CECO Environmental Corp (CECO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 CECO Environmental Earnings Conference Call.

On the call today are Benton Cook, Interim CFO; Philip DeZwirek, Chairman; and Jeff Lang, CEO.

At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Benton Cook, Interim CFO.

Please proceed.

Good morning, everyone.

Also joining us on the call this morning will be our Chairman, Phil DeZwirek, and our CEO, Jeff Lang.

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 10-K for the year ended December 31, 2010.

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.

Before I turn the call over to Jeff, I want to make a few brief comments on the quarterly results.

As you can see from our earnings release, our results, both on a quarter-to-quarter and year over year basis, continue to the favorable.

Gross margins, operating margins, and net income are all up significantly.

We've had another very good quarter and 12 months results.

Now, a brief review of a few key results for the quarter and 12 months.

For the fourth quarter of 2011, net sales were $37.8 million, compared to $36.9 million in the comparable quarter.

Gross margin increased to 29.9% from 23%.

Operating margin increased to 10.1% from 3.9%.

Net income was $2.7 million, compared to net income of $0.7 million.

Net income per diluted share was $0.17, compared to $0.05.

Bookings were $37.4 million, compared to $34,9 million.

Cash and cash equivalents increased to $12.7 million, with no bank debt.

Backlog as of December 31, 2011, was $54.9 million, compared to $55.3 million as of the quarter ended September 30, 2011.

Financial highlights for the 12 months ended December 31, 2011, compared to the 12 months ended December 31, 2010, include net sales of $139.2 million, compared to $140.6 million for the comparable period.

Gross margin increased to 27.4%, from 23.2%.

Operating margin increased to 8.9% from 3.6%.

Net income was $8.3 million, compared to net income of $2.1 million.

Net income per diluted share was $0.51, compared to $0.15.

Year-to-date bookings increased by 9% to $139.8 million, compared to $128.5 million in 2010.

Now, I'd like to turn the call over to our CEO, Jeff Lang.

Thank you, Benton.

Good morning everyone, and thank you for joining our call today.

As you can see from our press release, CECO had another good quarter and good year.

Our business continues to improve, and we fully achieved our internal operating income gross profit, and net income goals for the year.

The team is executing on our global sales and operating strategies.

Thank you to our Management team and CECO employees who provided the focus and daily efforts to position CECO to win.

In context of the full year 2011, here are some comments.

Of particular importance, full year bookings were up 9%, gross profit year over year has improved 4 full points, 400 basis points, achieving 27.4% gross profit.

Operating costs have continued trending downward, roughly $2.2 million, and operating income grew substantially to $12.4 million, which equates to roughly 9% operating margin.

It is also important to note our numerous product mix strategy changes over the past two years have delivered favorable operating income results.

We've shown some solid revenue growth, given the product mix changes.

Bookings grew $11 million in 2011, while we subtracted $14 million in legacy product revenues from 2010.

We're pleased with our 2011 performance, and more importantly, we're excited about our 2012 position, opportunities, and outlook.

We continue to make substantial progress as we diversify and expand CECO's technology and our global in market served -- refining, mining, utility plants, natural gas, petrochemical, steel, automotive, and the largest industrial plants in the world are key end markets for us.

Solid progress has been made in diversifying our markets served globally.

China's overall air pollution control activity is solid.

China is seeing expansion in these markets.

The China Ministry has stated and has enacted significant air pollution control standards, driving favorable demand in many of those segments.

We continue to expand our China operations and add core CECO products, as well as new sales engineering capacity into the China APC markets.

Please note 2012 will be CECO's seventh full year in the China markets, and we're committed to those organic and inorganic growth opportunities.

Our global refinery Cyclone activity is solid, coming off an excellent year.

In addition, other markets are gaining momentum, such as petrochemical, large-food processing, mining, and automotive.

Power plant activity is seeing an increase as of Q4 of 2011.

North American activity over the past two years has improved slowly and steadily, and our global business is strong.

Our component parts business, re-occurring revenue, and after-market business is trending favorably.

Our contracting services business continues its successful portfolio transformation into more of a design, build, end-user projects, at higher gross margins.

In general, our product mix shift last year has been favorable, and is a key under-pinning for our improved operating results.

We expect solid bookings to continue in 2012, price management focus and improvement, along with some operating leverage.

Our sales engineers today continue to pursue attractive opportunities that enhance gross margins while creating end-user value.

Product differentiation, technology, and competitive advantage drive our end-market solutions and strategies.

Q4 showed continued and significant improvement in operating and net income.

We are committed to our improvement journey.

We remain focused on executing each of our core strategic areas that we launched in early 2010, when I joined the Company.

For example, number one, profitable growth domestic and globally, organic and inorganically, and enhancing CECO's excellent technology and brands and overall competitive advantage.

Number two, our global market coverage.

CECO is showing solid progress, and we anticipate continued growth from China in 2012 and into the future.

CECO China is positioned very well today for growth, and we continue investing in sales engineers and resources globally, as we believe these investments will generate above-average returns for our shareholders.

Number three, operational excellence.

Price management, project management precision, and margin expansion continues to drive our strategies.

We have streamlined operations and we are balancing internal manufacturing with external subcontracted manufacturing to create a leaner model.

We are managing material inflation on projects very well.

Gross profit for full-year 2011, as I said, was up 4 full points.

Equally important, our backlog gross margin is up from previous levels.

Number four, acquisitions.

We continually search for smart, accretive, strategic bolt-on acquisitions in our global APC sector.

We have an excellent team and a proactive Board evaluating all strategic M&A opportunities.

Five, developing our talent.

CECO is investing in a two-year general management and business growth development program.

Our objective is to ensure we have relevant proactive global business leadership capability at CECO to take us to new heights, along with general management sustainability.

We're also focused on our CFO search, and continue to work with the Board on this important process.

The CECO financial and accounting team is doing an excellent job.

We continue to expand globally.

CECO China delivered $2.5 million of CECO's $12.4 million operating income in 2011.

We are pleased with our trajectory and Outlook in China.

Also, we are focused on after-market parts, re-occurring revenue, and service growth in all aspects of CECO's portfolio.

The CECO installed base of engineered equipment is quite large, over $2 billion today.

Currently, 25% of our total business is re-occurring parts and service, and we are striving over the next few years to reach 40% in that area.

This re-occurring revenue strategy will help make us less reliant on end-market cyclicality as it relates to our global engineered equipment business.

I'd like to mention some large CECO orders to highlight the incoming bookings.

We received a $1.2-million Cyclone order from a refinery in the USA.

We received a $400,000 Cyclone order from a petrochemical plant in Korea.

We received a $1.9-million engineered ventilating system order from a large automobile plant in the USA.

We received a $675,000 scrubber order for a mining application in China.

We received a $650,000 damper and diverter order for a power plant in Malaysia.

We received another $3.8-million damper and diverter order for a power plant in the USA, another $2.2-million Cyclone order for a refinery in the USA, a $400,000 scrubber for a chemical plant in China, another $580,000 Cyclone order for a petrochemical plant in China, and several large aluminum orders with engineered ventilation systems in the USA.

Those are just a flavor of some of the bookings we are receiving in the last four or five months.

We're very excited these large customers have placed their confidence in CECO for our reliability, technology, and strong performance.

We're very pleased with CECO's increased participation in the growing global air pollution control markets.

Our mid-term aspirations are to reach 40% global revenues and 60% domestic revenues to strategically balance CECO's global portfolio, and our long-term aspiration would be 50/50.

Sales quotation activity, domestically and globally, continues to improve slowly and surely to fill up our backlog pipeline with good gross margin business.

We are focused on building quality backlog with higher gross margins as a core initiative as we move forward.

As Benton said, operating income grew to $12.4 million, from $5 million in 2010.

Globalization, operational excellence, product mix, price management, and streamlining contributed to this 148% performance improvement for the year.

Full-year 2011 EPS was $0.51, versus $0.15 in the comparable period 2010, showing excellent improvement and validating that the CECO team is executing on our strategies we began two years ago.

Full-year bookings were up 9%.

Note this improvement is favorable, as we exited 10% of CECO's product portfolio in 2010, due to low-margin customer segment that did not meet our new criteria.

We have zero bank debt.

Cash on hand, $12.7 million versus $5.8 million in 2010, and our $20 million revolver with Fifth Third Bank of Cincinnati.

We also initiated our first-ever cash dividend to shareholders of $0.025 per share per quarter for Q3 and Q4 last year, and also commenced a share buy-back program that we believe will provide our shareholders with the value-enhancing use of our cash.

We purchased 91,000 shares of CECO stock as part of our aspiration to buy back 500,000 shares.

We're also studying M&A opportunities frequently from a capital-allocation perspective.

Global sales, streamlining, manufacturing costs, and operational excellence goals have been put in place, with good progress being made.

I'd like to touch on a few financial 2011 highlights.

Q4 operating income was 10%, versus 3.9% the year before.

Q4 net income was $2.7 million versus $700,000 the year before.

Revenues were $37.8 million in the quarter, versus $36.9 the previous quarter.

Very solid Q4 performance versus Q4 2010.

2010 full-year revenues were $130 million, versus $140 million in the previous year.

Solid growth, considering we exited 10% of our portfolio the previous year.

Full-year gross margin, we reached 27.4%, versus 23.2% the previous year.

Solid improvement.

Full-year operating income was $12.4 million versus $5 million the year before, an increase of 148%, and OI as a percent of sales was 9% for the year, versus 3.6% the previous year.

SG&A was 18.2% last year, versus 19.6% the previous year, a $2.2 million reduction.

We have a strong balance sheet, with $12.7 million in cash, no bank debt, and we mentioned before our $20-million bank facility available -- has positioned us ideally for value-enhancing accretive M&A opportunities and other business development opportunities should they arise.

Full-year EBITDA was in the $15 million range for CECO last year.

In summary, we are executing on our stated objectives that we have communicated over the past couple of years.

Our aspirations are to become the global leader within the air pollution control technology sector, and to continue delivering significant operating income and net income into the future.

CECO's positioned well for the global air pollution growth and domestic activity, as well as for excellent operating leverage.

As we move into 2012, we're continuing our focus on growing our bookings year over year with above- average margins, expanding globally, and building our re-occurring revenue base, and enhancing the excellent CECO brands and their associated technology.

Finally, and very importantly, CECO operations had our safest year ever, with total recordable incident rates at an all-time low.

Special thanks to our committed employees for working safer and smarter, while boosting productivity in our various facilities around the world.

Now, let's please open up for questions.

(Operator Instructions) Michael Lew, Needham.

Jeff, as you continue to prune the portfolio and execute on the product strategy mix, what kind of timeframe were you looking at before you consider this exercise completed?

I think we're in pretty good shape, Michael.

We're pretty much there.

I think we're in great shape.

I think the products we have in place are doing well, and I think the outlook is favorable.

I think most of that is behind us.

Our objective this year is to continue growing the top line with good quality bookings.

Okay.

You mentioned margin expansion, just mentioned you do expect top-line growth, continued top-line growth for '12.

What kind of growth trajectory should we be looking for?

Can you give us a sense of that?

Well, you know we don't provide specific guidance, but I think over the past two years we've always stated we'd like to grow -- our aspirations are we'd like to grow 10% to 15%.

That would be inclusive of organic growth and inorganic growth opportunities.

Those are our internal aspirations.

Okay.

Also, you mentioned improving quotation activity.

Can you discuss the pipeline -- how large is it, and what do you think you can book in the near term?

Also, characterize it by geography and large-deal opportunity?

We study that quite a bit, and we have a dashboard, and we have a pipeline that we publish every week.

I would say over the past two years, quarter over quarter, our quotation activity has increased 5% to 10% each quarter.

The quotation activity is very strong.

As I stated in my prepared remarks, Mike, we are doing quite well with quotation activity in the US.

I think every quarter the US gets stronger, slowly but suredly.

That's a good indicator.

China continues to grow at a faster pace.

Our quotation activity in China is probably growing at a higher pace than the USA, and I can say that for India and Brazil as well.

Now, are the deals on average getting larger?

Actually, I think for our engineered equipment business, it's probably the same.

For our contract services business, I would say the deals are probably getting a little bit smaller, probably small to mid-size, but they carry much more gross margin with them.

Our parts and component parts and re-occurring revenue after-market business probably is about the same size on an order-by-order basis as it has been in the past year.

How large was China as a percentage of revenues for this quarter?

The discrete variable we've been given is China represents about 20% of our operating income, and our aspirations are to get that into the 25% or 30% range, for obvious reasons.

What kind of tax rate should we be using for the year?

For your model, I would suspect 2012 would be in the 34% to 36% range, very normalizing.

What was head count at the end of the year?

Probably in the 500 range.

500 range?

Okay, great.

Well, thank you.

Thank you.

Will Dale Pfau, Cantor Fitzgerald

Good morning, gentlemen.

Congratulations on a good quarter and a good year.

Thank you very much, Dale.

What you think margins can go over the course of the next year?

Well, we're very keen on everything it takes to improve margin.

Expanding margin is something everybody is doing within CECO.

In 2009 we were in the 22 % range, and then we jumped up to 23.5%.

Then last year it was 27.5%.

We feel that's a solid place to be right now.

However, our aspirations are to grow gross margin 100 basis points to 150 basis points each year.

Internally, we'd like to get to the 30% gross profit margin in the next couple few years.

That's what we're striving for, Dale.

Okay.

Your gross margin enhancement over the last year -- how much of it has just been because you're quoting better gross margin, better products, and how much is actually utilization?

I think there's probably four or five elements that go into why our gross margin improved.

I think we're quoting smarter, we're recognizing that great technology that CECO brings, and we're pricing it optimally.

I think we're performing -- we're delivering projects with greater precision that's improving the gross margin once we bring in a job.

I think the product mix has had the biggest impact on our business.

We know where our core profit zone is for each division, and we're focusing on that.

I don't think it's one thing, Dale, I think it's a host of five or six things that's driving the gross profit.

Great.

We talk about your order pipeline in the US in particular?

In the past, we've seen it as almost a direct correlation to GDP.

Are you actually seeing an improvement in the business outlook, or are these replacements by your customers as they've seen improvement in business, or is it just market share gains?

I think we're picking up some market share gain versus our peers, but at the same time I do think each quarter the US is getting stronger, with plant expansions, with upgrades, with regulatory applications taking root, and a lot of the above.

I don't think it's a one thing.

I do think the US economy is picking up slowly and suredly, and I think it's stronger today than it was two years ago.

Okay, great.

Thank you very much, gentlemen.

Thanks, Dell.

James Fronda, Sidoti and Company.

Good morning.

One question I had was in terms of the revenue.

Basically, what you think it's going to take to get better revenue growth -- I guess what your main strategy is?

Well, we focus on that quite a bit.

We've trained our sales engineers to be more productive, we've added more sales engineers domestically, and in China, and in India, and in Brazil.

Those are the CECO sales engineers.

We've also added and upgraded our CECO rep agents, distribution channel, if you will, around the world.

Our division managers and general managers are very focused on achieving top-line growth while we keep boosting operating margins.

It's a collective goal we have, and that's our strategy.

Okay.

I know you said you were looking to hire more sales engineers.

Do you think, do you anticipate significant higher costs from this in 2012?

We've added sales engineers in Q4 in China.

We've added some in the last several months in the USA, and we've added a couple in India.

We recognize you have to invest in high-quality sales engineers around the world to grow.

Okay.

That's part of our strategy.

Do you anticipate significant hiring going forward?

Potentially, some.

Okay.

A think we did a lot of that in the last three or four months, James.

All right, okay.

All right, thanks, I appreciate it.

Take care, James.

Lou Mosher, Mayfax Investors.

I was looking just at your backlog for December 31 versus the September backlog.

I know you read off a bunch of contracts -- not sure when those were signed -- but can you give me just a general idea as of let's say, around today's date if you've gone ahead of the comparable backlog previously?

You are asking our backlog today versus a year ago?

Well, yes.

Yes, we're pretty close to that $55 million backlog.

I think we've seen -- we're around that $55 million today and that's roughly where we were a year ago, so we're holding pretty good, given the fact that we did a lot of pruning and discontinuing of some products.

I would say our gross margin attached to our backlog continues to improve.

Okay.

That's it, thanks.

Yes, thank you.

Sam Bergman, Bayberry Asset Management.

Good morning, Jeff.

Congratulations on a very good year.

Thank you, Sam.

A couple questions.

Can you tell us which countries have mandatory regulations that are kicking in, in 2012, that could help the business going forward?

China and the US.

And, what areas in the United States and what particular industries is it kicking in, in the United States?

We're seeing signs of the utility boiler mech in the USA that's currently in play.

The [Cass-Parr] and the clean air ruling is probably going to be enacted here in 2012.

I think the Cass-Parr was already set in motion, but there was some final stays and some evaluation, but we think 2012, the Cass-Parr and the clean-air ruling will take -- will be enacted.

The utility boiler mech is in play today, and we also think the industrial boiler mech will have an up-tick in our business in the USA in 2012 and 2013.

Can you give us, perhaps quarter-to-quarter, third-quarter, fourth-quarter comparisons in terms of largest contracts that you're bidding on versus last year?

Do you have those figures?

I think they're pretty similar.

I think they're pretty similar in terms of the quotation contract, quote log.

I think there's a lot of similarity in the size of the quote by and large, but I do think the quotation activity in listening to our division sales managers and our business development people, I think our quotation activity is growing sequentially, and that's a good sign.

I think the dollar values are probably similar.

Do you have any idea, or can you guesstimate what these new regulations could mean for the top line in 2012?

Any idea?

Well I will speak for the Effox-Flextor division of CECO.

That's a $30 million, $35 million division, and it's tied to the US coal-fired power plants.

Their bookings in Q4, and their quotation activity in Q4 started a ramp.

They're showing some nice bookings growth and some nice quotation activity growth, and I think that's tied to the utility boiler mech that was enacted and the potential Cass-Parr regulatory things that are coming down the pike.

The big players within that arena are looking around the corner and they're already gearing up for that.

I think our Effox-Flextor division will probably have a very good year in 2012 as a result of that in the USA.

In terms of adding resources, you mentioned China.

Any other emerging countries that you're adding the type of resources that would grow those international revenues in 2012?

India, Sam.

We've added two sales engineers in India in the past three or four months.

We are gearing up in India.

We have formed a partnership with a very large and long-standing industrial firm in India called Empire.

They have five sales offices and perhaps 12 or 15 sales engineers around the country helping us sell the CECO portfolio.

India would be the answer to that, but China would be our number one emerging market for CECO, and India would be number two.

The last question, what would come first, increasing the dividend or doing a tuck-in acquisition, or both at the same time?

The Board meets on that frequently.

They are very keen on capital allocation.

We have re-purchased 91,000 shares of CECO stock thus far in 2011.

We continue to do opportunistic share buy-back in conjunction with our opportunity to buy 500,000 shares.

We will communicate our dividend policy in the next few days for Q1.

The essence to your question is, we like to have cash on hand to move forward on smart, accretive acquisitions that the Board is focused on.

From a capital allocation, M&A, dividend, and stock re-purchase, will be focused on in 2012.

Again, thank you, Phil and -- I mean, Jeff -- and say hi to Phil for me.

Thank you.

I'll do it.

Take care, Sam.

(Operator Instructions) Larry Schumacher, Morgan Stanley.

Hi, guys.

Great quarter, good year too, actually.

Thank you, Larry.

Just a question about the SG&A in the fourth quarter was up as a percentage of sales.

Could you just give some color on that?

Yes, sure.

Q4 probably was, we had to do some true-up for the year.

From a larger context, our SG&A shrunk $2.2 million for the year versus 2010.

We got into that 18% SG&A as a percent of sales.

That's a pretty good number, but I think the answer was, Q4 we had to do some full-year true-ups, but I do think our SG&A run rate and our 18% is sustainable into 2012.

So, that's going to go away, so we could expect some more profit-margin expansion?

No, I think our SG&A rate going into the first half of the year will probably be similar to that of 2011, on average.

I do think that 18% SG&A as a percent of sales is a good number for 2012 for modeling purposes, and that's what we're focused on to try and stay within that 18% for 2012.

Okay, great.

Thank you, Lou.

Keep it up -- Larry.

We will.

Thank you.

This concludes the question-and-answer portion for today.

I would now like to turn the call back to Jeff Lang, CEO, for closing remarks.

Thank you very much for joining our call today.

We look forward to talking with you in the future.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.