CECO Environmental Corp (CECO) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

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

My name is Shakwana and I will be your coordinator for today.

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

We will facilitate a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Philip DeZwirek, Chairman of CECO.

Please proceed.

Thank you very much.

I would like to welcome all to the call and introduce to you who is on the call, myself, Philip DeZwirek, our Vice President and COO, Rick Blum, Denny Blazer, our Chief Financial Officer, CFO, and our brand-new exciting to be CEO, Jeff Lang, who will be addressing us all shortly.

But first, I'd like to call on our CFO, Denny Blazer, who will read our Safe Harbor statements, and follow with our financial results.

Thanks, Phil and good morning.

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 law, 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.

Also, during the call, we will discuss non-GAAP financial measures.

These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.

A reconciliation of non-GAAP measures to the nearest GAAP equivalent is provided in today's press release, which can be found on our website at www.CECOEnviro.com under Investor Relations.

Now I'll do a quick review of our financial results.

Despite a very difficult economy we were able to return to operating profitability in the fourth quarter.

Also please note that we have now classified our H.M.

White unit as a discontinued business.

Financial highlights for the fourth quarter are as follows.

Net sales from continuing operations were $36.6 million in 2009, as compared to $53.8 million in 2008.

Gross profit from continuing operations was $7.9 million in 2009 as compared to $15 million in 2008.

Selling and administrative expenses in 2009 decreased by $2.5 million to $7.1 million, as compared to $9.6 million in 2008.

With regard to goodwill, due to the weakening economy and its impact on the performance of our business units, we determined that under current accounting standards it was necessary to reduce the carrying value of goodwill on our books, and as such, we took goodwill impairment charges before tax of $17.1 million, net of tax, $14.3 million in the fourth quarter.

It's very important to understand that a write-down of goodwill is a non-cash charge on our consolidated statement of income, and does not impact our cash flow or our operations.

This accounting treatment in no way reflects our opinion of the value of these businesses, and we are optimistic that as the economy recovers, these business units will return to their previous levels.

Our operating loss from continuing operations on a GAAP basis was $16.5 million in 2009, as compared to operating income of $4.8 million in 2008.

Excluding the goodwill impairment charge, operating income was $0.6 million in 2009, as compared to $4.8 million in 2008.

Net loss was $14.1 million in 2009 as compared to net income of $3.4 million in 2008.

Excluding the goodwill impairment charge, net income was $0.2 million in 2009, as compared to $3.4 million in 2008.

Net loss per diluted share was $0.97 in 2009, as compared to net income of $0.19 in 2008.

Excluding the goodwill impairment charge, earnings per diluted share on a non-GAAP basis was $0.02 in 2009, compared to $0.19 in 2008.

And our backlog from continuing operations as of December 31st, 2009, was $66 million compared to $68 million as of December 31st, 2008.

For the 12 months ended December 31, 2009, net sales from continuing operations were $139 million in 2009, as compared to $183.2 million in 2008.

Gross profit from continuing operations was $30.9 million in 2009 compared to $42.3 million in 2008.

Selling and administrative expenses for the year decreased by $2.7 million to $28.9 million, as compared to $31.6 million in 2008.

Operating loss from continuing operations for the year was $15.8 million in 2009, as compared to operating income of (technical issues) in 2008.

Excluding the goodwill impairment charge, operating income of $1.3 million in 2009 as compared to operating income of $9.2 million in 2008.

Our net loss was $15 million in 2009 as compared to net income of $5 million in 2008.

Excluding the goodwill impairment charge, our net loss was $0.7 million in 2009 as compared to net income of $5 million in 2008.

Net loss per diluted share was $1.06 in 2009 as compared to earnings of $0.30 in 2008.

Excluding the goodwill impairment charge, net loss per diluted share was $0.05 in 2009, compared to $0.30 net earnings in 2008.

Additionally, due to our strong cash flow from operations, we've been able to significantly reduce debt from $27 million at the end of 2008, to $13.5 million at December 31, 2009.

We are also very pleased that we recently completed a private placement of $10.8 million in convertible debt, and this debt is a much lower interest rate, than the subordinated debt that we repaid.

I would also like to add that CECO's operating management team is very pleased to have Jeff on board as our new CEO, and we are very much looking forward to the many exciting growth opportunities that lie ahead, And now I'll turn the call back over to Phil for introduction of Jeff.

Thank you, Denny.

And good morning everyone.

This morning, I am very excited to officially introduce all of our shareholders, analysts and other stakeholders to CECO's new CEO, Jeff Lang.

After an intensive search process led by the Board and with the assistance of international executive search firm, Egon Zehnder, we are thrilled that Jeff has come on board as CEO to lead CECO through its next evolution of growth and value creation.

Jeff Lang has unparalleled experience in the industrial space and we believe is the ideal person to lead our great Company.

Jeff brings more than 30 years of executive operating management to CECO.

Prior to joining us, Jeff served as Executive Vice President of McJunkin Red Man Corporation, a Goldman Sachs Portfolio Company, and the market leader in pipes, valves and fittings with annual sales of approximately $4.5 billion and over 3,000 employees.

Jeff also served as Senior Vice President and the Operating Officer of Red Man Pipe and Supply Company, which merged with McJunkin in 2007, and had revenues in excess of $1.9 billion.

Incidentally, McJunkin Red Man is a Portfolio Company of Goldman Sachs' private investment area.

For the 25 years prior to joining McJunkin Red Man, Jeff began his career at Ingersoll Rand Air Solutions Group and he grew to increasing leadership positions, including director of Ingersoll Rand's Air Solutions North American Sales, Service and Distribution Operations Division.

Jeff led Ingersoll Rand's air solution division to significant growth and operating excellence and above average operating income.

We're all very happy to have such an experienced, dedicated and successful executive as the new CEO of our Company, and I personally could not be more excited to pass the CEO torch to such a fine and talented person.

Now, I will turn the call over to Jeff for a brief Q4 summary and also his forward comments and outlook on CECO.

Jeff?

Thank you very much, Phil, Denny, and good morning everyone.

First, I would like to thank the Board, the management team and all CECO employees for the truly incredible support they have provided me since I joined the Company a month ago.

Before I review some of my forward thoughts, generated over the past month, I briefly want to reiterate some of the key points that Denny just mentioned.

In particular, the fact that CECO returned to profitability in the fourth quarter, and we added about $10 million to our backlog, which now stands at roughly $66 million.

In addition, as a result of our streamlining and cost cutting efforts, our SG&A was $2.5 million lower in this quarter than it was in the fourth quarter of 2008, and was $2.7 million lower for the year.

We will continue to reduce these costs and streamline further in 2010, as well as look at other operational costs.

Our international business continues to be a bright spot, and is an area that I intend to focus considerable sales efforts on expanding.

In 2009, overseas bookings represented almost 18% of our total, and we've had particular success in Latin America.

The two countries that rank first and second in overseas bookings for CECO last year were Colombia and Mexico respectively.

Our China footprint is moving forward solidly, and we're also seeing significant activity in the international FCC refinery markets.

We recently announced that we had secured business in Korea, Mexico, Venezuela and Australia.

Since that press release, we have secured significant new orders in Oman, Jordan, India and China, and we are quoting an ever-increasing number of international projects today.

Power, refining and chemical, both internationally and domestically, still are the most significant portions of our business.

They represent roughly 52% of last year's bookings, and 68% of our current backlog.

In the last three months, those industries still lead the way, especially international.

We're also seeing increased activity in the chemical processing markets and the cement markets.

Now I would like to switch gears and provide some comments and direction on CECO's path forward.

First, I'd like to state that I'm very excited and honored to be at CECO, and that we have an excellent future.

Also, I'd like to reinforce a few important fundamental comments about our Company.

We believe that our business fundamentals, our portfolio of businesses, and the future demand for environmental air pollution products and services are very strong.

In reference to our purpose as a Company which drives our strategic direction, we are focused on making the environment cleaner all over the world by building systems, equipment and services that, one, remove airborne contaminants from industrial facilities, and two, clean the air exhausted from those facilities.

Please note, those global industrial markets are significant and growing.

The CECO brands of portfolio companies and products are excellent, and we believe they are roughly one or two in the markets we serve with excellent experienced management running those businesses and those divisions.

Our future objectives and key execution targets at CECO are as follows.

Number one, we plan to grow our core business portfolios organically, both domestically and globally.

Each business unit will have a strong growth plan.

Number two, we will invest in bolt-on acquisitions globally that are excellent strategic fits and we will not rule out larger acquisitions that are prudent and meet our strict criteria.

Number three, we will continue expanding our China manufacturing and sales footprint.

Number four, we will ensure that CECO is positioned well for the renewable fuels gasification and biomass evolving markets with related products and sales engineering coverage.

Number five, we will reshape our contract and services division while shifting to less cyclical end markets and related CECO portfolio offerings.

And number six, we will be raising the operational excellence bar at CECO to become a Best-in-Class Company and improve our performance.

Here are four concrete examples of operational excellence that we are already focused on and the management team is committed to achieving in the short term.

Number one, completing the integration of our recently acquired businesses and streamlining core functions between headquarters and our many business units.

Our goal is to develop centralization and scale of those core functions.

Number two, continue our SG&A and management streamlining processes and the related organizational productivity.

Number three, further implementing of lean manufacturing and lean operations and project management precision.

Four, gross margin expansion through a host of initiatives that we've discussed.

In the next few years, we expect CECO to become a 10% operating margin Company, a world class business in the markets we serve.

During this journey, we will strengthen the CECO Environmental Corporation brand globally, as well as strengthen the portfolio Company brands.

In closing, Phil and the team have done an excellent job acquiring, building and positioning CECO Environmental Corporation and navigating us through the turbulent end markets of the past couple years.

I look forward to working with all of you and communicating regularly on CECO's growth and progress.

Lastly, given CECO's position and future outlook and our operational plans, I certainly believe that there is significant shareholder value that will be created as we execute on our vision.

If any of you would like to speak with me personally, please do not hesitate to call our Cincinnati office or e-mail me directly.

Thank you very much, and we will now take any questions that you may have.

(Operator Instructions).

Your first question comes from the line of Ted Kundtz with Needham.

Please proceed.

Good morning, everyone.

And Jeff, welcome to CECO.

Thank you, Ted.

I look forward to working with you guys.

I as well.

The rest of them I have worked with a long time and look forward to working with you.

Just a couple of questions for you or for the team.

Could you talk a little bit more about the current order trends you're seeing?

It looked like the quarter had bookings of, if my calculations are right, about $46.5 million for a book-to-bill of 1.27.

Denny, I don't know if those are the correct numbers, but that's kind of where it came out with, with where your backlog's increased sequentially.

I just wondered if you could comment on that, and currently are you continuing to see positive book-to-bill trends?

Would you expect this quarter to be greater than 1?

I know it's a lumpy business, but I'm just trying to get a sense of what the current environment looks like in terms of order activity.

Good question, Ted.

Go ahead, Denny.

For one thing, we really don't want to make any forward-looking comments about bookings in the quarter.

You are correct about the fourth-quarter book-to-bill ratio, it pretty much was slightly in excess of 1.

As you know, typically our first quarter is our slower quarter.

There's some seasonality to our business, and first quarter is typically not representative of how the year's going to turn out.

Okay.

So the current bidding activity, could you give a little more color around that?

This is Rick, Ted, how are you?

Hi, Rick.

Good.

Good.

Current bidding activity is pretty good.

There's more overseas than there is in the US.

The US economy is still difficult, but we're seeing an increasing level of activity, let me put it that way.

Yes, just to add a little more color to that, Ted.

Our fuel FCC business is significant quotation activity in some of the mega international refinery business activity.

China activity is picking up for our FKI quotation activity.

And again in our FKI business here domestically they are quoting many projects outside the US, and they're also seeing an influx of activity in the early stages of specs for gasification projects.

Would you expect mix then to be more -- you mentioned about 18% of total I think business was overseas last year.

What would you expect that to be this year?

Where do you see that mix going?

I would say directionally that is correct but I can't give you a hard number right now.

Okay.

But it would certainly be an increasing percentage, you would expect that to be happening as you mentioned.

We do.

International business is stronger.

Denny, for you, you look like you restated sales here for the year and for last year as well.

It looks like the restatement for this year is about $5 million and for last year it looked like it was about $34 million lower.

I assume that ties in with the discontinued operations.

Is that all related to H.M.

White?

Yes, absolutely.

We have dissolved our relationship with H.M.

White in Detroit, and that's effectively the results of reclassifying the discontinued operation at this point.

Okay.

So that business accounted for $34 million last year and only $5 million this year; is that correct?

Yes, yes.

It was winding down significantly.

They were seriously impacted by the economy and the economy's impact on some of their primary customers, which as you know, were mostly the auto industry.

Okay.

And it just -- was the business not worth keeping on, keeping a hold of?

And that was a goodwill charge, correct?

Is that all associated --

No, no, there was no goodwill related to H.M.

White.

H.M.

White was -- that was not an acquired Company.

That was more of a joint venture merger.

We actually leased their facility and hired their employees.

There was never any goodwill on the books related to that.

The goodwill was written down relating to what?

Actually the goodwill was written down related to several pieces.

The hardest hit piece was our contracting business.

We took a significant hit there.

We actually reduced goodwill in several of the other entities, not completely written off, but we reduced them each accordingly to the net present value of the cash forecast.

And the problem you have with this, and again, it's just an accounting treatment, but the impact of 2009 and the economy on our results really affects our ability to forecast forward and show a forecast that can generate a net present value that can justify those pre-2009 numbers.

And like I said, we've not lost any confidence in the ability of these businesses to perform.

It's just strictly an accounting treatment and it's a non-cash charge.

Okay.

Another question, just on gross margins.

They came in at 21.4%.

A little below my numbers, but pretty much in line.

And Jeff, you mentioned you obviously have goals to raise those.

Do you have any target gross margins in mind that you could share?

Ted, I can't give you a specific number but I will say we've talked a lot about things that drive gross margin, the sales engineering training to create consultative solutions and solve problems for customers, some price management actions across the business, and again, improving productivity and lowering our operational costs.

So there's a host of things that we've talked about to drive gross margin and our aspirations are to improve it.

Are you seeing any differential in gross margins with the international business than you are here?

With a couple of the businesses, they're relatively the same and maybe in a couple of the businesses they might be slightly down.

But I think as we ramp up our China footprint, which is doing solidly, we should be able to maintain equal or improve our gross margins.

Okay.

And Denny, just last one for you, then I'll jump off.

Just on the cash flow, there's not much balance sheet information.

I don't think there's any in the release.

Could you give us a little color on what the cash flow, the operating cash flow was for the quarter and maybe a few of the balance sheet numbers?

Well, I can tell you that operating cash flow was very strong in the quarter.

As you noticed in my comments, we paid down a significant amount of debt, and we did a refinancing to lower the cost of our existing subordinated debt, and replaced it with lower interest convertible debt.

So I can say that cash flow has been very strong from operations.

I can't give you a number because it's not a published number yet, but cash flow's been very strong.

Okay.

And how about the current debt?

Where did that stand at year end?

We basically paid our credit line down to zero.

So essentially we have a little piece of term debt.

We have $10.8 million of subordinated debt.

And that's basically it.

Okay.

So we've got a good bit of availability on our credit line now.

Okay.

Great.

When's the K out?

When is the what?

When will you file the 10-K?

Probably later next week.

Okay.

We're a smaller business unit now so we don't need to file until March 31st.

We're no longer an accelerated filer, we're what's called a smaller reporting Company so our actual deadline is March 31st.

But we would like to get it filed hopefully by the end of next week.

Great, thank you.

Thank you, Ted.

Your next question comes from the line of Dale Pfau representing Cantor.

Please proceed.

Good morning, gentlemen.

Welcome aboard, Jeff.

Thank you.

Good morning, Dale.

A couple of housekeeping questions first.

Denny, could you give me the portion of revenues that were international in the fourth quarter and the portion of bookings that were international?

I believe the bookings were 18% and I know that our annual revenue percentage was around 12.

Okay.

And how about revenues?

That's the foreign revenue percentage.

Or that's foreign revenue.

Okay.

How about bookings?

Bookings was about 18%, I believe.

In the fourth quarter or for the full year?

For the full year.

International bookings were 18% for the full year and international revenues for the full year were 12%?

Yes, that's right.

Okay.

Do you have that for the quarter?

No, I don't.

We don't track that on a quarterly basis.

Okay.

Could you give us the revenue breakout in the fourth quarter for your components, your equipment and your system revenues?

Well, typically, since that's not in the press release, I think we probably shouldn't disclose that at this point.

That will be heavily disclosed in the MD&A in the 10-K next week.

Okay.

Could you give us any kind of indication?

Were you --

Let me say it this way.

There's been a significant shift of business to our equipment group, which is our higher margin group.

As you know, our Contracting Group's been the most severely impacted by the economy, so the equipment group is now more than 50% of our total revenues, and the Contracting Group is a smaller piece.

Okay.

And how about the trends there?

Have components picked up recently or not?

What was the -- components?

Component parts is --

The parts business is picking up, Dale, yes.

That's what you're referring to?

Yes.

In the past sometimes that's been a little bit of a leading indicator as the components business picks up, that helps.

You are correct.

Yes, we met with our President of that division yesterday and they had a solid year, a decent year in 2009 and their expectations for 2010 are good, with growth over 2009.

Okay.

And looking into 2010, Jeff, would you hazard any kind of statement on whether you could see modest growth, strong growth, when you look at the overall business?

Well, certainly our hope is for significant growth.

I think Q1 bookings will probably reflect a little bit of the Q4 nature, but our hope is for a solid growth year-over-year, Dale, and that's our aspiration and we've regeared our business plans accordingly.

But I think that will probably kick in as the year progresses.

And from an international standpoint, 12% of revenues for 2009, would you hazard a guess on what you think it will be for 2010?

We talked a little bit with Ted on that a moment ago.

I can't give you a hard number today.

I could probably follow up with you on that later in the week, but it should be better than 2009.

It will go up and I probably see that over the next couple years.

Okay.

Thanks very much, gentlemen.

Thank you very much.

(Operator Instructions).

Your next question comes from the line of Larry, representing Oppenheimer.

Please proceed.

Hi, guys.

Congratulations, Jeff, and everybody there.

Couple of general questions, Jeff.

What changes have you made or are planning to make in the coming months to kind of -- not turn the ship but improve on what you see so far?

And I guess, what have you seen in the first few weeks on the job that made you feel good about CECO going forward?

Well, I think the fundamentals of the Company are strong.

I think the people are well trained with great experience and continually looking for ways to improve and that we are gearing for more international activity.

Your first question regarding improving performance, I would reemphasize my earlier comments about our focus and drive on revenue growth across all the business units, one.

Two, we believe we can improve gross margin opportunities.

And then thirdly, we believe we can improve operational excellence and streamlining and at the end of the day, improve our total operational costs.

So those are a few things, to answer your first question.

Regarding the past 30 days, the team and I have evaluated our business units, the operating performance and the management team that run those businesses, and we're very optimistic about those businesses.

Secondarily, we're taking a deeper look into the markets and one of the learnings is there's significant activity internationally and we've made nice progress to position us there, but there's room for market coverage improvement to take advantage of those opportunities and that's what the team is focused on.

And also, we've looked at our operational excellence standards, and we think there's room for improvement there from a benchmarking and a goal setting.

And then lastly, we want to make sure we're positioned -- our footprint and our sales engineering market coverage is positioned well for the global growth.

So I hope that covers your questions.

Okay.

Yes, a little bit.

A lot of it.

Profit margins have been an issue in the past.

Will those initiatives or things you're working on improve that or are there specific -- more specific things that will address profit margins going forward?

And I think you mentioned you're planning to get to 10% profit margins in a few years.

How do we get there?

That sounds nice.

Well, there's a couple pieces to your question.

We anticipate, as we progress through the year, that our gross margins will improve.

I can't give you a hard number right now, but that's our expectation with the initiatives we're working on.

Is that mostly from cost cutting or -- ?

It's a combination of both, how we approach projects, price management, how we're providing solutions to our customers.

Further streamlining, and there are room -- there is room for operational cost out.

Probably not as dramatically as we delivered in 2009, but certainly more room.

Regarding your other comment, becoming a 10% operating margin business, we believe we can with the industrial -- with our industrial position and the initiatives we're working on, we think over the next few years, we can achieve that.

And at the same time, we will be making significant investment in our global footprint and sales coverage.

Okay.

That sounds good.

Just finally, not every, but it seems like often or more often than we want there's one-time charges that pop up.

How can that or will that be addressed so that one-time charges don't seem to become regular charges?

It's difficult to manage those, for example, the impairment charge that we took in the quarter is -- it's an accounting transaction.

It's required by current accounting rules and regulations.

It was driven by the economy.

I would anticipate as we move forward that you'll see much less of those things.

I assume some of the other things you're referring to are in some cases when you have convertible debt you have marked to the market issues and there are a lot of complicated derivative calculations that sometimes come into play.

But again, as I move forward, I would anticipate you'll see less and less of that, but that's just my guess, just my opinion.

That will be helpful.

Okay.

Thanks.

Good luck.

Thank you.

At this time, there are no further audio questions.

We'll give you guys another -- this is Phil DeZwirek.

Give you another 30 seconds or so if anybody has any questions for anybody on the panel, otherwise, we'll sign off.

(Operator Instructions).

All right.

If there's no further questions, I'd like to thank you all for attending the call.

I hope you appreciate the tone in the message with Jeff's plans for the future, with the assistance of all of the group.

So thank you again, and have a good day.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.