CECO Environmental Corp (CECO) 2009 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 Ann and I will be your coordinator for today's call.

(Operator Instructions)

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

At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr.

Dennis Blazer, CFO.

Please proceed, sir.

Good morning.

Also joining us on the call this morning will be Philip 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 facts 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 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 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 third quarter of 2009 net sales were $33.2 million for the quarter compared to $55.2 million in the same quarter last year.

Gross profit for the quarter was $7 million compared to $11.6 million in the same quarter last year.

Gross margin increased to 21.1% from 20.9%.

Selling and administrative expenses decreased $1.5 million to $7.2 million.

Net loss was $0.7 million compared to net income of $1.2 million in 2008.

Net loss per share was $0.05 compared to net income per share of $0.08 in 2008.

Our backlog as of September 30, 2009, was $56.1 million.

The total debt was reduced by $12.4 million to a total of $14.3 million from $26.7 million as of December 31, 2008.

For the nine-month period net sales were $106.5 million compared to $159.5 million in the nine-month period last year.

Gross profit was $23.3 million compared to $28.3 million in the same period last year.

Gross margin increased to 21.9% from 17.7%.

Selling and administrative expenses increased $1.1 million to $22.5 million.

Net loss was the $0.9 million compared to net income of $1.7 million in 2008.

Net loss per share was $0.07 compared to net income per share of $0.11.

Additionally, as we discussed in the earnings release we have continued to reduce overhead expenses as well as selling and administrative expenses.

On a comparative basis, excluding expenses from companies acquired in 2008 that were not comparably present in the prior period, selling and administrative expenses were reduced by nearly $1.6 million for the quarter and $2.9 million for the comparable nine-month period.

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

Thank you, Denny, and good morning, everyone.

We still have difficulties caused by the depressed state of the US industrial economy and our Contracting Group.

The recession continues to affect its results negatively.

I told you three months ago that our Contracting Group overhead and SG&A expenses had been reduced by about $800,000 compared to the six months ended June 30, 2008.

I also told you that we expected to see a further reduction going forward.

In the third quarter of 2009 those expenses were $1 million less than they were in the third quarter of 2008 and $1.8 million less for the nine-month period.

That was still not enough to bring that group to profitability, but those reductions combined with bookings that have improved somewhat did bring the group to a breakeven status in September.

The bookings rate of August, September, and October combined with its new overhead structure should return it to profitability.

Third-quarter results were obviously not what we wanted them to be.

The bright spot was that in September results did improve.

We were profitable in September.

We also see bookings in all of our groups improving somewhat.

October was one of the best bookings months we have had all year.

We expect November to be even better.

International sales continue to be a bright spot.

Our foreign backlog is about 20% of our total.

The top 10 countries in which we have booked business this year are Brazil, Canada, China, Colombia, India, Indonesia, Saudi Arabia, South Africa, Sweden, and Turkey.

South Africa and Indonesia are new additions to that list due to contracts we booked in July.

To sum things up, we still have a volume issue but we believe that that situation is improving.

Our gross margins are still much improved from a year ago.

Additionally, we have done cost cutting that was necessary with a view to not damaging the business for the long term.

Our objective is to make sure when the recovery which will eventually come arrives that we are in a position to take advantage of it.

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

Thank you, Rick.

And I hope I don't seem too redundant in what I have to say which pretty much mirrors the picture you have of both the present and a future which looks much brighter.

I want to thank both you, Rick, and Denny for cutting our costs by several millions of dollars over our planned goal and steadily increasing our gross profit margins -- the two aspects of our business for which in the past we have been criticized.

We have consciously and with great effort worked on them and the proof is in the pudding so to speak.

However, we disappointedly ended this quarter with a loss due to the economy, due to a one-time charge, and an unexpected overage on a project.

Now the economy is beginning to show a positive turn and our awareness of how and why costs on specific job were beyond our plans.

We have initiated a more consistent control of costs with increased oversight of large projects.

There is never a guarantee, but our new oversight program should eliminate the occurrence of this happening again.

And now with our substantial reduction of overhead and the anticipated economic recovery, CECO's return to profitability should be demonstrated in our fourth quarter and possibly covering the entire year, that is of 2009.

Right through we should be positive in the 2010 fiscal year.

This may sound redundant, but the fact remains CECO is the right business for both the current times and the future.

Performance and profit is not only our goal but the standard we will maintain on a consistent basis.

CECO's position, both domestically and internationally, is a platform for success.

Every effort will be made to capitalize on our position and realize our potential.

Most importantly, especially in these times, we are relatively free of debt and we are in a position to borrow or to raise funds to continue our acquisition program which helped get us where we are.

I, personally, am excited about the current and future direction of CECO.

As the largest shareholder of CECO I would like to thank my fellow shareholders for their patience and look forward to all being properly rewarded in years to come.

All three of us will entertain your questions and comments.

The floor is open.

Thank you.

(Operator Instructions) Dale Pfau, Cantor Fitzgerald.

Good morning, gentlemen.

A few questions here.

First of all, it looks like your bookings were under 1 to 1 in the quarter.

You said you felt fairly comfortable that you will be profitable in the December quarter.

How much have bookings improved here in October and November to give you that kind of comfort, Rick?

Bookings have improved, I would say -- I have to get the exact numbers.

October was the second-best month we have had all year, but way above the average.

November we expect to be better than October based on some indications we have from customers and how we have done so far this month.

The other side of the equation, Dale, is the cost-cutting.

Basically, what I was saying there in our contracting business -- which is where we have had our problems -- if I take August, September, and October and say that is a quarter, what we have booked, and then take our expenses as they currently stand, we are profitable in that business.

Does that make sense or did I answer your question?

Yes, a little bit.

Okay.

What was your percentage of contracting versus equipment business in the quarter, Denny?

It was -- let's see here.

Contracting was 25% and the equipment sales were 64% for the quarter.

And the rest was components?

Yes, the other 10.5% was the Parts Group and Engineering.

And engineering, okay.

Phil mentioned a couple of things.

He mentioned a one-time charge and he also mentioned an unexpected overage.

Could you give us an indication of how much of the bottom-line impact those two things were, Denny?

The one-time charge -- well, there actually are a couple one-time charges.

We have a currency exchange rate loss of about $200,000 in this quarter, which is about $250,000 on the nine-month period.

As you know from last quarter's conference call, we had a $300,000 non-cash charge for increasing the allowance for doubtful accounts.

So there is about $0.5 million of those particular issues.

On the contracts, we don't particularly disclose losses on individual contracts so I can't really tell you what that number was.

But there was an impact in the quarter due to an overage?

Yes, there was.

In other words your gross margin could have even been better.

And could you tell me whether that was -- I assume that was a contracting job?

It was a contracting job.

And one of the issues we have now is that in this difficult economy it's much more difficult to negotiate extras with customers.

So when we get to the point where we are about to finish a contract and we have had extras that we thought we had agreed upon, when you get down to the final negotiation the customers are very, very difficult to get to agree to paying extra money.

They are just fighting tooth and nail.

The whole environment has changed dramatically with regard to relationships with our customers in that regard.

We are still pursuing some of the extras on this one particular contract, but again there is just no guarantee that we will recover these costs.

Dale, this is Phil.

May I add those are the incidents we intend to avoid in the future.

The customer can't just dictate extras because of past relationships and hope that they are going to -- anticipate that they are going to pay us because they always have in the past.

But things being the way they are everybody is playing hardball, so it's hard trying to play the same game.

Okay.

Let me get this clear, Denny.

So in the quarter specifically they only charge was the $200,000 currency with the exclusion of the overage.

Is that correct?

That is correct.

Okay.

And I know we are not going into numbers, but I will add because I think it's important that the overage was substantial.

Could you give us, Rick, if you can, your top industry groups in shipments and backlog?

Okay, let me give it to you by bookings first, because that is the one that is on top.

Power is still number one in both bookings and backlog.

Refining is number two, but number three in bookings; number two in backlog.

The chemical industry is number three in backlog, but probably down to fifth or so in bookings.

Ethanol is still up in our backlog, believe it or not.

Steel, we have booked a couple of jobs in the steel industry that have bumped our backlog a little bit.

The food industry, in the food industry we are including pet food because we booked a nice contract in that business.

The foundry business is still in our top 10.

Energy management is still in the top 10 of our backlog, I believe.

Automotive from a backlog standpoint is very low, from a booking standpoint we have booked -- and I am giving you, on bookings I am giving you through October and on backlog I am giving you through September, so some of these may get a little discombobulated.

Automotive is actually up to almost 10% of our bookings as of the end of October.

And then our parts business is, as usual, 10% of our bookings.

Okay.

And a couple more questions then I will turn the call over.

The confidence you have on the bookings that you are thinking about here in November and clearly in December looking forward, what industries are those popping up from?

Power; the metals industries, steel and aluminum; the chemical industry.

We have started to actually penetrate further into the sulfuric acid/fertilizer industry where prior to this we only sold them fiber bed filters for the sulfuric acid plants that they have to have to make the nitric acid, etc.

But we are starting to actually get other work in these facilities through some relationships we have been able to develop.

Okay.

And how about internationally?

Is international looking strong?

International is looking very good.

We are pursuing a number of contracts in Latin America.

We have some interesting opportunities in India, some interesting opportunities in China.

We have some agreements that we think are going to bear fruit in a number of countries through a -- I don't want to call it licensing agreement, but sort of a joint sales effort with another company.

That continues to be a bright spot and that we want to make grow obviously.

Okay.

That is it for now and I will come back and ask another question.

Thanks.

(Operator Instructions) Michael Potter, Monarch Capital.

Just a couple questions.

I am trying to back into the EBITDA number.

What was the EBITDA number for the quarter?

EBITDA for the quarter was slightly negative $180,000.

$180,000?

Yes.

Okay.

And where was that versus Q2?

Q2 EBITDA was minus $69,000 so almost breakeven, almost to zero.

And in the first quarter the EBITDA was $1.640 million.

Okay.

I guess along the same path as the last caller, can you give us any greater insight into the current pipeline size and how it breaks down more between US and international?

I would say it breaks down approximately 20% international and 80% domestic.

Which is consistent with the year?

Which is consistent with where our backlog stands.

Okay.

I will get back in queue.

Thanks, guys.

Dale Pfau, Cantor Fitzgerald.

Okay.

There have been a number of new initiatives or at least a fair amount of discussion in the press about some improving or more strenuous environmental regulations that are probably promulgated over the next six months.

Have you had inquiries from your customers' clients about getting ready for these yet or not a lot of activity?

You are going to see them -- there is a -- you know these as well as I do, Dale, because you and I have discussed them I know.

But there is a MACT in cement.

We are talking to customers about them, but here is a very good example.

We have a good customer in the cement industry and they know they have to make some changes.

They have indicated that we are the guys that they are going to make the changes, but they are not going to make them because at their current rate of production they are under the limit.

If they can ever sell enough cement to get back to full production, they have got to spend some money.

It's a very typical example of where things are now.

In the power industry, as you know, we are waiting to know what the rules are and then we can all go out in the field and play the game.

But prior to that we are waiting.

And so that is the general trend out there is everybody is doing not much until they have to or until they are sure?

Exactly.

They are doing it -- jobs are going forward when they must because a customer is out of compliance and must operate, but nothing else is happening.

We know that we are seeing new opportunities.

There are new rules being promulgated that are going to require more monitoring, more control systems, etc., that are all positive for us.

But until, in this country, the demand for the products that these people are making improves we are not going to see them move forward.

Okay.

Normally you have a pretty strong fourth quarter.

Are you expecting that again this year?

Yes.

Okay, that is it for me.

Thanks, guys.

(Operator Instructions) Ladies and gentlemen, this concludes today's question-and-answer session --

May I -- excuse me, ma'am, I am just going to interrupt for one second.

This is Phil DeZwirek.

I just want to add the general summary to what Rick said that the jobs are out there, but to push the button to release the funds is on hold in many instances because of the economy and because we sometimes are at the tail end of a job.

But potential is building substantially.

When new legislation comes into effect the potential ability is more.

What is significant is that while we are in this waiting period the Company financially is very strong and we can withstand a wait if necessary, although we are seeing indications of picking up.

And as Rick said we had a great October, November looks great.

The fourth quarter should be good.

Bookings of October, November will certainly carry through to 2010, so things are getting better.

If they don't get back to where they were a year ago immediately, we have cut our business down to a size where we can maintain profitability and sustainability.

Thank you.

And there being no further questions, this concludes today's question-and-answer session.

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

Philip DeZwirek for any further closing remarks.

I guess I just about made them a little bit prior to your announcement so we have all said what we have to say.

We have heard your questions.

We would have liked to have had a little more participation, but we welcome all of you and continue have our policy if any one individual would want to contact either Rick or myself or Denny the lines are always open.

Thank you.

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

This concludes the presentation and you may now disconnect.

Have a wonderful day.