Q1 2021 CECO Environmental Corp Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the CECO Environmental Q1, 2021 earnings Conference call.
All participants will be in a listen only mode.
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After todays presentation, there will be and opportunity to ask questions.
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Please also note today's event is being recorded.
At this time I would like to turn the conference call over to Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.
Whether as a result of new information future events or otherwise today's presentation will also include references to certain non-GAAP financial measures.
Reconciled the comparable GAAP and non-GAAP numbers and today's press release as well as a supplemental tables and the back of the slide deck and with that I'll turn the call over to Todd.
Thanks, Matt and good morning, everyone.
And would like to start by thanking our CECO employees for their dedication and contributions to ensure we continued to deliver for our stakeholders.
We would also like to thank our suppliers and partners around the world for helping us to navigate these challenging times. We appreciate all your efforts before we discuss the quarterly results. Let me also welcome Ramesh <expletive> Holly to our leadership team as Sickos first Chief operating officer. We're mesh is a proven executive with significant experience driving high performance <unk>.
Mrs <unk>.
<unk> has been and executive general manager for several leading industrial companies, including international assignments, and the Middle East and Asia Pacific. Additionally, Ramesh has helped to create and execute growth strategies and M&A activities at the corporate and business unit level, it's great to have him on the team now.
And now please turn to slide three is that will highlight the key financial results for the first quarter.
Building off the momentum from the fourth quarter of 2020, we started 2021 strong as we stress on our last earnings conference call. It was critical we start 2021 with a solid bookings quarter.
We did that and more.
Orders were $92 million up 22% year over year, we will discuss the details of our orders and a few minutes, but we are pleased with the balance contribution for many of our businesses and and market momentum.
Sales were down 11% year over year as our $72 million of revenue reflected the lower starting backlog position, we had entering 2021, and we expect sales to pivot towards growth and the second half given our backlog is back above $200 million. After our book to Bill was approximately one three Thai.
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So it is great to replenish our backlog and turned towards revenue growth.
Q1, gross margins were 33, 9%, which were down approximately 120 basis points on project mix.
We continue to see very good project execution and are pleased with our margin levels given half challenge 2020 was from our bookings perspective.
Adjusted EBITDA was six $4 million and the quarter down approximately 1 million, but reflecting a strong conversion to sales. This demonstrates the important work we have done to streamline our SG&A costs and.
Just and earnings per share of nine was down year over year, but again, we were coming off a tough year as the COVID-19 pandemic slowed or 2020 growth and so we started 2021 with a lower backlog.
How our customer buys and how they recognize CECO environmental as a leader not as and energy company per se or fluid handling, but instead of solutions provider to solve their most complex challenges and environmental or industrial process areas as we roll on our strategies and the coming months, we will articulate our focus to steadily.
Build on our leadership position and advance and adjacent industrial markets.
These platforms are structurally and place today, and we are prioritizing growth initiatives, both organic and inorganic preach when we articulate a major project award and the rapidly growing electric vehicle Arena, which is a real example on some of our orders growth. So far this year and is important to understand and is within the air.
Pollution control Arena. Similarly, Ah recently announced multimillion on a project award to supply, our leading arguing noise abatement solutions may be associated with the energy markets, but it really extends beyond historic energy segment alone, we're hoping to provide grid stabilization solutions to support renewable energy sources.
As we think more broadly about investments to advance our leading platforms, we expect to find adjacencies and growth avenues I expect our platform leaders need to and we'll think aggressively about their markets and where we can invest for more growth and I want them to challenge their teams to think beyond their traditional markets and look for.
Or adjacencies and new opportunities, it's all about growth. It's all about sustainable growth I will now turn it back over to Matt and he will provide more detail on our financial results and key metrics, then I will conclude with some final comments Matt.
Thanks, Tot start with slide six and orders and $92 million and ordered we are pleased to feed balance growth year over year and sequentially for the second straight quarter, several and market that had been installed and this time last year have reemerged as of late and.
And even more excited for our prospects as they progressed throughout the rest of 2021, our sales pipeline continue to expand and has crafted and $2 billion watermark and.
That's up from the one 9 billion dollar pipeline communicated and March our markets are healthy and growing and addition, we keep pushing and a new market.
Just this past two months, we've been on a Powerplant, India battery plants, and Brazil, and a new electric vehicle production plant and the U S and.
Exciting for me to be talking about growth once again and.
And Q1 engineered systems book $56 million borders up over 35% versus trailing 12 months average and more in line with 2019 levels.
This is a good indicator that are and customers are loosening their capex budgets.
Most notably are Amtrak viewer SEC cyclone and the business book $60 million and Q1, which is the highest level since Q3 of 19 with $20 million and prior to that and late 2018.
The pipeline for Asia Pacific refinery projects remains strong while European and U S markets remain subdued as stated several times prayer. This business isn't a matter of if it will come back and it is when deferring maintenance capex on our products has downstream repercussions, we're very optimistic about our.
Future here.
Are shorter cycle businesses industrial air and fluid handling both printed their third consecutive quarter of orders growth Air pollution control solutions were up 8% sequentially as we continue winning more jobs and the growing bad can and as Todd highlighted the production and markets with best and cost oxidizer solutions.
Blue and handling continues out relic peers on solid performance with 28% sequential growth. This quarter. The growth was led by our Murphy AG branded filtration products that also has exposure to the EV automotive market.
On the pump side of fluid handling we are really hitting our stride as our traditional markets of agriculture, and midstream oil and gas remains soft due to COVID-19, we're branching out and a new and market and regions of the world. If you fall or social media feed you had recently seen we've added partners and Canada and seeking additional partners and Europe Africa and.
Pan Asian countries.
<unk>, we've made and and our pumps facilities and shrunk lead times below the competition and nailed on time and deliver it and 99% we're ready to grow and we're pushing our own boundary limits. Her again I'm excited for the future.
Flipping through the right revenue was down and $11 million or 13% sequentially purely on lower starting backlog and our long cycle engineered systems segment highlighted and below.
And this volume declined came as no surprise cause there and negative book Bill and prior periods on.
On the other hand, or industrial short to mid cycle businesses, highlighting green grew revenues sequentially, just not enough to offset engineered systems.
And for our site psychometric introduced last quarter, we were happy to see modest growth to $76 million up 4% sequentially on pumps and filters.
And the U S and Europe, but on a TTM basis, they're still down 22% market Pundant suggested the market is sitting at around 25, Gigawatts annually and expect this to rise to 30 over the next 18 months Nat gas as a feedstock remains cheap and gas turbines are still the fastest and most economical means of powering the grid we <unk>.
Aleve that as electricity demand continues to rise from summer 2020 levels, we will see an increase and new project Awards.
For midstream oil and gas, we track gas consumption and fairly closely and for 2020, the EIA reported a 3% decline versus 2019, and anticipate flat to down 1% to 2% and 2021.
Our focus for these products has been growing our position and water and wastewater separation, which has a greater near term opportunity for growth.
Briefly on slide eight our backlog sits at $203 million, which is up 11% sequentially and down only 3% year over year. Our book to Bill was a fantastic one three times breaking at sub one drought of five consecutive quarters, which is largely a result of the pandemic impact to our end markets our convert.
Pipeline grew from the last time, we updated investors to know $2 billion as measured and a 12 month window.
As we look to our 18 month window and our prospects are even greater and growing to say the leases and exciting time to talk about growth let's.
Let's turn to slide nine our gross margin bounce back to 33, 9% and the quarter, which is up 230 bps sequentially, but down 130 bps year over year with mix of short cycle and large engineered systems jobs driving the decline.
As we look at our current backlog and read the market, we like our peers are seeing modest commodity inflation, most notably and steel prices.
Expecting increases we've been vigilant to protect profitability.
We've increased prices, where most applicable and we shrunk the window of customer quote validity to protect against project margin erosion.
We feel good about the tools, we have to monitor and react as this plays out in the coming quarters I'll keep you updated on how we progress.
As for non-GAAP operating income and adjusted EBITDA, both moved South and volume declines were offset by SG&A reductions as Todd will elaborate on further our cost structure and the lowest it's been and five years and investors should rightly see that with continued market tailwind and the operating leverage that our business model provides will be very productive.
Firmly believe that as our backlog begins to grow and we continue to execute with our more efficient and streamlined cost structure that we will achieve full year EBITDA margin rates and greater than 13% and the next few years.
Slide 10 summarizes the quarter and total a few quick highlights.
FERC with revenue down, 11% and EBITDA down only 13% year over year, our decremental EBITDA margins were strong at 12% year over year.
Despite lower volume, our proactive operating expense reductions positioned our EBITDA to be one to two points above our 2017 cyclical trough and revenue on.
Operating leverage and a big upside for CECO.
Second GAAP earnings per share was <unk> and the quarter and down <unk> <unk> year over year, and our non-GAAP basis, EPS was <unk> <unk> and down <unk> <unk> year over year, both primarily on volume offset by cost.
As well as 2020, we continue to project, 25% non-GAAP effective tax rate heading into 2021.
Flipping to slide 11, we outperformed on cash flow and the quarter on the left side trade working capital decreased sequentially by $6 million, primarily on solid customer collections, but also bolstered by better upfront billings that comes along with a growing backlog as outlined last quarter on backlog has grown for CECO customers are typically paying us early.
On the right you can see we generated nearly $10 million of cash flow from operations and invested 500000 and capex to arrive at $9 4 million on free cash flow on the quarter.
This is the best performing quarter since Q4 of 2018 for CECO hats off to our sales and project management and finance team for responding to a call for action last quarter.
Briefly on slide 12, our balance sheet remains healthy we paid down 3 million of debt and the quarter to arrive at $71 million. Our bank defined leverage ratio is relatively flat at one <unk> and our net leverage sits at <unk> with approximately $55 million of capacity available as the backlog starts to convert and second half arc.
Capacity will expand providing opportunity for bolt on M&A to advance our environmental mission on.
I'll conclude with I'm proud of the team for an excellent quarter, it's nice to be talking about growth of our costs. Once again I'm excited about our second half and even more excited about executing on strategy ahead of us Todd elaborate on that further Todd.
Thanks, Matt, let's move to slide number 14.
We are rebuilding our backlog and expect to return to revenue growth and the coming periods. Our pipeline of opportunities is near $2 billion and we expect to build on the momentum that has helped us put up several quarters of orders growth and as both Matt and I have highlighted our growth is balanced across most platforms and end markets.
We have a number of key organic initiatives across our business platforms, and we are working to prioritize ones with a combination of highest impact in best markets and with a healthy balance sheet will be clear and purposeful around areas. We will focus our capital allocation to steadily transform our portfolio and the one with more short cycle sales and.
On a higher blend of industrial revenue mix the financial targets, we have articulated over the past few years remain in place, but we will update them as we progressed through our execution. The key is that we will have a focused set of prioritized platform initiatives as well as and equally focused capital allocation approach.
Now please turn to slide 15, which we included the demonstrate our structural benefits as we turn to growth.
Simply put we have a more streamlined cost structure and far less complexity to reducing head count and tackling ERP system consolidations is not easy and it has been a steady process.
But over the past few years and somewhat accelerated in 2020 because of the COVID-19 pandemic. We have established a cost structure that we expect will translate into strong EBITDA and EPS expansion over the next few years, a greater than 20% reduction and head count since 2017, a 65% reduction and ERP.
And additional system complexity all of this translates to greater than $10 million annualized reduction in SG&A and a baseline for real earnings power I. Appreciate all our CECO employees that are rolled up their sleeves and help to transform our organization into one poised for higher margin growth.
Let's wrap up with slide 16.
A great start to 2021, thanks to team CECO for continuing to focus on our customers while navigating the challenging work environment brought on by the pandemic, while things are improving and many areas and it remains a challenge and our thoughts are with the millions of individuals still impacted by the terrible pandemic, our end markets continue to improve over.
Hall, and our sales pipeline has never been larger our strategy progress has brought clarity to our initiatives and focus areas and we continue to make the right progress with our ESG initiative, which will result, and our first ESG report in short order, we have a cross functional team of leaders, compiling our ESG data policies and other materials.
And have outside resources, helping us put together, a great foundation of information and targets and with.
With that we thank you for your support and interest and CECO and we will open the lines of questions operator.
Yes.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Ask a question you May press Star and then one using your touched on telephones.
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Pause momentarily to assemble the roster.
Okay.
And our first question today comes from Sameer Joshi from H C. Wainwright. Please go ahead with your question.
Thanks, Thanks, Thanks for taking my questions.
Good morning, So just looking at.
Flips flow congratulations on the nice bookings there.
Hello.
And finally, just Simplistically AD bookings over the last four quarters, they amount to around 340 million on those.
And then.
And remind me of your timeline of longer term projects and how do you see this.
And working into 2021.
And you will.
And I have and you also have 340 or what is the expectation then.
Yes, thanks and good.
Morning, It was a good quarter bookings.
And this is Todd and I will start answering and then ill hand, it over to Matt to provide additional detail on the longer term projects, which which makes up the bulk of our bookings and go into backlog those generally start to turn into revenue and around and around six months, we'll get some upfront revenue potentially.
Depending on the type of project sooner than that maybe even within the first quarter, but the majority of the revenue starts at around the six month, Mark and and Rolls out to 12 months to 18 months, depending on the duration on the project so but a bulk of the revenue. If you look at sort of a bell curve is between six to 12 to 16 months on the shorter cycle obviously.
Which is 22, 5% of our revenue those those term from if they do go into backlog as a booking they will turn into into revenue and in the quarter and.
And the 30 to 90 day timeframe, Matt you know the second half and Q1 and next year and looks good and based on bookings here continued growth on our pipeline and sets up for more corp. Another quarter of good orders and that continues to roll forward. So Todd talked about it perfectly.
Okay.
This increase mainly from the are there that you announced in March from auditing from this event or was there other contributions.
That growth significant Venezuela.
Net order was specific and the gas turbine exhaust business, where we came up with and optimized solution.
Help to stabilize the grid, we're excited about what we did from a technology perspective, I wouldn't say that was anything abnormal as far as size goes in the 92 million that we printed in Q1.
Understood.
Just moving to <unk>.
SG&A.
Typically it was up.
And of course, you have done a good job and get them, but it was up sequentially was it mainly because of non cash items or was there anything specific that caused the uptick a little bit.
I'll, let Matt handle the details, but I think most companies see a sequential increase not all the time it depends obviously, but but for US a lot of the sequential increase was where certain things that have been.
And are associated with either healthcare.
Incentive compensation just in terms of how we're accruing for the year, obviously time will tell on some of those items in terms of how they flush out stock comp expense things of that but I wouldn't call them onetime in nature, but there are periodic and the sense that it's not like we increased our head count or our corporate cost per se. It's more how we're how we're recruiting for certain expense.
Items, and we start the year versus how we finished the year.
And yes, and I think that might be answer and that's it.
Yes variable incentive comp that was basically zero at the end of Q4, and obviously, we started occurring and so that in Q on health care expenses and didn't exist and Q4 come back in Q1 tax expenses associated with employee things of that nature Samir.
I think I think it would be helpful. We continue to believe that our if you want to call. It current normalized SG&A by quarter and somewhere between 18 and $19 million range. So if it goes a little below a little above those are typically going to be in the period adjustments or accruals that we may be adjusting in terms of as we go through the.
Year, but I would I would try to be helpful on that and that way.
Got it and $18 million to $19 million is on a GAAP basis right.
And that is on a GAAP, excluding stock comp and depreciation.
And just yes got it.
And then just last one but trying to juxtapose two items that were highlighted in the press release about.
Some more clarity on diversified industrial markets and the <unk>.
Second about.
On the M&A expertise that <unk> brings to the table should we read something into that.
What should we expect to meet or indeed, if anyone.
Yes, I think look we've we've been somewhat consistent over the past few quarters as we've as we've provided external commentary and net.
And we're excited about the organic opportunities within CECO, we think our end markets are healthy and continuing to get healthier, obviously, theres still a little bit of uncertainty and the market out there in terms of the recovery from the pandemic, but our balance sheet is and a good place our cash flow generation, obviously and the first quarter and.
And we expect for the year is going to be strong and we'd like to continue to evolve our portfolio to include a balanced of and industrial businesses that we think fit really nicely and our environmental and.
And and industrial theme as well as businesses that can provide more short cycle revenue for again revenue mixed balance. So yes, I think you can look at us, adding a great operating leader for our organization. As we are currently built but somebody who understands and and can help us strategically identified businesses that they continue to provide.
And even healthier portfolio mix.
Got it.
And so on that.
Good luck quick wins.
Thank you have a good day.
Once again, if you would like to ask a question. Please press star and one.
Our next question comes from Bill <unk> from <unk> Capital. Please go ahead with your question.
Thank you and at Titan capital.
Let me start relative to bookings and <unk>.
Order activity would you discuss the pattern.
And that activity level over the course of say the last six months I'm really thinking starting and in November or so and I think.
And kind of bring us, bringing us up through and through April and I guess, you're welcome to talk about the first six days of May and if you'd like.
We don't have a lot for you Bill on the first 60 days of May but let me.
Let me say look I think.
Q.
And an interesting it's been an interesting year plus with everything that's gone on and the global.
Economies and pandemic related impacts Q3 for US was a turning point I think we'd say as we as we close the book on Q3 and as we were navigating Q3, we were seeing.
We were starting to see our pipeline our future orders really start to move up but we haven't booked.
Those orders, yet and we were still interested and concerned a little bit about when those projects would be sort of authorized and released so that we could you saw on the fourth quarter and now you've seen and the first quarter two really good sequential peer.
Periods of orders growth and I think.
Intra quarter trajectories are healthy there.
And we're always a bit backend loaded like a lot of larger project companies are that the third month of the quarter defines the quarter, but.
I would say that what we feel really good about is the engineering work that we're still getting which is an indicator of these projects are starting to be led the capex is starting to be released because we're being asked now to not only bid on projects, but start to do some advanced engineering work that continues to be sustained.
And in across a couple of key end markets and that have energy exposure, but also just broad industrial exposure I'll, let Matt also talked about anything that we're seeing in terms of the analytics to kind of answer your question from that from that momentum and I. Just go back to Q3, though I would tell you that.
We are very backend loaded so a lot of orders come and the last.
A few weeks of a quarter, but a good.
Kpis for US is also the first 45 day, because you've created a solid base and I would say that if I look back at Q4 October or the first part of November we are starting to get a lot stronger than the first part of even Q3, when we wrapped up Q1 of this quarter just now.
The first 45 days and was stronger than the first 45 days.
Q4, and I will tell you that as far as April goes right now, while we haven't released or anything there.
First month of Q2 is stronger than the first month of Q4 and the first month of Q1, So again that goes back to our pipeline and our conviction about growth right now.
And that's important to us it's not just one or two areas. It feels like we have quote unquote a lot of options. If you want to think about who were pass on the ball to around the field and we have a lot of open receivers and so we hope to advance from Q1 book what time will tell.
Great. Thank you and then because we are reasonably new to this story I don't have the perspective and the last time that you had orders of 92 million or greater and did you have that off the top of your head and I know it's longer than the five quarters and if you have been here presentation Q.
Q3 of 19, and Q2 and 19, we're both over.
Great. Thank you and then lastly for now.
Uhm Ramesh congratulations on on bringing him and his.
Chief operating officer, what is his initial focus.
Within the business.
There's no shortage of things that are going to be added on a on messes list of duties, but I can tell you. One is we are excited about continuing to advance our growth profile and ensuring that our platforms as we sort of articulated here, which is how our customers buy from us how they see us as leaders and this space solving complex.
Albums, It is ensuring that each of our platforms has the right short and long term strategies to maximize their growth and profitability.
Okay. So I could interpret part of that answer is as focused on on.
On acquisitions.
And the other part of the answer focused on making the existing business more profitable did I hear that correctly and if so would you would be able to put one in front of the other.
I would say strongly one is remasters focus on operational and organic strategies with with certainly bringing a lot of seasoned expertise around areas, where we may be able to fill gaps and our growth profile or even profitability profile with small.
Acquisitions that we could add to our core and remasters focus is going to be on that continuing to drive our operational strategy, which is again, mostly focused on on propelling our core businesses organically.
While while I think it gives us.
Myself Mad and others.
The the added time to think about our portfolio more broadly.
And also really dive deep into the best growth opportunities within our current business.