottom line here in spite of the downturn in the revenues.

Maybe you could give us a little bit of indication of what kind of products that you're selling are your big sellers into your top industries here, your power and refining industry.

What are you selling into those?

Be sharp.

What does your pipeline of products look like?

Are the RFUs up, down?

Kind of give us an indication of what you think, because your backlog -- we've burned a little bit of backlog in Q1.

I know that's normal.

But what do you see looking into Q2 and Q3?

Okay, if I would -- I'll start in power.

Our primary -- we do two things in the power industry.

We sell a lot of dampers and expansion joints through EFFOX and FLEXTOR.

And we also have through [Buehl] ESP components, and also are pursuing ESP rebuilds and conversions.

So we have really two angles into that industry.

The pipeline in both of those is good.

There is, especially overseas, a lot of activity.

That's why we're pursuing the power industry all over the world.

We have -- it's why we bought FLEXTOR.

FLEXTOR was a direct competitor of EFFOX, but they had an international component to their market that EFFOX did not.

In the refining industry, we supply primarily what are called refinery cyclones or fluidized catalytic cracking cyclones.

And again, we do that primarily in North America, but we have customers in many other countries, also.

It is one of the reasons we went to China, was to -- or Fisher-Klosterman went to China before we bought them -- was to pursue that type of business.

In the chemical business, we provide all kinds of things -- fiberbed filters, bag houses, et cetera, et cetera.

Ethanol -- we have primarily provided oxidizers, but we have also fabricated for some other people some drying equipment.

And in steel, again it's mainly rolling mill ventilation systems, some motor room cooling systems and strip coolers -- our patented JETSTAR product.

Does that answer your question?

Or--?

Yeah, that's a great rundown, except for what do the trends look like?

The trends in power and refining and chemical are good.

The -- you know, they're not on the same cycle as the rest -- especially power and refining, they're not on the cycle that -- the steel industry is a little -- I can't -- I was at a steel show in St.

Louis last week.

It's a little depressed.

However, having said that, we plan -- we think we're going to book a metals industry job here in the -- this month that'll be a fairly significant project.

Not a large project.

But ethanol -- we've gotten one order in ethanol this year.

There is nowhere near the activity that there was a year ago or two years ago.

But there are projects out there.

There are a few.

Could you characterize your pipeline of things you're looking at as better or significantly better than one quarter ago?

I would say it's a little better.

It's not double or anything.

But it is better.

We are seeing more activity in some industries.

And in other industries, we're seeing less.

And since you generally see your strongest trends at the -- as we get into the end of the year, are companies that you're talking to saying wait until the end of the year?

Are they saying things will be better by then?

Are they still trying to keep expectations down?

What is your general feeling on the outlook?

Generally, what customers are saying is call us in three months and let's see if we're getting our funding from our corporation.

It's very much dependent -- there are a lot of projects out there that are waiting for an indication that the economy has turned.

That would be my assessment.

And is this kind of across the board in your industries?

No.

It's in the -- more of the like steel, anybody who has anything to do with automotive.

The power industry's in another world.

You know they've got to do things because of regulation that they've just got to do.

And they're -- the demand on their end is not down.

Refineries are in a different cycle.

But if you go talk to somebody in the steel industry or -- you're going to get a totally different -- we're waiting.

Okay.

And could you talk a little bit about your expense control?

You did my number pretty surprisingly on the expense side.

I worked -- let me tell you some of the things that we've done.

First of all, we froze -- we would normally have reviewed salaried wages at the beginning of the year.

We froze them.

We've reduced sales, administrative and technical staff where appropriate.

We've reduced the hourly work week to four days for some administrative staff.

We have obviously delayed hiring -- not all hiring, because we've had people -- we've had needs that we've had to fill.

But certainly, we're not hiring willy nilly.

We've reduced travel and entertainment.

I just -- I mention that because we tried -- we have a quarterly management meeting, and we did it on Go To Meeting.

And it worked great.

And not only did we reduce the cost of bringing everybody in here, but they only had to spend about five hours instead of two days to have the meeting, so they could go out and do something else.

We're actually making sales calls that way for some -- our parts people are doing demos on Go To Meeting.

And they like it, because they have the customer's computer, they have them on the phone.

He can't read his E-mail, and he can't answer the phone, either.

They have his total attention.

We've also reduced some shop supervision and maintenance personnel.

And we have closed or, at a couple of our Kirk & Blum satellite shops, we have either mothballed them or reduced activity to a large degree.

So the reductions -- and I think you will see the effect of this more down the road -- have been significant.

And we will continue to do -- as Phil said, we will keep our expenses in line with our revenue.

Great.

Well, congratulations.

And I'll pass this call off.

Thanks, guys.

Your next call comes from the line of Ted Kundtz from Needham & Company.

Yeah, good morning, everyone.

Hi, Ted.

Morning.

Good morning.

Couple questions for you, just kind of going back over that, Rick.

If you could maybe give us -- it sounds like the trend in bookings, you -- it sounds like it's kind of flattish at the moment.

And you would expect that to kind of remain so.

Is that kind of the takeaway?

I see it's -- I see it's flat now.

How -- what it's going to be three months from now, Ted, I couldn't tell you.

Right.

Okay.

Because there's a bunch of stuff building up against the dam.

And someday that dam's going to break.

And we're going to see in some -- not in power or refining, but in some other industries that we're serving, I think we're going to see some pent-up demand cut loose.

Okay.

But I don't know when that's going to be.

It sort of ties into--

In the meantime, we're just looking in other places for business.

Right.

Okay.

Right, which is lots of opportunities, hopefully, there.

And -- but it sort of ties into my next question, how much of your business would you say would be kind of expansion-oriented where you look to companies who would spend if they're expanding their manufacturing or production activities, versus how much would be kind of non-expansion oriented where you'd incorporate some of the regulatory work that has to be done?

Have you thought about your business that way?

Could you gives us any sense of that?

I don't have -- I don't have a statistic for you.

I could throw a number off the top of my head.

But I don't think that would be--

Just how about your gut feel for that?

My gut feel is that there is probably -- again, it depends on where you look.

I think in refining in the United States -- define expansion.

Has there been a new refinery built?

We know the answer to that question.

Right.

But so, if it's maintenance, that's one thing.

Power, I don't know.

Yeah, maintenance I would think I would put in the category of non-expansion, obviously.

What we're -- what we're doing in power is still probably mostly existing facilities.

And then if I go look at the steel industry, it's generally -- the things -- the projects we're looking at are -- there's a couple of significant new facilities underway and going forward despite -- more slowly despite the economy, and then some other projects that are cleanup of existing facilities.

So it's a comp.

Okay.

You know, the few jobs that we have -- we're still working on an automotive plant in Georgia and another job in Mississippi.

These are for transplants.

They're -- the one in Georgia's brand new.

The one in Mississippi they're revising -- they're revising a line to make a new product.

So--

Okay.

So it's -- but this project buildup you're seeing, is it kind of across the board?

Or is it--?

I mean, you just -- your quote -- if we looked at our -- during our bimonthly marketing call that we have, and you look at the list and the guys go through their list, and a lot of what you hear is this thing's on hold pending funding.

Right.

They don't mean funding from a bank.

They mean funding--

Funding from the -- yeah.

Headquarters.

Yeah.

I'd like to just interject.

This is Phil.

I just wanted to interject with Rick to supplement Rick's answer to your question.

On new jobs, what -- I mean, our emphasis which we're going to make into China and overseas largely, but especially in China where they're opening a new coal plant once a week, that's going to be all -- our overseas business will be a lot of new business for us, but also, new construction as compared to reconstruction.

Because those are the countries that are really expanding.

So the more -- and we're now up to close to 20% of our business being overseas.

And with the platform we've built -- the global platform we've built, we expect a lot more overseas business, a lot of which will be new construction as well as doing reconstruction with our existing customers and some new customers.

But we're very optimistic that now that we've built this global company -- and it's certainly starting to happen -- we'll see a lot more new business.

Okay.

Terrific.

The new margin level -- do you think that's sustainable -- gross margin level?

Yes.

Or it should've been do you think that's the new kind of model you've got out there, that you could be at that level?

Or -- and is there a target margin?

Is it something that can work a bit -- itself higher given the mix of what you're seeing out there?

Or is this a pretty good number to kind of model it here for the time being?

Well, it's a good number.

Are we trying to get them higher?

Yes.

It does depend as -- on product mix, as we have said since time immemorial.

But the more we do business through our equipment group, the higher the margin will be.

Okay.

Okay.

Great.

Could you say what that is as a percent of revenue -- the equipment group?

Fifty five percent.

Fifty five.

Okay, terrific.

Okay, great.

And the cost -- you talked about the cost structure.

And that seems like that's -- what do -- what should we expect there?

Is that going to be fairly stable as well?

I know that's been a big emphasis, Phil, for you as well.

And it looks like you've made some great progress on that.

Is this -- is this the level we can expect going forward?

Are you talking about the SG&A?

The SG&A line, yes.

Yeah, I think you -- let Den -- I'll let Denny answer that question.

Ted, I can address that.

If you look at the SG&A in our first quarter -- and it's difficult to compare, because our acquisitions are not fully reflected in all the quarters.

So in some cases, you're looking at apples and oranges.

Right.

If you look at the $7.5 million in our first quarter, and you back out the incremental acquisition cost that was in that quarter, you get a comparable quarter of $6.2 million compared to our quarter a year ago at $6.8 million.

So you can see there's been a true cost reduction just in our core expenses of $600,000.

What will happen as we get towards the end of the year -- and you can see by looking at our fourth quarter SG&A -- it's always higher because people exceed their commission thresholds and their performance-based incentives at certain points.

And in many cases, that kicks in in the fourth quarter.

So you can always anticipate that the fourth quarter will be a little higher SG&A-wise.

But I think consistently as we go forward what you're seeing is pretty much what you can expect.

And additionally, all the cost cuts that we made in Q1 didn't start on January 1, so they'll be more fully reflected in the subsequent quarters.

Okay, terrific.

And then maybe just a last question, Rick.

Are there some large projects out there that you guys are chasing?

Is there that potential for something larger than your normal average contract?

Yes.

There's no -- there's no mid 50 -- there's no $50 million project right now.

Okay.

No, I didn't -- okay.

But there are some that are in the double-digit millions that we are looking at.

Okay.

In different industries, by the way.

Okay.

Okay.

Any sense of timing on those?

Are they really out in '10?

Or is this something--?

No, there's some that are sooner -- one.

Okay.

But I don't want to say anything more about it.

No, that's fair enough.

I just wanted to see if there were some of those out there.

We'll stay tuned.

Okay.

Thanks a lot.

All right.

Thank you all.

Your next question comes from the line of Larry Schumaker from Oppenheimer.

Hi, Phil.

Great quota.

My --

They did a beautiful job with your name, Larry.

Okay.

Yeah, terrible.

That's -- that happens sometimes.

After DeZwirek, I'm used to it.

Okay.

Exactly.

But my questions have been answered.

Good quota.

Thank you very much.

Thank you.

Your next question comes from the line of Tom [Lamafal], [TSL] Consulting.

Good morning, gentlemen.

And congratulations on the very favorable first quarter results.

My interest really is in your cash credit and debt positions as of quarter end.

Any comments you could provide us as well would be colorful and helpful.

Well, you'll notice today that we filed an 8-K.

We were -- we recently amended our debt agreement with our major lender here in town.

And the fortunate part of it is, we were able to extend the maturity date out an additional year, which we feel is critical in this difficult credit environment.

We did increase our margin rates by about a percentage point.

But we're still looking at very low LIBOR rates plus an incremental add-on of about 3%.

So we have a $30 million credit line with the bank.

We're at about $16 million on that credit line right now.

So as we move forward, we will carefully manage our cash flows.

Because when the economy slows down, you have to be a little more careful.

And a lot of times the -- our customers will slow down their payments.

And we're monitoring that very closely.

But we're pretty comfortable where we are right now.

Thank you.

Gentlemen, there are no other questions at this time.

And there are no other questions at this time.

I would -- I would just like to make a point.

It's not a question.

It's Phil DeZwirek.

Denny, correct me if I'm wrong, but on the balance sheet side, I believe that we now have just -- our bank is no longer -- is no longer current.

I mean, that was a bit of anomaly that we showed it as a currency, so that our total debt as we stand right now including the fluctuating bank line is just a little over $17 million.

Is that right?

Yes.

And it's still long term, because our amendment was effective March 31st.

So--

Right.

So all our debt is long term.

So we have no short-term -- we have no short-term debt.

Right.

Well, I just wanted to clarify that, because it's different as to how we reported it previously.

So there are no other questions?

There are no other questions, sir.

All right.

Thank you all very much.

I'm glad you listened to our call.

I will be satisfied that most of your questions, if not all -- and if anybody has something that they didn't want to speak about over the conference call or they think about later, our phone lines are open.

They can contact myself.

The number is available.

If necessary, they can call Rick or Denny.

But I'm always available to speak to any investor or interested investor.

And so, thank you again.

And have a good day, everybody.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Have a great day.