Q1 2020 Earnings Call
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I would now like to turn the conference over to met coal Chief Financial Officer CECO Environmental. Please go ahead.
Thank you for joining us on the FICO Environmental first quarter 2020 conference call on the call today is dentists, Laski, Chief Executive Officer and myself.
Chief Financial Officer.
We began I'd like to no. We have provided a slide presentation to help guide her discussion.
I will be webcast, along with our earnings presentation on our website <unk> see going Barbara Dotcom presentation materials can be accessed through the Investor Relations section of the website.
So like the caution investors regarding forward looking statement any statements made in today's presentation and are not based on historical facts are forward looking statement.
Statements are based on certain estimates and expectations and are subject to a number of western uncertainties.
Actual future results may vary materially from those expressed or implied by the forward looking statement. We encourage you to read the risks described in our FTC filings on form 10-K for the year ended December 31st 2019.
The next steps required by applicable securities laws, we undertake no obligation to update or probably were by any of the forward looking statements. We make here today.
Whether as a result of new information future events or otherwise today's presentation will also include references to certain non-GAAP financial measures.
We've reconciled the comparable GAAP and non-GAAP numbers in today's press release as was the supplemental table in the Bakken to slide deck and with that I'll turn the poverty data.
Good morning, everyone and thank you for joining our call.
I hope that you and your loved ones.
I bet in good health throughout the call with Nike pandemic. Unlike all of you I look forward to better times ahead.
On this call I'll take sometime at the outset could discuss he goes responses adjusted posture to successfully navigate the cobot 19 pandemic and its economic fallout.
He used to generic sports analogy.
We strengthened our deepen and refocused our off it.
Next I'll summarize our first quarter performance.
Well with our team's strong execution delivered solid results, despite the accelerating social and economic changes in challenge is emerging from the pandemic.
Following that I'll touch on or end markets and what we're seeing in the mix of the world's effort to mitigate and contain the square the virus.
That will then discuss our financial details after which I'll share a couple of examples of the work. Our teams continued to drive ahead, despite the global economic shut down.
I lead us into the QNX action well, we'll address your question.
As we jump in.
I want to emphasize it CECO is already taken several decisive actions in response to these unprecedented times, while maintaining our commitment to progress them superior execution.
Let's begin with library, which shows our 433 operating strategy that successfully guide or execution since late 2017 and into much of the first quarter.
The fourth grade three operating strategy was a blueprint for transforming CECO environmental into a vibrant growth company.
And executing the blueprint.
We built a solid foundation of strength and agility.
That foundation gives us the confidence to pivot to an operating posture that allows us to proactively navigate grew the cobot 19 health pandemic and its economic fall out.
Quite simply under the 433 strategy, we built the plan executed the plant and delivered result.
The strength agility and results for execution put us in a strong position headed into these uncharted waters wed asset light business model, a robust 200 million plus backlog, a geographically distributed organization and a very healthy balance sheet.
I've referred to the 43 operating strategy and soccer tournament has an offensive minded approach to winning at CECO.
Adding to that analogy is a graphic on slide four.
You can see our for value creation, enablers, where akin to forward looking depends solidifying the core of the company.
At the midfield line was our three compelling and market driven by the industries need for sustainable solutions in the world growing low carbon economy.
Leading our offense for the three core growth platforms engineered equipment industrial air quality, especially bumps.
Cobot 19 triggered the need for a major short term pivot.
The paraphrase famous box there Mike Tyson.
Everybody has a plan until they get punched in them out.
And for just about every business, including CECO covert 19 pandemic was that part.
No no boxer, but let me follow up on Tysons quote.
Typically to say that even when function that they fundamentally sound and growth oriented businesses like CECO are expected to be resilient enough to withstand of low and then quickly in confidently adapt their posture to forge progress.
So in this altered state a world that's exactly what we've done.
Bringing things back to my favorite soccer analogy I want to hear how CECO has adapted to what we're calling out for four to formation, which is depicted graphically on slide five.
It's formation features the strength in defense and a refocus docket.
Not a long term strategy, but it will guide us and making continued progress in this challenging world environment.
I want to emphasize this point, our capability and capacity to plan and execute its a compelling difference maker in serving our customers and creating value for investors.
The fact is that why we all maybe moving through the same store.
We are not all in the same boat.
Starting on the defensive left hand side, we've instituted a number a proactive steps.
Reflects both the right thing to do by our people and the smart thing to do for our organization.
Collectively these four actions increase our operating headroom and give us considerable flexibility going forward.
First to protect the health and safety about workforce all of our office positions have been instructed to work from home.
And our manufacturing plants, all deemed to be a central in this pandemic period have instituted added hygiene and distancing measures, while we continue to execute customer orders.
Navigating the mandated shelter in place orders has been a challenge.
Actually in some of the manufacturing location and with our field work at customer sites.
Remained operational across the business.
And I believe it's a tribute to our customer focused mentality and the strength in commitment of the entire global CECO team.
Second senior leadership team and the board have taken temporary compensation reduction.
See this is a proactive measure until we get a better read on the direction of a post covered world.
We also kind of number of staff position from our central administrative functions to generate savings going forward.
Third we've instituted a rolling furlough across the U.S. workforce during the first six weeks with Q2, which we believe will be in especially hard hit period.
All of our U.S. associates are taking a mandated two weeks of and paid time off.
I want a pause here and recognize and thank our leadership in every CECO U.S. associate we're finding the strength to maintain superior execution and service to our customers. During this difficult window of time.
Well our actions didn't materially influence our first quarter result rolled up they represent a reduction in savings of about 3.5 million to our second quarter fixed operating costs.
Our fourth action was to draw down 40 million of cash on our line of credit and keep these liquid funds in our bank account.
It's been caution, but its smart one that provides considerable flexibility to act with speed is a global economy evolved from the covert 19 pandemic.
I want to emphasize that we're monitoring customer and vendor activity, that's the prevailing restrictions and startup guidelines on economic activity.
And more prepared with actionable plans to take additional measures to strengthen our defense and refocused their effect.
In the midfield are for value creation enabler.
More than ever each enabler is a multiplier of value creation for CECO environmental.
Even with our office staff restricted to work from home, they're staying true to our outside in mindset and staying actively engage with customers.
And we continue to drive simplicity, if we adjust and prioritize how we do business in the near term.
Pico continues to maintain investments in product innovation, because we have to stay ahead of what our customers need and be ready to supply solutions as markets recover.
And finally, we remain well positioned to manage our portfolio and continually evaluating M&A targets. It further our environmental mission.
On the far right. It's a forward tip of are often.
Market oriented sales and marketing efforts aimed at exploiting our competitive advantage to grow share in the active pockets or energy and industrial end markets.
I'll go into more detail or end market, shortly but I want to touch on the pockets of activity that are for four to strategy is targeting.
Well position with a diverse set of served end markets and see promising activity even in that part of the pandemic in food and beverage semiconductor production process water.
Our team has developed improved digital content and remains connected to drive share growth when these targeted areas.
And we're encouraged about the potential infrastructure investment in the United States. It's part of an effort to get people working in the economy growing.
Our team is ready for targeted specialty pump and air quality products and solutions to serve industries like asphalt production, which would see a surgeon demand with infrastructure investments by the federal government.
Before summarizing our first quarter results I'd like to add that our leadership team has experience with challenging economic conditions.
We prove that by successfully navigating the micro recession simultaneously hit both powergen and refinery end markets back in 2017.
Obviously, we're now facing unprecedented conditions that are broader and deeper than the micro section.
It's rough flooding in the global economy put her experience and extensive playbook of tactics isn't invaluable intangible asset.
And that along with our focus on superior execution is why I'm confident that seek goes for four to posture will enable us to see healthy progress during this period of uncertainty.
Now, let me jump into our first quarter results on slide six which once again demonstrate our ability to execute despite the pandemics accelerating social and economic changes the challenges during the quarter.
New orders came in at 76 million up 12% from Q4 with sequential order is up double digit and all three of our reporting segment. After a down final quarter of 2019.
A valued or note is that while the pandemic slug project order decisions across the board orders remained steady into the final weeks of March even a shelter in place requirements became more widespread.
From a year ago warrants were off almost 22%.
Revenue came in at 80 million.
After a very solid start to the year revenue moderated down 10% sequentially and 6% year over year.
Kobe 19 pandemic definitely muted <unk> revenue growth, it's bottlenecks associated with the unprecedented locked down scope customer delays and supply chain interruptions.
I'll mention here that our backlog remains a robust 209 million and we expect to see its conversion to revenue continue.
Given the current circumstances, the timing of conversion may fluctuate as some customers modify their project schedule.
It was good to see even with lower revenue.
Our teams track record of strong execution produced a healthy gross margin of 35%, which is up both sequentially and year over year.
Higher gross margin helped offset the lower volume and resulted in an adjusted EBITDA of 7.4 million or 9.2% itself.
People also generated solid free cash flow 6 million in the quarter.
We continue to focus on converting profitable projects into investable free cash flow with even more bigger going into the crisis.
Yeah, one was a challenging period of accelerating changes a week's went on.
Definitely tested and I'm proud to say that are consistent in high caliber execution allowed us to earn solid results.
Well sell competently pivoted, our operating posture with an updated tactical plan to ensure that CECO environmental continues to deliver healthy progress.
Turning to slide seven.
I'll provide some brief insights regarding the outlook of our end markets.
Clearly the outlook for our overall end markets is changed and until we see what a restart looks like will proceed with an abundance of caution.
Our global footprint broad set of technologies and active interaction with customers provides us with a powerful lens to see understand and adjust to restarting markets on a sector by sector basis.
Fortunately he called competes in a diverse set of end markets and as part of our pivot we've turned more attention towards promising pockets like food and beverage semiconductor fabrication in practice water treatment.
And much of our portfolio serves critical industries and infrastructure for capital and maintenance can be deferred but not ignored completely.
So while today's comments, it's in uncharted rough waters.
Still executing with competent and strength into our key end markets segment.
Referring to left side of slide seven served energy segment markets are still active with longer term projects that we've been tracking for at least six to nine months.
We expect to see refinery projects progressing towards new orders gas separation and process water projects being awarded and even some new gas power demand moving ahead.
We have little exposure to upstream oil in the U.S.. So we don't anticipate any direct answer there.
And it's too early to conjecture, what kind of second order effects will come from the massive drops in oil price in demand.
What we do know is that most energy companies have announced substantial capex reductions for the remainder of 2020.
Which is why we've adapted our posture for challenging market going forward.
Global sales team is closely monitoring client projects that remain active in our sales pipeline.
Down the right side of the pie or the industrial markets served by both our industrial and are fluid handling solutions segment.
Well serve a diverse set of industrial applications with the heavy focus coming from North American customers.
Coming into the year, our pipeline of activity was improving and our sales team appeared to be hitting stride in finding solutions for our customers.
And in both segments, we converted a good portion of wins to grow our market share in the first quarter.
Sales pipeline pushed out in a number of industrial markets, but several key pockets are active in expanding.
Industrial air quality and filtration solutions for the food and beverage producers is seeing a pickup in near term activity.
And as I mentioned earlier, we're working with several asphalt plants in preparation of demand increases from potential federal investments in infrastructure.
In summary.
Even with much of the world on stay at home orders, we are still making progress with customers in key industries and on critical infrastructure projects.
Our sales teams are making more prospecting type calls unusual that they're using their lack of windshield time effectively.
There's no doubt that customers have become more discipline and deliberate with their spending decisions, but project orders are being awarded.
And we're still adding to our significant sales pipeline with new leads generated by a digital content.
In closing I'd say that it's still early.
It would be quite speculative to forecast the other side of the covert store.
Until we see more clarity on the horizon remain in our for four to posture with the strength and deepen and refocused often.
I'll emphasize that we intend to exploit our competitive advantages in the attractive pockets of activity that exist today and the opportunities from restarting the economy that were little and merged tomorrow.
I'm fully confident that CECO is up to the challenge.
Every way.
With that I'll turn things over to Matt that take it away.
Thanks, Dennis before starting I want to say that I hope that you have all whether the pandemic with a minimum of personal hardship and professional disruption going to challenge for families dealing with stay at home orders I touched her businesses and certainly good to see some countries and your state taking the initial steps to getting working again.
In discussing she goes financial results for the first quarter also provide some additional detail about our pivot to strengthen our defense and refocus our often.
I shared Dallas is competence that with our continued execution the fourfold to formation, we pivoted to will drive healthy progress.
Slide nine which shows that despite the accelerating spreads the television 19 virus, our sequential orders improved in all three segments as the bar chart on the left hand side shows or all orders increased 12% sequentially and decreased 22% year over year.
Energy orders were subdued, especially in the refinery area, where capital expenditure stalled as a slumping oil prices slowed the award process.
Older than industrial solutions were solid well not matching last years extraordinary first quarter. It did beat our historical range of 18 to 22 million per quarter.
Well it handling bounce back on the strength of our pump business well enough yet filtration parts are still weighed down by lower automotive demand.
The Bar chart on the right shows that revenue came in at 80.5 million, reflecting a decline of 10% sequentially and 6% year over year buffer colder 19. This metric could have been measurably different subcontractor shutdowns in Canada, and Italy first approximately five to 10 million in revenue out in the second quarter and second huh.
For CECO production facility, all are up and running serving customers today.
Our pumps and sodium telephone, Pennsylvania was temporarily shut down but after an appeal to the state some great work by our team were granted a waiver has an essential business after five days.
Actually impact was minor pushing just 300000 of shipments into Q2. The common is meant to highlight the fortune of our operations team to serve our customers Anthony Powell, though our plant manager worked tirelessly what our legal HR teams to file the paperwork sourcing decisions repair safe place to work for employees, our employees want to work and serve our.
Customers I'm, so proud of the bias for action.
Moving on to slide 10, our backlog remains at a healthy 209 million given the difficulty engaging when and how our end markets will lead to we're obviously pleased to have this bank future revenue.
Conversion from backlog revenue is expected to be a bit slower than in the recent past until the bottlenecks on the pandemic our alleviated.
We're staying on top of projects and monitoring their progress based on current conditions, our backlog appears secure.
Now on slide 11.
Chart shows the despite the first quarter lower revenue execution by our team delivered healthy gross margins.
Gross margin improved to 35.2%, which is up 1.6 points sequentially and 2.2 points year over year.
Our commercial team continues to sell the value of our capabilities to customers often commanding higher pricing.
That's coupled with superior project execution by our ops team is driving margins higher.
Non-GAAP operating income and adjusted EBITDA, well better than some previous quarters over the past year, Nevertheless sequentially declined by 35% and 27% respectively.
Surprisingly the first quarter is lower revenue was the culprit.
Tempered by higher margins and cost savings.
Next up is slide 12, which provides a detailed financials for the first quarter 2020, I'll say again, our execution led to solid results. Despite the accelerating impact of cover 90.
I've already touched on several of these metrics. So I'll highlight a few brief items.
Earnings per share was 10 cents on a GAAP basic and 15 cents on a non-GAAP basis.
5003 cents, respectively led by higher gross margins decreased tax and decrease interest expense.
Our non-GAAP tax rate was 25% in the quarter, we anticipate maintaining that rate through 2020.
Wrapping up this slide I want to take a minute to quantify the proactive measures we announced in our April 7th press release.
The compensation reductions in our organizational streamlining will generate approximately 1.5 million a run rate savings, while the U.S., though well reduce expenses by approximately $2 million and the second quarter, specifically declared there was no benefit to the first quarter results.
I'll emphasize do other things first these actions are temporary and will be influenced going forward by how our markets play out second we're fully prepared to take additional actions to reduce expenses if warranted.
Pushing on slide 13, I'm pleased with the 6 million to free cash flow generated during the first quarter, we benefited from diligent air collections across the enterprise and the receipt of a large upfront cash inflow from the sizable middle Eastern project.
Two we managing or project milestones carefully as that same large project cash outflows the vendors may create a Q2 timing headwind.
I'll now turn to slide 14, which summarizes our healthy balance sheet.
The Bar chart on the left shows a steady work we have done using our operating cash flows to drive down or debt every quarter.
Dennis mentioned earlier, we conservatively decide to draw down $40 million from our revolving credit facility to supplement the company's already strong cash position in doing so our banking covenants are not impacted and we still have access to 70 million of Undrawn funds.
We made that decision in late March and given the Unprecedent situation that was evolving we believe that flexibility what's most important.
In short at all done exemplifies our intention to be good stewards, but she goes I happen to date, we have not touching reserves and they remain in the bank.
In the home stretch in my comments today I'll go to slide 15, which addresses our progress toward our 2021 financial targets.
These targets are intended to measure the progress of our commitment to deliver top tier returns.
The 2021 financial targets were established to be a self imposed challenge within the bounds of historical economic conditions and not the condition of the global carbon 19 pandemic and fall. This unforeseen situation puts us in a position to reevaluate the timing to achieve the target though.
We still see FICO as a top tier return company and well return from the timing of achieving these targets once governmental restrictions on commerce or move and visibility energy market improves.
Here's where we started after Q1 as you will see we're able to improve and a few targeted areas.
Starting in the up a lot quadrant, our goals the organically our growing markets to actually overtime.
After meeting with target for an extended period, we clearly fell short on the way the last quarter as revenue and order is contracted especially in March.
Going to the right our EBITDA rate is largely driven by revenue in the operating leverage achieved ongoing.
Even with value selling cost saving and superior execution, we could not overcome the revenue decline our EBITDA came in at 9.2%, which is below the target range of 12% to 14%.
Next is return on tangible capital when the considerable strength of our asset like business model. We continued to meet this target with a TTM returned 51%.
Lastly on the lower left hand side, it's a free cash flow conversion rate, which is 81% during Q1 and 78% or TTM basis.
Right and the met all of our target range.
Yeah, let's go to consistent execution in our asset light business model.
Wrap up we were pleased with the execution in first quarter. We're now however in the unchartered waters of the cold in 19 pandemic as Dennis mentioned every company is navigating the same storm, but we are not all in the same but that's why we're commonly committing ourselves healthy progress.
With that I'll turn things back to Dennis.
Thank you Matt.
Before moving on to your questions I want to highlight the great work being done by the CECO team in both executing projects in the field and reeling in new wins during the Pandemics economic restriction.
Highlighting their great work I'll focus on two projects and nice win during the last week as a quarter and an essential customer project that we've been executing onsite throughout the quarter and into May.
I'll start with the ongoing project.
One of many we continue to execute which is shown on slide 16.
He got booked this project in late 2018, as part of the gas power plant output and efficiency increase.
We had previously completed work on two or three turbans in 2019 at this Michigan power plant with work on the third unit underway during the spring of this year.
Increasing the plants electric production meant that the emission control systems had to be upgraded to handle increased not conceal output.
CECO is contracted to design build and installed emission controls and reduction systems. So that the generating plant would continue to meet regulatory requirements are producing higher levels of power.
He go technology and teamwork, our competitive advantage where demonstrated on this project as it involved complex design and installation issues under tight scheduling and a unique multi pollutant catalyst product.
Our expertise included a proprietary and patented system to handle the increased ammonia that the plant would have as part of it to Yossi reduction system.
The plant upgrade along with Ficos part of the project within the final stage when covert 19 turned into a global pandemic.
Got completing this work on schedule would mean that the plant wouldn't produce it obligated supply of electricity during the higher demand summer month.
As you know, Michigan was hard hit by the Cobot 19 virus and strict limitations on traveling work where imposed.
But this vital project was allowed to continue.
We continued as well.
FICO is managing up to 30 workers on site and they had to adjust the CDC distancing and hygiene guidelines and cumbersome traveling lagging restrictions.
Our team in the field hasn't mix to be proving that our execution can adapt to changing situations and still be superior.
We are scheduled to finish up in May part of a great brownfield upgrade and I'm, particularly proud of the CECO field team for their resilience.
One other quick highlight is reflected on slide 17, demonstrating that our team was out winning new orders throughout the quarter and into late March when the public health an economic implications of covert 19 were gaining steam.
This project when supports the need of a global manufacturer of key ingredients for foods beverages, and even pharmaceuticals, and therefore, it's considered an essential business during the pandemic.
Its customers facility located in Indiana, Greases ingredients like starches that are derived from corn gray that yields a byproduct of filing particulate or does that must be controlled and capture to assure safety and comply with environmental standards.
When the facility cyclo needed replacement upgrading they turn to Cecos Fisher Klosterman Brad.
This was an uncontested win because the customer was loyal to our value proposition of high quality products in engineered solutions to fit their specific operating requirements.
This project was a classic win win win.
Customer maintain safety and as lower maintenance requirement.
Environment is protected by the high efficiency cyclo and CECO exploited the competitive advantage in a pocket of activity essential even during the pandemic.
Right now CECO teams already underway with the engineering design.
Clothing today's call with slide 18.
Summary of our products and services, representing competitive advantages it will be exploiting the pockets of activity that exist throughout or end markets.
And I'll remind everybody that a reputation for not only providing sustainable solutions, but also for doing what others can't do our technical capabilities and innovative product gives us a distinct edge during the restart recovery period of our end markets.
Pico solution for a cleaner safer world are valued by industry to me government regulations and improve the safety efficiency and profitability of their operations.
Not even the Mighty Cobot 19 virus can change this basic need of industry throughout the world.
In wrapping up we had a solid first quarter, despite the accelerating pandemic.
We used our experience in strong position to decisively pivot to a different operating posture that strengthened our defense with a proactive cost actions to provide operating headroom and flexibility.
And we refocused our offense to exploit our competitive advantages to win share in the pockets of activity that remain active in our markets.
Cobot 19 pandemic, it's dealt everyone a challenging Hana cards.
Winter, we those that play their cards to the maximum potential.
CECO entire team is determined to be one of those winners and its committed to healthy progress through superior execution.
And now we welcome your questions.
Operator.
Thank you Sir.
Well I'll begin the question and answer session to ask a question you May Press Star then one on the telephone keypad, if you're using the speakerphone. Please pick up your hands up before person keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble a roster.
[noise] and the first question will come from Chris Van Horn with B. Riley.
Please go ahead.
Good morning, everyone. Thanks for taking my call and hope everyone's doing well.
Good morning, Greg.
I was wondering if you could maybe update us on the real time environment. How April is going with with some of the states announcing restarts and some industrial.
End markets, so starting to ramp back up.
Yeah.
So first off you know throughout the period, our operations have all remained active but with the offset of a brief shut down in one of our pumps facilities that was down from about a week.
So from that standpoint of executing backlog or most things are progressing we're seeing some signs also in Europe that things and even in the most affected countries are starting to come back.
From the point of view of market and activity.
It's a mixed bag there I'm on one hand, a very long cycle larger projects seem to be progressing quite well our content as part of the major investment in critical infrastructure, we see activity progressing there on the short cycle. It we still see some decent demand in pockets that I meant.
And on the call, albeit with a very.
Murky outlook and you know in the middle there in the mid cycle April is probably as we anticipated you know I'm going to be part of the refer part of the period in that things were accelerating towards various shut down into March.
And starting to then pick back up here is as hopefully as we come into Meg.
Okay got it thanks for that color.
And you know you mentioned you then the shift to the four to four four to strategy.
You know market share seems to be on the offensive side here. So you know in some of our conversations we're hearing that some smaller competitors.
You know our are being more challenged and then maybe others and so you are do you see that is an opportunity in terms of you know taking share from your competitors as well as is there any M&A opportunity that you see a in the pipeline.
So Chris Thanks for the question number one we remain committed to growth and while the overall environment is filled with various headwinds.
You know we also have defined part of that growth its two times the market.
And we can only accomplish growth ahead of the market by taking market share and so we continue to focus on active pockets, we scan call, we're competing with strength.
A number of the areas that you know the out with our backlog our team our global reach our distributed.
Workforce give us those kinds of differentiated strength.
I, we haven't seen anything that's smaller guy so to speak fall by the wayside.
But it's pretty early and if you recall back at with the middle of the Powergen downturn, we did lose to a couple of competitors that we'd regularly see on gas turbine exhaust systems and related type project activity. So.
You know time will tell but we feel good about our position strengthened the balance sheet. The a activity at the sales team and you know that continued to add to our sales pipeline.
And on balance you know their balance that out with a lot of that pipeline is still stretching out as a customers and people will become much more deliberate about the timing of of how they see some of those investments going forward.
Okay got it and then lastly from me you know I imagine you're seeing a lot of deferrals and possible cancellations of projects and an award is there is there a timing.
I imagine there's a timing difference between some of those deferrals and is there any visibility that you can you give us from from your customers of what they're thinking about as we had through 2020.
So I'll just say start with what we grew the end of Q1 no material cancellations, we continue to monitor projects still out.
I have had projects put on you know temporary hold or slow down as the result of other things that customers can't get done in this current environment.
As far as visibility beyond that it really is a mixed bag.
You know in even in the refinery segment 'em, we see some customers starting to talk about Hey, you know our outlet is relatively low right now maybe now is the time to pull some.
Make major maintenance brownfield project forward and get things done while we can't is some of the pure place make real good money on the spread that have widened right now and then on the other hand, you know as you know and as would anticipate you know a lot of companies are sitting and try.
Thanks to delay their projects in order can serve their own view and understanding of what happens next.
Okay. Thank you so much for the time and stay safe and healthy.
Yeah. Thank you interest.
Next question comes from America, Dale with H.C. Wainwright. Please go ahead.
Thank you. Good morning, guys. Appreciate you taking my questions.
So with respect to the Twoq 20 outlook your loans will be immediate near term.
Markers, calling for Green, you could 30% GDP decline in the quarter.
So in that environment, how should we expect it to fair and you know what good results.
Hi, lever potentially look like sequentially.
Yeah. So you know we have not never provided short term guidance.
And with the amount of uncertainty out in the World I I think it would be a the most intelligent thing to say, yes, Q2 has a lot of uncertainty and and for that I, probably can be accurate at the same time. You know you should note that we entered the second quarter with 209 million a backlog.
They're very healthy all of our operations are active we have a cost saving furlough of two weeks for all of our U.S. Associates underway. You know revenue continues to operations, which will lead to operating income in the like and progress probably similarly to what.
Were seeing in Q1 with speed bumps that we have to navigate so you know it's an environment in Q2 that we're very fortunate we come into as we did the beginning in the year with a variety of strength.
And you know good backlog good team good focus from external internal and you know more than that it's still been something that we navigate on a daily basis.
Understood.
On the cross cutting side or any of these costs you have eliminated for the near term, they're gonna be permanent changes or will you potentially sort of.
Mmm doing park.
Yeah the work at all.
The way I divide that up wouldn't be a mix of onetime temporary and run rate savings. So of the three and a half we spoke during the prepared remarks to is specific to Q2 that would be tied to the furlough and wanting to have is run rate savings.
So some of that would be temporary the wage cuts until we get passed to cover at 19 crisis and the Borgata cost cuts that took place as well 1.5 on a run rate basis is a annualize would be 6 million. So.
Those are the breakdown between what's cure Jill and whats run rate settings.
Yeah.
And what had good to what Matt saying is you know these are actions, we think are still proactive.
Proactive actions that give us headroom and flexibility to continue to sense, what's happening in the market.
And then adjust and adapt and continue to take appropriate action going forward.
<unk>.
Well take my other questions offline. Thank you so much.
Great. Thanks, Thank you and.
Stay safe.
Our next question comes from Mike Cecos with Needham and company. Please go ahead.
Hey, good morning, guys. Thanks for taking the time with the questions here.
First question I have to use around your gross margin strength I understand you guys are are selling the value here, but I. Just wanted to know was there anything onetime that benefited this quarter I know the grows more just put up this quarter were a bump would you guys have historically been doing just trying to gauge the sustainability of this 35% gross margins.
Do you have here now.
Yeah, we had a really good quarter, mostly tied to project execution, we did see some productivity in our plant Tony investments are made and fluid handling yeah, we still believe 30% to 34% of the appropriate for modeling based on historical average we did outperform this quarter. It wasn't one time all three segments in really good in the quarter.
Okay. Thanks for that and then the the follow up I have you guys. I know that there were some comments in your prepared remarks as well as far as management's experienced during the the prior micro recession, but if we were using that lets say a template understanding where in onshore to territories here can you give us an idea.
What markets came back first or I guess, what we should be watching as potential indication of things maybe improving for see goes in mortgage.
The two end markets that occurred in the micro recession, where that powergen market. We're still in the fourth year of that downturn as new Nat gas gigawatt of does not return at the same exact time, we had a 30 year downturn in refinery utilization hit 90% in the U.S. and nobody was making turnarounds or investment and.
Refinery Capex, a refinery turned back within about five quarters quickly and almost violent light. We went from $10 million bookings you over a 10 month period to 20 million over a 3 million period, so ours or a three month period. So it turned back fairly quick I know that 30 or depth on this occasion.
As far as a covert 19 goes what I'd tell you Mike as it's all market. Although we plan that are likely impacted by the pandemic and to say that one is going to respond quickly you know there's lots of research out there at the who think that what's going to return factor.
And I don't have a good perspective on not just yet it's quite uncertain, but Dennis maybe has a comment on outlook maybe like that.
Well I guess, the one thing a weather return is silly said is gonna be an interesting question because we have a very diverse set of end markets that we cover there are quite a few critical infrastructure in key industries that are still active today and I mentioned a few of those on.
The prepared remarks earlier here. This morning places like food and beverage you know the food supply you see a lot of people actually having to pick up and step up their demand.
That semiconductor manufacturers and with tech being strong and all of it still working from home.
Demand there is likely strong as well we anticipate the investments will likely continue so there's a variety of the areas that are strong as we speak relatively speaking a there's movement. There's a activity you know what we're actually been called out.
To do even some site walk throughs to assess new project activity in some of these areas. So it isn't just what comes back first but some things that are still active today and we like our positioning there.
Great definitely interesting times, thanks for the color there guys appreciate.
You bet, Mike Thanks for joining us on the call and likewise stay safe.
Especially for those of you in New York City.
[noise] once again, if you have a question. Please press Star then one.
Our next question will come from Tate Sullivan with Maxim. Please go ahead.
Hi, Thank you lot good morning, falling up that comment on refining and like one specifically Dennis is oh, the psych homes, well first on refining I mean at worst case scenario would come out of this and loyal prices stay low like what is can you remind me of the replacement cycle for psych loans for existing refineries, please and I mean as a total.
Dependent on output levels.
So our key product into the refinery market, our psych loans in the catalytic cracking process.
And what we are doing is recycling a fine powder catalyst back into the system very high value.
Hi.
We shouldn't see psych loans they vary in size from large the very very large.
We have by all means the leading global market share strongest technical team.
And so replacement isn't necessarily that much driven by localized output, but it is by conditions because you are circulating.
A product that has in order to erosion effect and so whether there's an input feedstock change or are there some wearing out as the cycle, but our product as a 10 year design like probably has a 20 year full life with a variety of aftermarket opportunities within that period.
And right now we do see you know activity that's progressing from the planning stage up and over to the you know into more order stage as we see right now.
Okay. Thank you and to say clones stop it specs is it a can do completely different type of psych loan because it does not the catalyst for food and beverage and market and are there other industrial end markets for psych loans. If you can tell we also have a substantial array under our Fisher klosterman brand of Ah.
That's still psych loans that do everything from high purity poly silicon for the solar industry.
You know clean room type stuff for pharma as well as a lot in you know any other industry, where you see a high degree of dust or related activity from wood from corn et cetera, and that's a big part.
He piece often have an overall industrial air quality system.
Okay.
Matt can you on the slide on the on the leverage covenants and existing credit facility in just the key metric to focus on what than you have meaningful cushion over that the banks actually probably oh, Okay. I think the only pulte exact slide but on the debt page of our we actually published what the gross leverage ratio we have.
Fixed charge covenant as well, but we're being asked on life, so far away from that and that's really just give us leverage.
I think our current we're sitting at 1.5 and that goes all the way up right now to 3.5 as our covenant currently.
To 3.5, Okay. That's fine Okay, just wanted to thank.
Thank you. Thank you. Thank you for those details.
Okay. Thank you.
Ladies and gentlemen. This concludes our question answer session I would like to turn the conference back over to Dennis said Laski, Chief Executive Officer at CECO Environmental.
And I. Thank you again for joining our call I just want to reinforce that even in this challenging period for the world challenging period for the company.
The leadership team CECO is committed to help the progress through superior execution.
I think through the first quarter and into today, we're demonstrating that a fairly well.
This morning on on the way and I heard one of the lead analysts on CNBC talk about what are the winners who are going to come out of this segment those are going away the companies with strong balance sheet positive cash flows and a good management team and.
And I'd like to think that Oh will be one of those winters, because we absolutely come into this with a strong balance sheet. We continue to demonstrate positive cash flows and I like the team around me and how they're executing so thanks again for joining the call. We'll talk again in 90 days.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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