CECO Environmental Corp.

Good morning and welcome to the SECO Environmental Conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Matt Echol, Chief Financial Officer of SECO Environmental. Please go ahead.

Thank you for joining us on the SECO Environmental first quarter 2020 comments call. On the call today is Dennis Sadlowski, Chief Executive Officer, and myself, Matt Echol, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at secoenviro.com. The presentation materials can be accessed through the investor relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings on Form 10-K for the year ended December 31, 2019. 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 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 gap and non-gap numbers in today's press release, as well as the supplemental tables in the back of the slide deck. And with that, I'll turn the call over to Dennis.

Good morning, everyone, and thank you for joining our call. I hope that you and your loved ones have been in good health throughout the COVID-19 pandemic. And like all of you, I look forward to better times ahead. On this call, I'll take some time at the outset to discuss SECO's response and adjusted posture to successfully navigate the COVID-19 pandemic and its economic fallout. To use a generic sports analogy, we've strengthened our defense and refocused our offense. Next, I'll summarize our first quarter performance, which, with our team's strong execution, delivered solid results. despite the accelerating social and economic changes and challenges emerging from the pandemic. Following that, I'll touch on our end markets and what we're seeing in the midst of the world's effort to mitigate and contain the spread of the virus. Matt will then discuss our financial details after which I'll share a couple of examples of the work our teams continue to drive ahead despite the global economic shutdown. That'll lead us into the Q&A session where we'll address your questions. As we jump in, I want to emphasize that SECO has already taken several decisive actions in response to these unprecedented times while maintaining our commitment to progress through superior execution. Let's begin with slide three, which shows our 433 operating strategy that successfully guided our execution since late 2017 and into much of the first quarter. The 433 operating strategy was a blueprint for transforming Seco Environmental into a vibrant growth company. In 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 through the COVID-19 health pandemic and its economic fallout. Quite simply, under the 433 strategy, We built the plan, executed the plan, and delivered results. The strength, agility, and results from our execution put us in a strong position headed into these uncharted waters with an 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 433 operating strategy in soccer terms. as an offensive-minded approach to winning at SECO. Adding to that analogy is a graphic on slide four. You can see our four value creation enablers were akin to forward-looking defense solidifying the core of the company. At the midfield line was our three compelling end markets driven by the industry's need for sustainable solutions in the world's growing low-carbon economy. And leading our offense were the three core growth platforms engineered equipment, industrial air quality, and specialty pumps. COVID-19 triggered the need for a major short-term pivot. To paraphrase famous boxer Mike Tyson, everybody has a plan until they get punched in the mouth. And for just about every business, including SECO, the COVID-19 pandemic was that punch. Now, I'm no boxer, but let me follow up on Tyson's quote. specifically to say that even when punched in the face, fundamentally sound and growth-oriented businesses like SECO are expected to be resilient enough to withstand a blow and then quickly and confidently adapt their posture to forge progress. So in this altered state of the world, that's exactly what we've done. Bringing things back to my favorite soccer analogy, I want to share how SECO has adapted to what we're calling a 4-4-2 formation which is depicted graphically on slide five. This formation features a strengthened defense and a refocused offense. Not a long-term strategy, but it will guide us in making continued progress in this challenging world environment. I want to emphasize this point. Our capability and capacity to plan and execute is a compelling difference maker in serving our customers and creating value for our investors. The fact is, that while we all may be moving through the same storm, we are not all in the same boat. Starting on the defensive left-hand side, we've instituted a number of proactive steps that reflect 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 of our workforce, All of our office positions have been instructed to work from home. And our manufacturing plants, all deemed to be essential 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, especially in some of the manufacturing locations and with our fieldwork at customer sites. But we've remained operational across the business. and I believe it's a tribute to our customer-focused mentality and the strength and commitment of the entire global SECO team. Second, the senior leadership team and the board have taken temporary compensation reductions. We see this as a proactive measure until we get a better read on the direction of a post-COVID world. We also cut a number of staff positions 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 of Q2, which we believe will be an especially hard-hit period. All of our U.S. associates are taking a mandated two weeks of unpaid time off. I want to pause here and recognize and thank our leadership and every SECO U.S. associate for finding the strength to maintain superior execution and service to our customers during this difficult window of time. While our actions didn't materially influence our first quarter results, 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 a precaution, but a smart one that provides considerable flexibility to act with speed as a global economy evolves from the COVID-19 pandemic. I want to emphasize that we are monitoring customer and vendor activity as the prevailing restrictions and startup guidelines on economic activity. And we're prepared with actionable plans to take additional measures to strengthen our defense and refocus our offense. In the midfield are four value creation enablers. More than ever, each enabler is a multiplier of value creation for Seco Environmental. Even with our office staff restricted to work from home, they're staying true to our outside-in mindset and staying actively engaged with customers. And we continue to drive simplicity as 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 continue evaluating M&A targets that further our environmental mission. On the far right is the forward tip of our offense. Market-oriented sales and marketing efforts aimed at exploiting our competitive advantage to grow share in the active pockets of our energy and industrial end markets. I'll go into more detail on our end markets shortly, but I want to touch on the pockets of activity that our 4042 strategy is targeting. We're well positioned with a diverse set of served end markets and see promising activity, even in this heart of the pandemic, in food and beverage, semiconductor production, and process water. Our team has developed improved digital content and remains connected to drive share growth from these targeted areas. And we're encouraged about the potential infrastructure investments in the United States as part of an effort to get people working and the economy growing. Our team is ready with targeted specialty pump and air quality products and solutions to serve industries like asphalt production, which would see a surge in 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 proved that by successfully navigating the micro recession that simultaneously hit both power gen and refinery end markets back in 2017. Obviously, we're now facing unprecedented conditions that are broader and deeper than the micro recession. It's rough sledding in the global economy, but our experience and extensive playbook of tactics is an invaluable intangible asset. And that, along with our focus on superior execution, is why I'm confident that SECO's 442 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 pandemic's accelerating social and economic changes that challenged us during the quarter. New orders came in at 76 million, up 12% from Q4, with sequential orders up double digit in all three of our reporting segments after a down final quarter of 2019. A value to note is that while the pandemic slowed project order decisions across the board, our orders remained steady into the final weeks of March even as shelter-in-place requirements became more widespread. From a year ago, orders 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. The COVID-19 pandemic definitely muted our revenue growth as bottlenecks associated with the unprecedented lockdowns drove 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 if some customers modify their project schedules. It was good to see, even with lower revenue, our team's track record of strong execution produced a healthy gross margin of 35% which is up both sequentially and year over year. The higher gross margin helped offset the lower volume and resulted in an adjusted EBITDA of $7.4 million or 9.2% of sales. PICO also generated solid free cash flow of $6 million in the quarter. We continue to focus on converting profitable projects into investable free cash flow with even more vigor going into the crisis. Q1 was a challenging period of accelerating change as the weeks went on. It definitely tested us, and I'm proud to say that our consistent and high-caliber execution allowed us to earn solid results. We also competently pivoted our operating posture with an updated tactical plan to ensure that CEQA Environmental continues to deliver healthy progress. During slide seven, I'll provide some brief insights regarding the outlook of our end markets. Clearly, the outlook for our overall end markets has changed, and until we see what a restart looks like, we'll 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, PECO 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, and process water treatment. And much of our portfolio serves critical industries and infrastructure where capital and maintenance can be deferred but not ignored completely. So while today's commerce is in uncharted and rough waters, we're still executing with confidence and strength into our key and market segments. Referring to the left side of slide seven, the 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 US, so we don't anticipate any direct hits there. It's too early to conjecture what kind of second-order effects will come from the massive drops in oil price and 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 a challenging market going forward. The global sales team is closely monitoring client projects that remain active in our sales pipeline. Down the right side of the pie are the industrial markets served by both our industrial and our fluid handling solution segments. Both serve a diverse set of industrial applications with a 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. The sales pipeline has pushed out in a number of industrial markets, but several key pockets are active and expanding. Industrial air quality and filtration solutions for the food and beverage producers are 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 than usual, as they're using their lack of windshield time effectively. There's no doubt that customers have become more disciplined 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 contact. In closing, I'll say that it's still early and it would be quite speculative to forecast the other side of the COVID storm. Until we see more clarity on the horizon, we'll remain in our 4-4-2 posture with a strengthened defense and a refocused offense. 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 will emerge tomorrow. I'm fully confident that SECO is up to the challenge in every way. And with that, I'll turn things over to Matt. Matt, take it away.