CECO Environmental Corp (CECO) 2009 Q2 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 CECO Environmental Earnings Conference Call.

  • My name is Heather 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 today's conference.

  • (Operator Instructions).

  • As a reminder, this conference is being recorded for replay purposes.

  • I will now turn the presentation over to your host for today's conference Mr.

  • Dennis Blazer, CFO.

  • Please proceed, sir.

  • Dennis Blazer - CFO

  • Good morning.

  • Also joining us on the call this morning will be Phil DeZwirek, CEO and Rick 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 uncertainties.

  • 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 10K for the year to 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 will do a quick review of our financial results which will be followed by comments from Mr.

  • Blum and Mr.

  • DeZwirek.

  • And then we will open the call for questions.

  • For the second quarter of 2009, net sales decreased from $57.4 million to $33.5 million.

  • Gross profit decreased from $10.5 million to $7.6 million.

  • Gross margin increased to 22.7% from 18.3%.

  • Net loss was $0.6 million compared to net income of $1 million in 2008.

  • Our net loss per diluted share was $0.04 compared to net income per diluted share of $0.07 in 2008.

  • Our $62.4 million backlog as of June 30, 2009, has remained constant compared to the $63.2 million as of the end of the first quarter.

  • Total debt as of June 30, 2009 has been reduced by $12.9 million to $13.8 million.

  • For the six months ended June 30, 2009, net sales decreased from $104.3 million to $73.3 million.

  • Gross profit decreased from $16.8 million to $16.3 million and gross margin, again, increased to 22.2% from 16.1%.

  • Our net loss was (technical difficulties) $0.3 million compared to net income of $0.5 million in 2008.

  • The net loss per diluted share was $0.02 compared to net income per diluted share of $0.03.

  • And again our backlog, as previously mentioned, is only down slightly compared to $68 million as of December 31, 2008.

  • Additionally, as we discussed in the earnings release, we have dramatically reduced selling and administrative expenses.

  • On a comparative basis, excluding expenses from companies acquired in 2008 that were not comparably present in the prior periods and an additional non-cash charge of $300,000 to increase the allowance for bad debts, selling and administrative expenses were reduced by nearly $1 million for the three months ended June 30, 2009, and $1.6 million for the comparable six-month period ended June 30.

  • It is also important to note that net income for the quarter and six-months period was affected by a nonrecurring expense resulting from a sales tax audit of a prior year which amounted to an additional charge against income of $211,000.

  • This was a sales tax audit in the state of South Dakota, which is not one of our resident states and it is a state where we did a lot of ethanol work back in 2007.

  • And that is what created the charge.

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

  • Rick Blum - Pres and COO

  • Thank you, Denny, and good morning, everyone.

  • Where we have encountered difficulties both this quarter and last has been in our contracting group.

  • The recession has hit it more than any other part of our business.

  • We are doing a number of things to deal with this.

  • In our contracting group alone, overhead and SG&A expenses have been reduced by about $800,000 compared to the six months ended June 30, 2008.

  • Based on what we spent this last -- this June, we would expect to see a further reduction going forward.

  • We have instituted reductions in force, the savings from which take time to realize due to severance costs, salary reductions and even furloughs in our contracting operations.

  • Our sales part people are pursuing opportunities anywhere they can find them.

  • In July we saw an improvement in contracting bookings.

  • The best performing part of our business has been the equipment group.

  • That group has booked the bulk of our foreign business and also the bulk of our power and refining business.

  • Our parts group, whose customers are primarily contractors, has seen a decline in business since the amount of work its customers have has declined dramatically.

  • It is still, however, contributing to our bottom line since it has grabbed market share through aggressively marketing our KB Duct product line.

  • We are continuing our efforts to build international business.

  • Through the end of June, foreign bookings make up over 18% of our new business.

  • Foreign backlog is 23% of our current backlog.

  • We have done business already this year in 27 different countries.

  • The top 10 have been Colombia, Canada, Saudi Arabia, Sweden, Brazil, India, Turkey, China, Ecuador, and Mexico.

  • We are having good --.

  • The largest component of that international business has been in the power industry.

  • We are having good success in that industry in Latin America and are continuing to pursue the power industry in that part of the world vigorously.

  • In July we booked two jobs -- one in power and one in refining, the total about $1.1 million.

  • One goes to South Africa, the other goes to Indonesia.

  • The top two industries in our bookings continued to be power and refining.

  • Automotive, chemical processing, and contractors who are the primary customers of our parts group round out the top five.

  • During the last call, I talked about renewable fuels, biomass and gasification.

  • This month we announced that we have received a significant order relating to biomass.

  • We have also received a few smaller, but no less important, orders from that segment.

  • Fisher-Klosterman's high efficiency cyclone expertise is very applicable to those types of projects.

  • And we are pursuing business in this new market segment vigorously.

  • While the ethanol industry has been quiet we have booked two significant orders in that industry this year.

  • We booked a second one on July 10.

  • We continue to be recognized in that industry as the best provider of oxidation equipment.

  • We intend to pursue these new industries while still going after business in traditional areas.

  • To sum things up, we have a volume issue especially in contracting.

  • We still have improved gross margins 23% compared to 18 -- two points -- 18.2% a year ago.

  • Our backlog stayed essentially the same throughout the quarter.

  • In fact it grew in June.

  • We intend to get our costs in line, grow our sales wherever possible and positioned this Company for the recovery which will eventually come.

  • Now I would like to turn the call over to Phil DeZwirek.

  • Phil DeZwirek - CEO

  • Thank you, Rick.

  • I would like to take this opportunity to thank both Rick and Denny for their fine job in downsizing and refining CECO so that it was able to get through this really difficult worldwide period, especially in industries such as ours and primarily our customers, financially intact and with a slight loss.

  • I must say I'm as disappointed as anybody that we did have an unexpected slight loss.

  • One of the reasons is really our form of [completion] accounting is such that there is a -- we don't really know to the very day as to how much money we are making or losing.

  • Because we can't -- we don't know until we have actually booked how much work and how much cost and how much income we get from each job.

  • That is a factor that we are going to put tremendous inputs in the next quarter and for eternity as far as I am concerned, and having a system which more accurately and quickly (technical difficulty) the financial standing of the Company, despite the fact that we do completion accounting and does make that fact difficult.

  • But it's something we are definitely going to put our hands on.

  • And once we were losing a very slight amount of money, as Denny alluded to, and it was a corporate decision, we figured we may as well throw in the kitchen sink.

  • So we threw in receivables which may or may not be recoverable.

  • We threw in the tax audit in South Dakota, South or North Dakota -- whichever it was -- in one of the Dakotas where we do have a legitimate chance of possibly recovering some of that money as most of it was a penalty and was not all due to us.

  • But we took a slightly bad case, made it -- of a loss and made a severe case just to clean the book so that going forward we don't have any bad history that we are going to [meet].

  • I would like to just add that we are clean and ready for the turn in the economy.

  • We are not politicians who are predicting turns that may or may not be there.

  • But we can tell from our long history in this business when things are starting to look better.

  • They are starting to look slightly better.

  • The automotive industry -- which is industry which was a great customer of ours, and then we had to back off during their trials and tribulations -- they are now coming back.

  • We have already received one order from a major automobile manufacturer and we are now at a point where we know the automobile manufacturers can pay their bills.

  • For a while anyway.

  • But we certainly will ensure that they do pay their bills, but it is going to re-open a big avenue of business for us.

  • But we are increasing our margins for years on these conference calls.

  • The main talk -- you are always great on your top line, but your margins are lousy.

  • Well now our top line is a little lousy and our margins are great.

  • We maintain our margins.

  • The top line will come back with the economy.

  • CECO will be a very profitable company.

  • And I also think in the next year possibly, you'll see some structural changes where we do put much more emphasis on our foreign sales and a lot more on our cost controls and, more importantly, depth of management which will take this Company to a much higher level.

  • And so we can realize the potential which has been built by this really good structure that is now in existence.

  • So as I say, we take the bitter pill with this quarter.

  • It's nothing that many tens of thousands of companies in North America and across the world are suffering, especially that are in industries like ours as I mentioned and we are in much better position than most of our competition to come out of this very strong.

  • And I am looking forward to the future.

  • Thank you.

  • And if there are any questions we will take them now.

  • Operator

  • (Operator Instructions).

  • Dale Pfau.

  • Cantor Fitzgerald.

  • Dale Pfau - Analyst

  • Good morning, gentlemen.

  • Couple questions here.

  • First on the housekeeping.

  • Denny, what was your cash balance at the end of the quarter?

  • And could you tell me whether your -- what your cash flow was in the quarter?

  • Dennis Blazer - CFO

  • Yes, our cash balance was about $1 million at the end of the quarter.

  • And as you can see from the significant reduction in debt, we had very positive cash flow and we used that cash flow to pay the debt down.

  • Dale Pfau - Analyst

  • So operating cash flow was?

  • Dennis Blazer - CFO

  • I don't have that number right in front of me, but move on to the next question and I will pull that up.

  • Dale Pfau - Analyst

  • Okay, great.

  • Rick, could you give us a breakout of your revenues in the quarter by equipment contracting and parts, roughly, if you could?

  • Rick Blum - Pres and COO

  • Yes.

  • Let's see.

  • For the second quarter, the revenue is -- well, wait a minute, Denny.

  • Denny just handed me a sheet here.

  • It is about 7% parts, about -- no.

  • Excuse me, for the second quarter it is about 9% parts, 33% contracting and 57% appointment.

  • It adds up to (multiple speakers).

  • Dale Pfau - Analyst

  • And does your -- your backlog probably is, I would guess probably a 60% or above on equipment right now?

  • Rick Blum - Pres and COO

  • It's probably -- our backlog of -- the equipment group backlog is about -- it's over, it's about 85% of our backlog.

  • Dale Pfau - Analyst

  • About 85% is on the equipment side.

  • Okay.

  • Rick Blum - Pres and COO

  • Roughly 80 to 85.

  • Dale Pfau - Analyst

  • Okay.

  • And could you talk a little bit about your pipeline?

  • Have you seen an increase in the inquiries recently the last couple of months here?

  • How is that looking?

  • You held your own in the quarter, but that is also because your revenues were a little light.

  • If your revenues had been equal to the first quarter your book to bill actually would have been down again.

  • So how do you see the pipeline out there?

  • Rick Blum - Pres and COO

  • There's more activity.

  • As I said, we had -- even in contracting, we had a fairly decent July.

  • Our bookings in July were up significantly from where they had been the first six months of the year.

  • We are seeing more activity so we are hoping and expecting, frankly, that to continue.

  • In the equipment group, we are seeing lots of activity -- especially overseas.

  • We announced that we booked a job, a couple of jobs in Latin America.

  • We are expecting to do more of that.

  • We are having a meeting in Montral next week to discuss the opportunities in India.

  • We are seeing activity in power and refining, though most of it is overseas.

  • There is still activity and power in the US, but I would say it is not as robust as it was probably a year ago.

  • I was at a conference in Portland, Maine, that I returned from last night, where the Council of Industrial Boiler Operators -- these are power plants at places like universities.

  • And they are coming under these new regulations that are almost written and not quite promulgated, but there is going to be a tremendous amount of opportunity in that arena.

  • Because there are a lot of those things out there and they are going to need new equipment.

  • So bottom line is, yes, we are seeing more activity.

  • Dale Pfau - Analyst

  • And to correct my notes here, earlier you said that -- I think you said 18% of your revenues in the quarter were from foreign countries.

  • Is that correct?

  • And 23% of your backlog?

  • Rick Blum - Pres and COO

  • 18% of our revenue -- 18% of our bookings, not recognized revenue.

  • Dale Pfau - Analyst

  • Okay.

  • Rick Blum - Pres and COO

  • It's foreign and 23% of our backlog is foreign.

  • And the reason for that is essentially that our parts businesses have no foreign business and they have no backlog either.

  • We get the order today and we ship it tomorrow.

  • So they have the backlog for the parts business is just miniscule.

  • But they are still an important part of our business.

  • That's the reason for the difference between 18 and 23.

  • Dale Pfau - Analyst

  • Okay.

  • Great.

  • I will get back in queue.

  • Thanks.

  • Dennis Blazer - CFO

  • The net cash provided by operating activities was $13.8 million.

  • Dale Pfau - Analyst

  • Great.

  • Thanks, Denny.

  • Operator

  • Ted Kundtz with Needham.

  • Ted Kundtz - Analyst

  • Good morning, everyone.

  • A couple of questions for you.

  • Rick, it sounds like you are looking ahead here, your bookings seem to be running, you said a little better in July, but my guess would be you are kind of running at the book to bill close to 1, a 1 to 1.

  • Do you see that trend sort of continuing?

  • Or is it just impossible for you to tell?

  • It sounds like things are just kind of continuing along the current line.

  • Rick Blum - Pres and COO

  • Well, in Q1 -- in Q2, in the second quarter our book to bill was about 1 to 1.

  • And the first quarter our book to bill was less than that

  • Ted Kundtz - Analyst

  • Less than (multiple speakers) 5.88, yes.

  • Rick Blum - Pres and COO

  • I would think that we will, while we will -- I mean we still have quite a bit of backlog out there.

  • We are adding to it continually and it becomes a matter of revenue recognition as to whether that book to bill is 1 to 1, or frankly I would like it to be a lot higher than 1 to 1.

  • And that is what we are working on.

  • Going out and getting new business.

  • Ted Kundtz - Analyst

  • Right but your best estimate now is for it to be at what level?

  • Do you see it potentially increasing this quarter?

  • Or do you think you just can't tell?

  • Rick Blum - Pres and COO

  • Yes, I think there's a good opportunity for to increase this quarter based on some contracts that we hope to secure.

  • Ted Kundtz - Analyst

  • Yes.

  • I just wanted to get a sense of your tone of your forward-looking thoughts here.

  • And in that new bookings, do you think the gross margins would stay at these levels, these 22.5 in the -- I guess maybe in the 22, 23% range?

  • Rick Blum - Pres and COO

  • Yes.

  • Yes, I do.

  • Because again and so much of this -- we have changed the mix of this business.

  • And strategically going forward, we are not going to abandon the contracting business because it gives us our turnkey capability.

  • But if you look at what we -- look at the acquisitions we've done.

  • Except for H.M.

  • White which was a unique case, the only things we have acquired have been equipment businesses.

  • And that is our strategy.

  • Long-term.

  • Ted Kundtz - Analyst

  • Okay.

  • Now the SG&A side, is that something you think you could bring down from this level?

  • You mentioned some unusual items in the quarter, so hopefully I would assume some of that could come down and then maybe the actual number would be a little bit lower going forward.

  • Is that a fair assessment?

  • Rick Blum - Pres and COO

  • Yes it is.

  • Ted Kundtz - Analyst

  • Would you expect that to come down maybe by -- I don't know, a couple hundred thousand at least anyway, $200,000 or $300,000.

  • But you could keep it at this rate or slightly lower?

  • Dennis Blazer - CFO

  • Yes.

  • We anticipate and we will continue to evaluate this, based on the economy and how it looks going forward and if we have to make additional reductions then we will do that.

  • Ted Kundtz - Analyst

  • Rick, just one more question for you would be, what industries do you think will kind of lead you to an upswing in business?

  • What are the most promising areas for you guys, looking forward?

  • Rick Blum - Pres and COO

  • I keep talking about power and refining and they are still great.

  • We are seeing more opportunities in chemical processing.

  • We are -- we are executing a project in North Carolina right now that is something that we had never done before.

  • And we are actually executing it successfully.

  • The automotive business, there are -- believe it or not, there's actually a couple of steel projects out there that we are pursuing.

  • But they are going to be long-term, but I think we have good chances.

  • The automotive business will pick up.

  • They are as Bill said they are -- they now have some money to spend and, more importantly, the capability to pay their bills.

  • So we are pursuing work now at a transplant.

  • Everybody knows Volkswagen is building a plant in Tennessee, but the American companies -- we've gotten a couple of projects and we are seeing more activity.

  • They are looking at doing things that six months ago or three months ago even they were just clamped shut.

  • Ted Kundtz - Analyst

  • Is this going to require an expansion in the economy to get this going or will these companies do kind of retrofit projects, upgrades on their existing facilities?

  • And does it require a capacity expansion?

  • What is your mix of business there?

  • Rick Blum - Pres and COO

  • That goes industry by industry and the -- talk about refining in the US.

  • You know we are not building refineries, but they are trying to get more capacity out of what they have.

  • Overseas, they are building refineries.

  • That is why we are overseas in that business.

  • We sold a refinery project's equipment to a place in South Africa this month.

  • If you look at the power industry, they need capacity, but they don't need it today.

  • You talk to them today and they will tell you that they have plants standing idle because the big users, the people like the steel plants are not sucking as much power as they were a year ago.

  • But in the long-term, that capacity has to increase.

  • Also in the power industry, there's a project we are looking at right now that we hope to land.

  • There are environmental issues on existing facilities where they have to do something and they have to do it now.

  • There's some old environmental equipment out there that is just flat worn out and it is going to have to be replaced or they are not going to be meeting their permits, their current permits.

  • And as the laws change -- that's why I was at that conference in Portland.

  • That is going to get more stringent.

  • And they are going to have to do more things even the little boiler guys.

  • Where there's some real opportunity.

  • That has gotten us very excited.

  • The automotives -- where they are going to go, are they going to retool?

  • Yes.

  • GM announced that they are closing Springhill.

  • They are going to -- or is it Lake Orion?

  • -- and it's going to be rebuilt to make a small car because they made that deal with the state of Michigan.

  • The other two are in the same position.

  • They are going -- as they are closing plants they have to retool others, but that is just starting out.

  • We are just starting to see that activity because until they got their financial house in order, they weren't making any plans at all, I guess.

  • Ted Kundtz - Analyst

  • So are you bidding on more projects?

  • Is there a metric that you guys use to measure the amount of bidding activity that you have going on?

  • Rick Blum - Pres and COO

  • Yes.

  • And I would say bidding activity is up.

  • We don't look at it and say, "Oh we bid $10 million for the project this month and $15 million last month so it's down," because you have to look at the quality and the percentage of probability of capturing network.

  • But yes.

  • I would say that the activity is increasing.

  • Ted Kundtz - Analyst

  • Okay.

  • Thank you.

  • Operator

  • [Tom Mellagessi] with -- please proceed.

  • Tom Mellagessi - Analyst

  • Good morning.

  • Looks like we've made some improvements on SG&A.

  • Thank you for that.

  • It seems to me like this is a time where a large part of the focus should be on operations and knocking the backlog down and then filling the backlog back up.

  • Can you address what is happening internally to actually convert that backlog into the revenue stream?

  • What are you doing differently?

  • Especially with a reduced workforce.

  • Rick Blum - Pres and COO

  • You have to understand the nature of our backlog.

  • We book a job.

  • We book the job to sell a bunch of equipment to a power plant in Brazil.

  • That job goes on their schedule, not ours.

  • So we really do not control the process of how quickly the backlog is recognized.

  • It really is a customer- or project-driven process.

  • The keys for us are to execute that backlog for the highest margins that we can execute it for.

  • Does that answer your question or --?

  • Tom Mellagessi - Analyst

  • Okay.

  • Thank you.

  • Rick Blum - Pres and COO

  • On the expense side, we are doing what we need to do in the portions of our operations where we need to do it to cut our overhead, if you will, to match the margin that we are generating.

  • Operator

  • (Operator Instructions).

  • Dale Pfau.

  • Cantor Fitzgerald.

  • Dale Pfau - Analyst

  • Hi Denny.

  • Just a follow-up here on your operating cash.

  • What was your total debt at the end of last quarter?

  • And then you said your total debt was 13.8 at the end of this quarter, is that correct?

  • Dennis Blazer - CFO

  • Yes.

  • Again I will have to pull that number up.

  • I don't have the last quarter balance sheet in front of me.

  • Dale Pfau - Analyst

  • And since you didn't include a balance sheet with the press release, did you do a decrease in inventories?

  • How did you squeeze that much cash out of the operations?

  • Dennis Blazer - CFO

  • Basically typically what happens in a downturn is receivables come down dramatically.

  • Inventories have held pretty constant, but when your receivables begin to come down and your billings have tailed off, that immediately converts into cash.

  • And of course the corresponding side of that is your accounts payable also come down, which is actually the use of funds.

  • But the net of those as I said was a pretty substantial amount.

  • And that is what permitted us to pay the debt down over the six-month period of time.

  • Dale Pfau - Analyst

  • This didn't have anything to do with the completion of the GM claim, did it?

  • Dennis Blazer - CFO

  • No, it did not.

  • Dale Pfau - Analyst

  • Okay.

  • Thanks very much.

  • Operator

  • There are no further questions in queue at this time.

  • Phil DeZwirek - CEO

  • All right.

  • If there are no further questions we will call the meeting to an end.

  • This is Phil DeZwirek again.

  • I would like to thank you all for attending our conference.

  • I would like to thank Denny and Rick again for the wonderful job they did at keeping us in line during these tough times and bringing us in a position to take advantage of the future and our own vast potential as business begins to, reappear, and we are getting indications of that.

  • We are a lean and mean machine now.

  • And our margins are where we could be if anything they will -- we hope they will go higher, but increased volume which is just a matter of business opportunities getting better, as I said, the market is inclined to show us that.

  • With these margins I think our future is not only intact, but brighter than ever.

  • So we are looking forward to speaking to you again for next quarter.

  • And if anybody has any calls they know where to contact us at any time.

  • So thank you all very much.

  • Operator

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect.

  • Have a great day.