CECO Environmental Corp (CECO) 2012 Q4 法說會逐字稿

A very good day to you, ladies and gentlemen, and welcome to the Q4 2012 CECO Environmental earnings conference call hosted by Benton Cook, interim Chief Financial Officer.

My name is Gary; I am your event coordinator today.

Throughout the presentation, your lines will be on listen only.

(Operator Instructions).

The conference is being recorded for audio replay purposes.

I would like to hand over to Benton to begin.

Over to you.

Thank you.

Good morning, everyone.

Thank you for joining us this morning.

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, 2011.

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 and annual results.

For the fourth quarter of 2012, net sales were $34.3 million as compared to $37.8 million in the same period of 2011.

This year-over-year decrease was related to timing on projects, the process and schedule for project completion with conversion to revenue in the period.

Gross profit was relatively unchanged at $11.2 million compared to $11.3 million.

Gross margin increased to 32.7% compared to 29.9% for the same quarter in 2011.

Operating income increased $4.4 million in 2012 as compared to $3.8 million in 2011, a 15.8% improvement.

Operating margin increased to 12.8% from 10.1%.

Net income was $3.1 million compared to net income of $2.7 million, a 14.8% improvement.

Net income per diluted share was $0.18 compared to $0.17.

Backlog as of December 31, 2012 was $59.5 million compared to $54.9 million as of December 31, 2011.

Bookings in the fourth quarter were $26.3 million compared to $37.4 million in 2011.

Additionally, projects that were in the quotation and award process were delayed from closing in Q4 2012.

CECO has been seeing an increase in booking trends in Q1 of 2013.

Cash and cash equivalents were $23 million as of December 31, 2012 compared to $12.7 million as of December 31, 2011 and we are continuing with no bank debt on our balance sheet as of December 31, 2012.

(inaudible) for Q4, on December 31, 2012, CECO completed the acquisition of Adwest Technologies, Inc., a leader in the design and manufacture of regenerative thermal oxidizers.

Adwest generated approximately $12 million in revenue in 2012 and their entire management team will continue in their roles with CECO.

Financial highlights for the year ended December 31, 2012 compared to the year ended December 31, 2011 include net sales decreased by 2.9% to $35.1 million (sic -- see press release "135.1 million") as compared to $39.2 million (sic -- see press release "139.2 million").

Gross profit increased by 11% to $42.4 million compared to $38.2 million in 2011.

Gross margin increased to 31.4% from 27.4%, approximately 4 basis points.

Operating income increased to $16.7 million in 2012 as compared to $12.4 million in 2011, a 34.7% improvement.

Operating margin increased to 12.4% from 8.9%.

Net income was $[8.9] million (sic -- see press release "10.9 million") compared to net income of $8.3 million.

Net income per diluted shares was $0.65 compared to $0.51 and year-to-date bookings were flat at around $[39.7] million compared to $[39.8] million in 2011.

One further note, subsequent to 2012's year end, on March 4, 2013, CECO announced the acquisition of Aarding Thermal Acoustics B.V., one of the world leaders in natural gas turbine exhaust systems and silencer applications.

Headquartered in the Netherlands, they have a significant global sales footprint.

Aarding generated revenues of approximately $34 million in 2012.

Aarding's excellent management team will continue in their leadership roles and will lead CECO's expanding global natural gas business.

And now I'll turn the call over to our CEO, Jeff Lang.

Thank you, Benton.

Good morning, everybody.

Thank you for participating in the CECO Q4 and full-year 2012 earnings call today.

We appreciate your continuing interest in CECO Environmental Corporation.

As you can see, CECO had another good quarter and an excellent full year of profitability for our shareholders and employees.

Our core organic business is very strong coupled with the two recent strategic acquisitions.

We are now moving into the $190 million to $200 million revenue range, which is pretty exciting for us.

We are pleased with our position and growth is a priority.

2012, we continued to focus on our core strategies of profitable growth, operational excellence, [delivering] a high recurring revenue model, acquisitions, global growth and margin expansion and the CECO team we believe is heading in the right direction and are very motivated to continue growing and improving our business for our shareholders.

Some comments about last year, we booked $139 million last year similar to that number in 2011 but at the same time grew our profitability significantly.

We see our current quotation activity very strong and we also see Q1 coming in favorably with intake of orders and so we are pretty excited about this year.

We are anticipating a solid organic growth year coupled with the two acquisitions to drive continued earnings for our shareholders.

Last year, we hit $0.65 of EPS compared to $0.51 the previous year.

That's a 27% year-over-year increase of or earnings growth and the team's aspirations are to continue growing that this year.

Now I would like to comment on some of the businesses in 2012.

Our parts business grew very well last year and they had a record year in revenue and operating margins and we see that continuing.

This is one of our core reoccurring revenue businesses that targets large general industries domestically.

Our traditional utility business, Effox, had a record year in growth and margin expansion and their activity at this point in time is very strong.

Thirdly, we continue to make very good progress in our global natural gas utility segment.

Now that the Aarding and Flextor Group is in place, we are optimally positioned for the exciting gas turbine growth going on around the world today and over the next couple of decades.

I am sure you read the March 4 press release regarding Aarding and their wonderful technology and their position in the global natural gas sector.

Fourthly, our contract services group last year had new highs in profitability and we are finished with the contract services group transformation into becoming a high reoccurring revenue model at high margins so we are pretty excited about the contract services business going into this year in the future.

Our FKI cycle and technology business had a really solid year.

Domestically, they have a very good year.

In Asia, they had a pretty solid year as well.

Our refinery technology group, Buell, that services the global refinery market saw a little bit of a downturn in 2012 so we are working diligently to show additional growth in our refinery business, our refinery cyclone business in 2013.

Our China business is strong.

We had year-over-year bookings increase and we continue investing in sales talent and introducing new products into the China market for CECO.

We are starting our eighth full year in China, it has been all organic growth and we continue to grow this business organically and we have an excellent team in place.

We just recently introduced the RTO Technology into the China market with sales and fabrication capacity which was led by the Adwest Technologies acquisition in December.

Strategically, CECO has diverse markets to sell into which favorably balances our business model, refineries, petrochemical, traditional utilities and now the growing natural gas utilities, metals, large industries and we are seeing a pickup in our high reoccurring revenues into the general industries.

We see our business in the 35% -- going forward in the 35% to 40% reoccurring revenue and around 60% to 65% in the engineered equipment side of our business.

We are not tied to one segment or one particular industry.

(inaudible) have a strategy to prepare us for a multitude of economic conditions that all businesses face today.

Regarding 2012, I would like to amplify three operating metrics and achievements that the team has been focusing on to help us win and we will continue to focus on to grow our business and improve our earnings for our shareholders.

Number one is operating income.

We hit $16.7 million last year of operating income compared to $12 million the previous year so the team is very focused on improving operating income.

Number two, gross profit.

We hit 31.4% of gross profit last year compared to 27.4% the previous year so we are very focused on improving our sales pricing and keeping our operating costs and cost of goods low.

And finally, cash flow.

We had $16.8 million in cash flow last year compared to $8.7 million the previous year so I want to thank the team for their meticulous focus on executing projects, working capital, and improving cash flow for our shareholders.

And I'm confident this will continue going into the future.

I'd like to share a few orders we received in the last three or four months to give the audience a flavor of the intake of business we are seeing.

Our Buell cyclone order -- our Buell Cyclone Division received a $2.5 million order for a Flint Hills refinery in the USA.

The Buell Cyclone Division also received a $1 million order for Ecopetrol America located in Canada.

A couple months ago, we received an order from Honda out of Mexico for a regenerative thermal oxidizer for around $900,000.

Caterpillar placed an order with us for around $700,000 to our contract services group in Tennessee.

Duke Energy placed a $700,000 order with our utility group for a damper diverter for one of their power plants.

Alstom India placed a $500,000 order with our natural gas group, Flextor, for an operation facility in India.

Procter & Gamble placed a $500,000 order with our contract services group in the USA here.

Burns & McDonnell placed a $400,000 order and Babcock & Wilcox placed a $400,000 order with Effox, our utility group.

And then Vogt Power placed a $300,000 order with our natural gas power group for a facility in the USA.

So there is a flavor of the kind of orders we are receiving globally and domestically and the type of Blue-Chip customers we are receiving these orders from.

Now I'd like to comment a little bit on M&A that CECO has been focused on.

The team, the business and the Board has been keenly focused on selective M&A for several years to enhance our technology and our portfolio domestically and globally and of course, being accretive to our 30% gross margin standard and our 10% operating margin standard as a base.

As previously mentioned, we have several M&A opportunities in various stages and we are excited to communicate today that we closed on two excellent transactions in the last 60 days.

Good news number one, we closed on Adwest Technologies located in California on December 31.

Adwest is an excellent regenerative thermal oxidizer company with 30 years of experience.

We are anticipating $15 million of revenue -- additional revenues to CECO this year as a result of that and that's a perfect complementary fit to our business in North America and Asia.

Good news number two, on February 28, we closed on Aarding which based in the Netherlands which is an outstanding technology provider of natural gas turbine exhaust systems and silencing systems in the $35 million revenue range.

We have been working on this acquisition for one year and the Board and myself and the organization have been tied to due diligence, studying this business and getting a high comfort level and we have an outstanding and successful strategic global alliance with Aarding that has been in place for three years.

So we are very comfortable with the Aarding acquisition.

It is a great fit.

It certainly bolsters our global growth trajectory because it is 100% global in business and we view Aarding as a significant year-over-year EBITDA growth opportunity fueled by the natural gas plants that are being added all around the world as we speak.

All the players in the natural gas industry have a high regard for Aarding Technology.

It fits our strategy, it's highly complex engineered business with a few competitors.

It's accretive to CECO's gross profit operating margins and again it helps our global model.

And also it fits our relatively asset-light facility model that we are going forward on with 50% external manufacturing and 50% internal manufacturing.

So it is an asset-light business.

And Aarding has a great global subcontracting model all around the world.

And lastly, Aarding is truly a global business with sales coming from most all countries around the world that are adding natural gas utility into their power grid.

The Aarding acquisition drives significant revenue synergies for CECO and expense synergies to our current Flextor natural gas division which we believe could double in size in the next few years and collectively this enhances the accretion of the Aarding investment.

As a footnote, although Aarding sales are global in nature, they are based in the Netherlands, which has a 25% tax rate which will help drive down CECO's total effective tax rate as a business.

We also see the Adwest and the Aarding as an easy integration play for CECO.

We have been working with Aarding for three years; we know each other quite well.

We've already started some integration plans but we don't see that as heavy lifting.

In this process of these acquisitions, CECO currently has no debt after these acquisitions.

Therefore, we have significant capacity for additional M&A opportunities to continue growing and acting on accretive opportunities that the Board and management are focused on.

And also these acquisitions will give us a higher EBITDA base to help fund future financing and M&A opportunities that make good sense to CECO.

And we are looking at other opportunities as we've stated over the past three years.

And also to take advantage of the global and domestic fragmented air pollution control sector.

As a second footnote, in 2013, given the Aarding transaction, we should be seeing a one-time M&A legal auditing and banking expenses in the first quarter as a result of the acquisition and we want to make sure you build that into your modeling.

Regarding details of Aarding, which I'm sure you have read in the press release, but I will reinforce it.

We paid $24 million in cash.

We have $7 million in a five-year earnout which is quite friendly to CECO; $7.8 million in stock, which is roughly 760,000 shares to the Aarding team.

And we also have built in -- and I applaud the Aarding team up for this construct and I also applaud the CECO team -- we have a $5 million bank guarantee on a retention process for the management team.

So there is a lot of protection and belt suspenders in this process over the next five years and it has been a very smart purchase agreement and I applaud the CECO team for putting this together.

It was a 12-month process and it met all our CECO M&A criteria.

Also, the natural gas and coal fire utility business will balance our portfolio.

We now have the Aarding and Flextor natural gas business which will be quite strong and growing and we have our Effox traditional utility business.

So we are well positioned to serve the global needs of the growing demand for power which we see could be [into 50]% over the next 20 to 25 years.

So we feel we are positioning the Company very well for the future.

Going forward and looking out 12 months, CECO now has an additional $45 million to $50 million of favorable new revenues to bolt onto our business that has great technology, strong markets and accretive and so we are very excited to get into that $200 million range of revenues as a business.

As we've stated over the past few years, our short-term goal is to get into that $250 million revenue range and $1 EPS and we want to do that through global growth, differentiated technology, building a high recurring revenue business and at the same time driving our PE multiple to enhance our shareholders.

And that's our aspiration and we hope to continue paying dividends and as you see by our announcement, the Board just approved a $0.05 dividend per share.

So in closing, we are very excited about our outlook and our business model.

We hope you've gained confidence in our strategies and our team's ability to execute.

So thank you and I'd like to open it up for questions.

(Operator Instructions).

Ajay Kejriwal, FBR Capital Markets.

Thank you and good morning.

Congratulations on getting the two deals done here in quick succession.

You have added about 35% to the Company but on a pro forma basis, still have very little debt if not no debt and arguably your capacity for acquisitions is higher now because of the EBITDA from these deals.

So maybe talk from a capital allocation perspective how should we be thinking about additional deals?

It sounded like there's more in the pipeline.

I mean would there be any limiting factors meaning would there be a lot of integration effort involved with these two deals that would take mine share or is it more the availability of the right kind of deals for you?

I think the first short answer is the integration of Aarding and Adwest should be a relatively soft and easy.

They complement our businesses.

We've been working with them for a while so I don't see that as a complex event.

I think over the next three or four months that integration will go quite smooth and favorably.

Regarding future opportunities, as you know, globally and domestically, the air pollution control technology sector is fragmented.

It's probably hyper-fragmented compared to other industries and there is a lot of opportunities out there and we are looking at a handful.

The Board studies them quarterly or actually monthly and we have, as we've stated for three years, we have -- we always have several in the queue that we are studying and going through due diligence on and would like to consider going forward on.

But we have pretty strict capitalization guidelines.

We have pretty strict M&A requirements so that deals are accretive, they are good fits, they bolster our technology but I think capitalization opportunities are pretty good for us and typically the three to four to one EBITDA to debt has been good rules of thumb that we follow.

But I think there's a lot of opportunities for CECO in 2013 and 2014.

Good.

And it sounds like you have a nice portfolio of products here in the natural gas sector with Aarding and Adwest.

So maybe talk about what would areas of interest for you.

Is it building out further in natural gas or are there other end markets you would be looking at?

I think there are a few other markets.

I think for 2013, I think our natural gas portfolio is in good shape.

Our traditional utility business is in good shape.

If there is a few items that we could bolt on to build out the systems in both of those, we will do that and there's a couple things we are looking at.

As we've stated, there are some things we are looking at to continue growing our reoccurring revenue side of the business, the parts and the services to get us in that into that 30%, 35%, 40% gross profit.

And as you know, one of our core strategies is to build a high reoccurring revenue model to skate us through any type of economic cycle and outperform our peers.

But I'd also say there is other air pollution control type of businesses and product recovery type of businesses that we would like to add to our portfolio that exists.

So there is a few more products and a couple other companies that we are looking at.

Good.

And then maybe on Aarding, if you can talk about the synergies with Flextor.

It sounds like you have complementary product lines and they are a very big international presence.

So just color on what synergies should we expect here over time?

Yes, quite a bit.

It's a great fit, it passed all our tests.

But number one, Aarding standalone is clearly accretive to our business, favorably accretive.

Number two, the Flextor division that's been participating in the natural gas arena for 20 years has the ability to in my view at least double in size in the next few years as the Aarding engine pulls all this global business into CECO.

So there's significant revenue synergies for Flextor and that's part the of the equation.

And there is some -- thirdly, there is some cost synergies in blending the Aarding, Flextor and Effox businesses together but we purchased Aarding for a long-term growth engine but there are additional revenue synergies and cost synergies.

And fourthly, we have an excellent business model in China that I think could help accelerate Aarding's growth in the Pacific Rim.

Good.

And maybe one more from me before I pass it on.

So in the prepared remarks, I think you mentioned timing on projects that hurt fourth quarter.

So maybe talk a little bit about that, any color on what project should we expect those revenues to show up in the first quarter.

And it seems like gross margins came in very -- at high levels in the fourth quarter.

What should be the expectation on the base business in 2013?

Well, number one, our bookings are up -- and our backlog is up nicely.

We are $60 million today versus $55 million a year ago and actually it's greater than that if you look at some of the businesses we kind of deemphasize.

And secondarily, we had probably four or five projects that we thought we were in position to be awarded in Q4 both domestically and in China and those orders though we are still in good shape on will be led to us in Q1 or Q2.

And actually some of those a couple of those have already been awarded to us.

So I see Q1 being strong from a bookings perspective.

Our overall activity in RFQ metrics are strong and as we've stated for several years, we want to be in the minimum of 10% to 15% year-over-year revenue growth both organically and through acquisitions.

So we are looking for a very solid organic growth year in 2013, maybe slightly above average.

And then gross margins on the base business?

Well, we certainly don't want to take any points off the board so we are going to hold the line on gross profit from 2012 but we also think there's some upside.

There is some upside synergies in pricing, there's some upside synergies in costing, in cost of operations so we don't want to dilute any of that.

We hope we can improve on our gross profit.

At the same time, we want to be very aggressive in bringing in business.

So it's a fine line of balancing gross profit improvement and bringing in a lot of revenue.

So I would say we would at least hold the line in 2013 maybe slightly above.

Excellent, thank you very much.

Rob Stone, Cowen.

Good morning, Jeff.

Congratulations on all the pieces coming together.

Thank you very much, Rob.

Good morning.

I wonder if you could comment -- you said there is only a handful of competitors in the natural gas space.

Now that you have Aarding and Flextor combined, what do you think CECO's competitive position is relative to others?

Strong, global.

I think when you put up a natural gas power plant, you are putting in complex highly differentiated engineered equipment and there's probably three or four players that the OEMs look to or the major EPC firms look to to buy.

You have to have a strong track record, you have to be able to meet 20, 30 pages of specifications.

So I think it would put us in the top three globally and in the next two to three years, we'd like to see ourselves being the leader.

Okay.

And you mentioned that the transaction was going to trigger some one-time expenses in Q1.

Could you or Benton quantify that?

Good question.

We are working on that, Rob, and we figured you'd -- all the questions we'd cover that.

We haven't calculated the exact value but it's coming in and we would like to report that in Q1.

But maybe in the next couple weeks we will have a better answer but we will try and dimension that for you and some of the other research analysts in the next few weeks.

But it will be a one-time event and we are working on that.

So excluding the impact of one-time costs, your expense run rate went up a little bit in the fourth quarter and now you've added on two businesses.

So how should we think about the run rate of operating expenses perhaps as we exit Q1 and things are normalized for the acquisitions?

Rob, we hit $25.4 million in total SG&A operating expense last year and that was almost the same amount in 2011, around $25.4 million.

We don't see -- we have added some sales engineering and some business development folks to drive revenues but we think we can hold the line on that 18.8% of SG&A as a percent of sales.

And at the same time, the Adwest and Aarding organizations are similar -- are relatively similar to us.

So we think we are going to be able to hold the line in SG&A as a percent of sales given CECO's core business along with the two acquisitions.

Okay, excellent.

And finally, the Aarding corporate headquarters benefits, your blended tax rate, do you have a thought on what the range of effective tax rate might be for 2013?

We have been working on that.

I'm glad you brought that up.

The team is doing a very good job on our effective tax rate.

The last two years, we have been around 29% as effective tax rate so that's pretty good.

The previous two years, 2009 and 2010, we are in 35% to 37%.

So the team is very focused on that.

I do think our forward tax rate should be equal to or better for several reasons.

One, Aarding brings us 25% effective tax rate and that's a big chunk of business.

Two, we are expecting more revenues and income out of China, which is a 25% or less effective tax rate.

And thirdly, the team has been zooming in meticulously on these research and development taxation credits that the US government provides.

We picked up some in 2012 and we are rigorously working on picking up more in 2013.

So I would just say the general direction of our effective tax rate should be equal to or better than we see today.

You mentioned China and that was actually going to be my final question.

You said the China business is strong.

If you have the figures handy, could you say how much China contributed to 2012 revenues overall?

I'd probably need to double-check that.

I know our bookings year-over-year in China were up.

That was a positive.

I do know some of the projects didn't get completed so I'm not sure it exceeded the income levels that we budgeted for.

But at the same time, we think we are going to get roughly 10% of our earnings -- 10% of our revenues this year from China and that's typically at a much higher operating margin which drives income and a lower tax rate.

But we are pretty bullish on what we are going to pick up in China in 2013 and 2014 but it was probably similar -- last year was probably similar to 2011.

Do you see any impact of the Chinese government -- they have announced some plans to work harder on their air pollution problem overall but beyond the announcement of those goals, do you see concrete action coming from the government to solve their quality problems?

We have seen a slow and steady seriousness out of China to improve a lot of their plants.

So yes, our activity for cyclones is up.

Product recovery activity is up.

We just launched RTOs a couple months ago.

We already have half a dozen serious regenerative thermal oxidizer activity and our filtration business is on the upswing.

So I would say the fundamentals for China are very good for our sector and we are going to continue investing organically and potentially some bolt ons to grow that.

So the answer would be yes.

Excellent, thank you very much.

Larry Schumacher, Morgan Stanley.

Good morning guys.

Congrats on a good show.

Maybe there is a simpler way to ask some of these other questions.

The two new acquisitions, do you have a sense, an idea, a target of how they are going to add to earnings per share this year?

Larry, we have been studying that.

We think it's going to be positive.

We don't give guidance but if you were -- both of those businesses are accretive to our metrics.

So if you look at our gross profit or our operating margin, our SG&A, those acquisitions are accretive and more specifically the Aarding because that's the bigger of the two.

So if you model it with some decent growth, 7.5%, 10%, or 15% and you add in the core metrics as a data point in your accretion modeling, you should come up with something pretty solid.

But we don't give guidance but we acquired the business because it is accretive and it's going to add to our EPS.

Okay, great, good luck.

Thank you very much.

Steve Shaw, Sidoti.

Hey, Jeff, can you provide any color on what kind of free cash flow the two acquisitions provide?

Probably should be pretty consistent with our current cash flow rates.

We haven't published that but it's very cash flow friendly.

It's probably equal to or accretive to what CECO has been generating for cash flow but we haven't published that, Steve.

Okay.

That's it for me.

Thanks.

(Operator Instructions).

Okay, we have no further questions at this time.

Thank you for joining the CECO earnings call.

We appreciate that.

Take care.

Thank you very much, ladies and gentlemen.

That now concludes your conference call for today.

You may now disconnect.

Thank you very much.