CECO Environmental (NASDAQ:CECO) Q3 2020 Earnings Call

0:00 Good morning and welcome to the SECO Environmental Third Quarter 2020 Earnings Call. All participants will be in 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. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Matt Eckel, Chief Financial Officer of SECO Environmental. Please go ahead. Thank you for joining us on the SECO Environmental third quarter 2020 conference call. On the call today is Todd Gleason, Chief Executive Officer, and myself, Matt Eckel, 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 cecoenvironment.com.

1:00 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.

1:46 Today's presentation will also include references to certain non-GAAP financial measures. We reconcile the comparable GAAP and non-GAAP 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 Todd.

2:00 Thanks, Matt, and good morning. We appreciate you joining us today. As we navigate through the COVID pandemic, we continue to focus on the health and safety of our employees, customers, and communities. We hope all of you are safe and healthy as well. Let's get into the materials. Please turn to slide three. It has been a busy and informative time for me since I joined SECO in early July. I've had the opportunity to engage with many of our employees and external constituents. Here are some observations and updates on what I see as someone still relatively new to SECO, asking a lot of questions and evaluating the opportunities. We will delve into the financials and markets in more detail in a minute, but like many companies, we have seen a dramatic pause from the COVID-related market impact.

2:46 We are regularly monitoring customer and market information. We would acknowledge that certain markets would still have been challenging this year regardless of the pandemic, such as oil and gas refining. But overall, we estimate over 80% of our orders decline is attributable to customers slowing down capital spending and pausing various projects because of COVID. It reminds many of us of the financial crisis in 2008 and 2009, or the sudden impact from events like 9-11. We remain confident that as markets steadily recover, we are in very good position to rebound too. I've highlighted a few market comments on the slide, but we will touch on these a little later in the materials. I continue to be energized by the tremendous talent at SECO.

3:32 Our employees are focused and engaged and want to drive success for our customers. At the core of our strength is the 300 plus engineers and application specialists, which comprise approximately 40% of our workforce. Our engineering team is the heart and minds of SECO. They have a passion for solving our customers' emissions and water issues, and their expertise is at the core of SECO's value internally. In short, they are solution providers. We will continue to leverage this core advantage as we drive growth and new markets and partnerships. The bottom section of the slide points to some new or heightened areas of focus that we have been driving and introducing since my arrival. There was a solid foundation in place for many of these items, so my job, in many cases, is to help prioritize and push for results.

4:23 We must and we will make more progress driving recurring revenue. We are putting new metrics in place to evaluate our recurring revenue streams and working to build new capabilities and incentives to drive results. And, like most companies, we continue to advance our operational excellence programs to drive productivity and streamline processes. And finally, We have done some good work with adjacent markets, but not enough. We can utilize our leadership position to build new relationships and revenue streams. We will continue to apply new processes and resources to drive new growth. It's time that SECO steps up our game on providing more leadership and detail around environmental, social, and governance, or ESG programs.

5:08 I frequently joke with our staff that we are like an honor roll student that hasn't shown up to take the test. ESG starts with disclosure and broadens with leadership action. We have a great story to tell. We just need to start telling it. In essence, we're going to show up for the test. I have assembled a talented cross-functional leadership team to drive our ESG initiative. More to come on this later, too. And we have a robust strategy and business transformation program underway. SECO has many opportunities for sustainable growth and market expansion. both organically and inorganically. We will have a detailed strategy and execution plan to follow as a result of our recently kicked off work. Let's keep moving. Please turn to slide number four.

5:56 On the top section, we provide a summary of our financial results. Orders were approximately $67 million, which was down 40% year over year. Customers in oil and gas refining and other energy sectors continue to delay spending. Sales of $77 million was down 9%. Both order and sales reflect the reality of the markets and timing of projects and are not at the levels we strive to deliver. Gross margins were 32% and EBITDA came in around $7 million. Finally, adjusted earnings per share was 11 cents and free cash flow was $6 million. Our trailing 12-month free cash flow is up $2 million compared to the preceding 12-month periods. Despite the challenging operating environment, our SECO team continues to execute very well, and I want to thank them for their efforts to focus on health and safety while delivering for our customers.

6:52 The middle section of the slide highlights key market commentary. We have a diversified portfolio with a view of many industrial markets. Discussions with our customers and channel partners, as well as our levels of proposals, bids, and general market trends provides many insights. We would suggest that refining is at or near the worst thought of its experience in my business lifetime. Our products in this category aren't discretionary, so as these customers begin to ramp up production or even address various maintenance and repair programs, we believe we will see a strong rebound here. We are already starting to see more studies and engineering assessments, so perhaps we are on the front end of the steady climb from the bottom.

7:37 Time will tell. Midstream oil and gas has also been largely halted as a result of the energy slowdown. We are starting to see more project bids and believe this market will continue to show pockets of recovery as well. In industrial air, we saw very encouraging signs in the quarter. Our orders were up 60% versus the previous quarter and up double digits versus the third quarter of 2019. No doubt markets will remain choppy and uncertain in the near term. But we are starting to see good growth in various markets and expect trends to continue to improve. As we position for 2021 and beyond, the focus remains on execution, cost management, and of course starting to drive the initiatives I have discussed on the previous slide. Now please turn to slide number five, which provides detail on orders by market.

8:29 On the left side of this slide, you can see the market and orders numbers associated with our energy segment products and solutions. And on the right side, you will see the industrial and fluid handling figures. I won't read all the numbers by sub-market, but instead make some high-level comments. Sequel orders and refining market were down 85% year-over-year. Our team has served this market for decades and has rarely to never seen this level of drop-off in the market. We believe this market has bottomed out and are starting to see higher levels of engineering studies and RFQs. Simply put, our products are not discretionary in this space and this end market will steadily rise. Midstream and power generation also witnessed double-digit declines. Some of the reasons for year-over-year declines are the result of delays in capital spending, but some are also related to the very difficult comparable to third quarter 2019, which saw extremely high project bookings.

9:27 and in our industrial solutions and fluid handling segments, we saw some mixed results year over year, but very good sequential growth. We believe those markets continue to improve. Let's turn to slide six to look at additional market commentary. This is a new slide for our earnings report. Let me hit some highlights. On the left side, we have listed our long cycle business exposure. These are energy markets that typically go into backlog and turn to revenue over a nine to 18 month timeframe. and on the right side are shorter cycle markets that are at least 50% faster to convert from order to full revenue. Starting with some highlights on the long cycle markets. Refinery, we believe, as we've said, is at the bottom.

10:12 We are well positioned for recovery as our FCC cyclones are mission critical. This market has deferred maintenance given the slowdown in demand and capital constraints and will rebound. Midstream oil and gas has had a surplus of supply for some time, and as we expected, this market was going to be slower heading into 2020. CECO continues to do a nice job offsetting the slower midstream market by expanding new products and new market penetration and water separation, and also U.S. naval contracts. Power generation in natural gas has stabilized, and electricity demand continues to rise. We believe the COVID pandemic delayed this market recovery given the market had been in decline for several years. We are well positioned with leading solutions in noise attenuation and NOx emissions.

11:03 On the shorter cycle side, our industrial solutions comprise leading air quality solutions to combat pollution to ensure equipment runs efficiently while protecting the environment. We continue to see improvement in sequential orders. In fluid handling or pumps and filters, There continues to be a mixture of recovery and delay. We have focused on improving quality and delivery and will start to increase our investment and growth as we believe our solutions will be in demand. Finally, in PowerGen solid fuel, we have a large install base that we will continue to serve with replacement systems. This market is the only one in secular decline, but our Apex Major JV is well positioned to serve the large market and is a small percent of our revenues. Thanks for your time letting me go through this material.

11:51 I will now hand it over to Matt, who will give more detail on our financial results. Thanks, Todd.

11:57 I'll start with slide eight and orders. At $67 million of orders, we are disappointed at the levels, but understand the market situation we are facing is choppy. There were several bright spots as industrial markets started gaining momentum in September. Activity in semiconductor, wood manufacturing, automotive all provided a 40% sequential lift for industrials. and our fluid handling business, primarily driven by pumps, was on par with its peers, growing 8% sequentially. Energy, on the other hand, was relatively flat sequentially and averaging just $40 million in orders per quarter. Refinery markets have been hit the hardest with just over $10 million of bookings in the last six months. To put that in perspective, year-to-date orders are down 32 million or 63% year-over-year.

12:42 Our Emtrol-Buehl branded FCC cyclones serve this market and as both the large integrated and independents continue to preserve CapEx, this business has been struggling. What is certain is that our customers are deferring maintenance CapEx that they will have to circle back to resolve in the near future. We've weathered this cycle in 2017 and our conviction of a market snapback is high. To the right, revenue is up 3% sequentially and did not progress as we had anticipated. Customers continue to delay engineering and site commissioning work as they battle a resurgence As a reminder, greater than 80% of our revenue is recognized on a percentage of completion basis. As customers and suppliers slow down, so does the execution of our backlog.

13:27 Progress, especially in Europe, the Middle East, and India, have stalled, weighing on the progression of our large oily water separation project. The end user and EPC are resolving scheduling differences, keeping this project from moving faster. Similar situations are occurring domestically, where our industrial services business is at less than 50% of its pre-COVID levels due to restrictions on customer site access. Moving to slide nine, our backlog is at 189 million, which is down 8% sequentially and 20% year-over-year. Unfortunately, in the quarter, we did de-book two U.S. projects. One of these orders was put on hold beyond 12 months, and another has been canceled. Both projects were relayed to manufacturers that support the aerospace industry, which is extremely hard hit from the COVID pandemic.

14:16 We remain in great relations with these customers and expect to be re-awarded when this market returns. Neither project has progressed, thus there were no revenue or costs associated with these cancellations. As the operating team here navigates this push-pull period of COVID, I'm very much pleased with their execution. Despite the ever-changing customer schedules and scope, we are maintaining our margins and cash flows through purposeful execution. Moving on to slide 10 and our key profitability measures. Our gross margins were at 32% in the quarter, which is down two points sequentially and year-over-year, primarily due to project mix. As suggested last quarter, a few higher margin projects have come to completion and replaced with larger jobs with margins below our SECO average, putting pressure on our margin rates. One of those jobs being the large double-digit Middle Eastern project previously mentioned. As you can expect, in the areas we can control, we are pruning costs in our plants and driving productivity to offset the project mix.

15:15 Hitting on non-GAAP operating income and adjusted EBITDA, both measures were down sequentially and year-over-year driven by volume and margin. I'm pleased with the proactiveness with which we've taken out costs in response to this downturn. As of the end of Q3, we've executed on all of the $10 million annualized cost savings target communicated in Q2. To put this in perspective, Since the beginning of the year, we've executed on a furlough, cut wages, shuttered three facilities, exited a lost business, and eliminated 20% of our global workforce. As an asset-light company that prides itself on being people deep, we don't take these actions lightly. These have been aggressive cuts, and it's been a tough year. However, our focus has to be on cash preservation while maintaining our market share through the next 12 months.

16:01 As a final point, our actions over the last three years to simplify SECO By reducing ERPs and legal entities, consolidating business units, and investing in technology and process has made us nimbler and enabled us to make these cost cuts faster. Had we not made the investment in prior years, we would be in a much different position. We continue our simplification journey, and just this past quarter, we've closed two more entities and another ERP, further reducing our SG&A footprint. A special thanks to our IT leadership team and the arting management team for overcoming an ERP implementation during the middle of a pandemic. As we start our 2021 AOP planning process, we have already built contingency plans to right-size the company further if markets don't recover.

16:47 And the automation activities we've invested in today will serve us well tomorrow. To say the least, this team is prepared. Now on to slide 11, which summarizes several of the metrics already discussed. Instead of reading the page, I'll briefly point out three highlights. First, with revenue down 9% and EBITDA down 13%, our decremental EBITDA margins were strong at 14% year-over-year. Despite lower volume and gross margin, our SG&A cost reductions preserved EBITDA at 9.4%. Non-GAAP SG&A was $18 million in the quarter and down $3 million from Q1 of 2020 when we began our cost-cutting efforts. We are laser focused on costs through this COVID period with already greater than $10 million in annualized savings achieved.

17:32 Second, GAAP earnings per share was a loss of one penny and down six cents year-over-year on approximately $3 million of expenses associated with M&A integration, executive transition, and severance-related expenses. On a non-GAAP basis, EPS was a positive 11 cents and down one cent year-over-year on volume and project mix offset by SG&A and interest expense. Final point, regarding tax, we still anticipate a 25% non-GAAP tax rate for total year 2020. Pushing on to slide 12, Wharton Capital is down sequentially to $41 million on a very positive quarter for AR collections. Our project RIP has grown, but primarily on our large Middle Eastern project that has back-end loaded milestones. We are executing this project well and look forward to its progression in the coming quarters. Due to the strong air activity, free cash flow bounced back in Q3, generating $6 million in the quarter. On a TTM basis, free cash flow is 15.1, which is up $2.9 million from the previous trailing 12 months.

18:34 Cash flow is a paramount to the SECO business model, and I'm pleased to see our TTM as a percentage of EBITDA at 46%, with aspirations to exceed 65%. Concluding on slide 13, our balance sheet is healthy, and we are prepared to weather this pandemic. We paid down $2 million of debt in the quarter, and our bank-defined leverage ratio is a comfortable 1.8 turns. And our net leverage remains sub-one with ample capacity. Keeping it crisp and to the point, I'll turn it back to Todd.

19:03 Thanks, Matt. Please turn to slide number 15. The markets may be challenging, and of course, we look forward to sustainable orders growth to replenish our backlog. But we want to stress that we are in a good position to weather the downturn and really capitalize on the recovery. Let's put some SECO perspective to this statement. In 2017, when the power gen markets went down sharply and the refinery sector slowed, SECO was structurally more challenged. The organization had yet to integrate the infrastructure associated with previous acquisitions, and debt level ratios were above three times. We navigated the downturn through various actions and divestitures, then set our sights on reducing complexity and integrating the organization. The downturn driven by the COVID pandemic has produced similar rapid declines in orders.

19:50 This time, however, our playbook is more proactive. We have taken decisive action to reduce structural costs by over $10 million. We have far less redundancy and complexity so we can focus on actions to drive faster returns. Our balance sheet is in very good shape so we can and have used it for appropriately sized acquisitions such as EIS in the first half of this year. And we have the ability to focus on growth initiatives to best put ourselves in position for market recoveries. While the orders and backlogs have been impacted by the market downturn, our organization is healthy and we will leverage our streamlined structure and growth focus as markets recover. Please turn to slide 16 which reinforces this view.

20:36 As we emerge from this downturn and continue to drive our growth and productivity initiatives, We remain committed to the financial targets listed on the top of the slide. These are the same targets we have highlighted in previous earnings presentations. 5% top line growth, which we believe we can sustain in normalized markets. Obviously, in some recovery scenarios, our growth should be more robust. We expect to achieve EBITDA margins greater than 13%. This is a 300 plus margin expansion from today's level. We will need the volume conversion associated with our streamlined cost structure and continued productivity actions. Finally, we have historically been a solid free cash flow producing company and intend to maintain that pedigree. With those achievable longer term financial goals, we are increasing focus on things we can control right now to drive results.

21:27 We continue to focus on cost and productivity actions, but we are increasing our growth programs. Our goal is to expand into new adjacent markets. like what we have done to grow over 100% in military naval orders. And we look forward to increasing recurring revenue. As I mentioned earlier, we will be articulating our ESG-related highlights, metrics, and commitments. We look forward to a phased rollout and sharing our ESG story publicly. Please turn to slide 17 and thank you again for following along in this material. We are anxious to get to your questions. But once again, we would like to thank Team Seco. We will continue to focus on health and safety, and we will continue to deliver results for our customers. In the quarter, we had solid execution.

22:15 We are in better position with the portfolio moves we discussed. Several of our end markets remain very depressed, but we see trends heading in the right direction in most of our markets. And even in refining and midstream oil and gas, we are seeing increased activity. Over the coming quarters, We will highlight our progress with respect to strategic initiatives and ESG rollout. Our team continues to work hard to deliver solid results for here and now, but also position SECO for a very bright future. With that, we would like to open the line for your questions. Thank you.

22:52 We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jim Picciutti of Needham and Company. Please go ahead.

23:24 Hi. Good morning.

23:26 A couple of questions. You seem to be suggesting that you think there's going to be and some of the maintenance-related refinery business. And obviously you guys have been doing this for a long time. So what's your best guess as to when some of these customers really get to that point of having no choice and you're going to start seeing that? Is it Q4 or is it early next year?

23:52 Yeah, good question, Jim, and good to talk to you and the rest of the group. This is Todd. So a couple of thoughts. Good in that we're already, as we mentioned in the prepared remarks, we're starting to see more studies and the early sort of engineering work associated with that market realizing the need for our product, which oftentimes goes into that sort of repair, maintenance, replacement cycle. So as far as the exact timing goes, We're more likely looking at 2021 in terms of orders. But again, we're starting to see an uptick in that sort of early study demand and activity. So we feel good about the recovery coming.

24:41 Timing's elusive, obviously, for a variety of end market reasons that we all understand today. But that's sort of what we see in front of us right now.

24:51 Got it. And just with respect to some of the bookings, cancellations, and the related to aerospace. Wondering how much of that was there any revenue associated with that business in Q4? How should we think about when you were planning to see some of that revenue, or was it more in the first half of 21?

25:14 Yeah, again, this is Todd. I'll take that, and then I'll hand it over to Matt to see if he wants to expand on it. and no revenue was certainly in the current period associated with those. Those were all or at least the vast majority of the bookings, the backlog was associated with revenue next year.

25:33 Yeah, very little was planned in our forecast there, Jim, for Q4. Most of that was supposed to kick off in 21. Only the engineering portion of that was planned for Q4. It's a very small percentage.

25:45 Okay, and if I could just slip one more question and look seasonally. Q4, you see some sequential improvement, but this is really a different world right now, and I'm just wondering, is there any way to think about Q4? I mean, obviously, your bookings were really soft, and is there any color you could provide as to how we might think about Q4?

26:05 Yeah, we typically don't have a seasonality factor to the company when you look at any of our businesses, albeit if you're going to track the last four years, UTQ4 is usually our lightest quarter on orders from a bookings perspective. And that's the majority of the reason why is because 80% of our business is really CapEx decisions by the customers, and some of them like to be judicious in the quarter and hold on to that CapEx. But, you know, with what's going on with COVID, the elections last night, we're hopeful that things are breaking free. Industrials, we're seeing some sequential growth. So we're feeling positive that Q4 is absolutely going to be better than Q3 and Q2. So it's a question mark on energy and we're positive about Q4.

26:51 I'll note too, Jim, I wasn't here last year, but I've heard a lot about it, and the third quarter was a great quarter. Timing oftentimes is certainly out of our control and sometimes even our direct customer's control. It could be who they're supplying and the project demands of the ultimate end customer. Anyway, regardless, third quarter last year was higher than maybe even we expected heading into the period. Things came into the third quarter last year that would have likely been more of a second half of 2019 balance. So Q4 was somewhat brought into Q3 a little early, which is one of the notes that I mentioned around the tough comparable year over year. I think even in a normalized environment, non-COVID environment, We would have just had a tough comparable versus the third quarter of last year, and which, again, tees up that the fourth quarter last year looks low, but I would almost want to move a little bit between the two quarters to make fourth quarter last year look a little more normalized if you were ignoring the quarterly spread there.

27:57 So, anyway, regardless, we feel that Q4 is going to be sequentially higher.

28:02 Got it. Thanks a lot. Thanks for the comment.

28:06 The next question comes from Pamit. Thank you. The next question comes from Amit Dayal of HC Wainwright. Please go ahead. Thank you. Good morning, Todd and Matt.

28:18 Good morning, Amit. Yeah, thank you. Thank you. Good morning. In terms of your emphasis on the recurring revenue opportunity expansion, are you thinking of taking steps to lower exposure to the energy vertical maybe as it stands for you today? And if yes, you know, what are the sort of easiest opportunities for you to leverage, you know, your current infrastructure resources to maybe make an entry into?

28:49 Yeah, I think, I don't know that I'd say that we're looking to lower our exposure to the energy sector. I think, you know, just to kind of pound the table a little bit on our focus on recurring and some of its blocking and tackling work. It is having more insights from a data and metrics perspective on where we have defining what recurring revenue really is within our organization. I guess simply put, applying more management metrics and focus on it, especially as we head into next year and our planning cycle. Where do we see pockets of opportunity around recurring? But it's not necessarily moving focus away from where we're typically strong and well-positioned in project business. I just believe, and I think I'm not alone, that we leave some opportunity on the table to go back after customers with with where we have a very large install base and ensure that if there's an opportunity for us to do replacement parts, replacement filters, replacement systems and solutions, that we're in front of those customers earlier and more often in their service cycle than we have been historically.

30:02 Understood. And now we're almost going into three or four quarters of sort of weaker software performance from a market environment perspective. Is customer behavior slowly sort of adapting to this new environment where, you know, things kind of stay where they are and they manage with, you know, fewer or lower CapEx, et cetera? Or, like you said, maybe there is a bounce coming on this run?

30:31 I mean, I think if we look out over the next three, four quarters, we can say with a high degree of confidence, again, we're already seeing industrial markets at or above last year's levels. So, you know, and we're still in the middle of COVID, and there's still a lot of concerns around demand and investment, capital deployment, et cetera. So in a good section of our organization, much like many other industrial companies, We're already back at a very good level, and we believe that's going to continue sequentially. There's always challenges and some timing issues, but we feel good about the industrial sector. Energy, again, like we said, in the areas that have been impacted the hardest, the hardest hit, refining probably being the one that we would say is certainly at the deepest bottom that we've seen.

31:24 Now it becomes a story of repair, maintenance, things that we believe the industry has prudently probably been very conservative from a capital perspective as everybody is conserving cash and trying to right-size for the demands in the marketplace. But there's little to no scenario right now, as our pipeline would even demonstrate, that we're going to see a year in 2021 similar to the year that we've seen so far and we expect to see in the fourth quarter in refining for one large sector of the energy space. We believe that starts to come back and where we participate in the solutions we provide just based off the demand that's going to have to occur in the repair and replacement side.

32:13 Thank you for that.

32:14 Maybe one question from Matt. Matthew indicated maybe there are potential further cost cuts possible if, you know, the weakness persists. You know, what level of cost cuts, what areas would you, you know, be focusing on with respect to that if it materializes?

32:35 Yeah, we'll be focused on our SG&A predominantly. The majority of our cost of goods sold is tied to our production network, which is all third party for the most part. and so there's not a lot of cost to go at. It's internal to SECO in that COGS line. It's not tied to backlog and back-to-back contracts with our suppliers and our customers. So SG&A would be that focus there. Look, since last time we spoke, we met our obligation of greater than $10 million of annualized savings. That's been executed. I suspect based on the proactive nature of what we've done, we'll exceed that number with some actions taken here in the fourth quarter and we're continuing the contingency plan So if the markets don't rebound and we are heading into 2021, or as I said, they're prepared marks, it's about preserving cash and cost and shareholder value through this COVID period.

33:26 So we are tallying up more options and opportunities. But be sure of this, we're going to ensure that when this market returns, we're positioned well to take to take share and win in the downturn, just like we did after coming out at 17 and saw a resurgence in 18 and 19. So I'm not ready to prepare a new target for us just yet, but we're above the 10, and we have more plans.

33:54 Yeah, and I think I'll just add to that. You know, it's a challenging time right now for a lot of organizations. and we're weathering it and our employees understand and are pushing really to perform for the customers, be great team players with each other and everyone understands that this is a buckle down period for SECO and a lot of companies like us. So, you know, we appreciate their commitment and hard work just like I think they understand that we're trying to put the organization in place and we have and we will continue to for what we know will be volume recovery at a structurally streamlined organization that produces well above historic average margin conversion. So our goal as we look at cost, of course, is to do certain things that are short-term in nature when appropriate. but most importantly is to put ourselves in structural position internally for a sustained model where we have to add back fewer costs to realize the volume as it comes back up. So that's what we keep rolling up our sleeves and working on are smarter, better ways for us to have a reduced redundancy, better systems and processes and structure so that when we come out of this, and we will, that we're producing very above average margin returns.

35:10 Understood.

35:13 That's all I have, guys. Thank you so much for taking the questions. Appreciate it. Thank you. Great questions.

35:18 The next question comes from Tate Sullivan of Maxson Group. Please go ahead.

35:24 Hi. Thank you. Good morning and thanks for your comments. Can you just review your aerospace and defense exposure across your product portfolio and I mean, specifically Navy, is that all water separation work? Looking at slide six, or can you just get any more? And then where is your aerospace exposure as well? Yeah. Within your segments, please. Good morning. Good to talk to you. This is Todd, and then I'll hand it over to Matt. Aerospace exposure isn't necessarily direct aerospace exposure. And again, the wording on the slide is trying to point to that. It is, we have customers in, let's say, metals, aluminum manufacturing and distribution that would supply that industry. We just happen to know that that's who, the reason the projects were either canceled, and in our definition of canceled, they may have They may have said, look, we want to reengage in 12 months, keep the engineering files, keep the engineering work, but in any time that there's a certain and many more.

36:50 You know, I'll let Matt sort of provide a size for it. But it's, you know, it's growing. It's up, you know, well over 150% year over year. We believe that there's a nice opportunity for even more global geographic expansion beyond, and we are bidding and working on beyond U.S. Naval because of some of the interesting solutions we have with some of our composite materials, rust proof, et cetera, that provides our longer term maintenance solutions on naval vessels. but I believe that the business is certainly about $15 to $10 million or so in size at the moment.

37:24 I'd only add the exposure as you used that word was tied to the aerospace customers we mentioned is in our industrial segment. Those are CapEx projects that were booked probably in Q1 or Q4 of last year that one of them, as I mentioned in the prepared remarks, The customer didn't actually cancel it. They just said, we need to delay this until things get better. And for transparency purposes and the way we operate, we said, it's better to de-book that. The other one absolutely was canceled, but I suspect when re-rewarded, we'll win it. I feel confident about that, but it's the right thing to do. But no exposure to the P&L there. None of the work had progressed on either of those. And we did a combing, and I don't see anything else that's specifically tied to aerospace that's of material value in our backlog tape.

38:14 and as far as the military, I think Todd mentioned, it's about 10 to 15 million. It actually rolls into, on the pie chart there, the upper left corner, midstream. It's our peerless brand. We just leave it in midstream because it's small. We could break it out, but it hasn't been big enough to split out just yet. But it is a growing opportunity for us in the area that we're trying to take our technology and apply it elsewhere as oil and gas has been shrinking of late. So good win for that team here in the Dallas office. is a recent month. Okay. Thank you both for that context. Thanks, Dave. Again, if you have a question, please press star then 1. The next question comes from Bill DeZillum of Tyson Capital.

38:59 Please go ahead. Great. Thank you. Relative to the refining business, what do you see as the key metrics to watch for for that industry to start to move forward on projects. Is it crack spreads? Is it utilization? And I recognize those two often go together. Or is there something else that's a leading indicator?

39:24 Yeah, I would add both of those in that order. And I would also add turnarounds. Those oftentimes, if you read what Valero puts out, marathons, refinery business, they'll talk about turnaround season and maintenance capex specific to that. If you see that going up, that helps as well. But you nailed it. We're, I want to say, close to 10 points below the five-year average of refinery crack spreads. By the way, Bill, just another note, we sell globally, so don't just look at the refineries here in the U.S. India, China, you name it, if there's a refinery and they have an SEC cyclone, they're using our product.

40:04 Okay, thank you. I'm going to ask an additional question here then. Do some refineries not use fluid? FCC, I assume, stands for fluid cracking catalyst, the cyclones. Do some not use that approach?

40:23 There are other means, but a very small percentage. It depends on the heat in which you're cracking, but for the most part, it is a very high percentage. I couldn't give you the exact percentage, but for the most part, you need it because catalyst is the way to actually crack, which separates the And then what about regulatory requirements?

40:52 And I'm asking the question in the spirit that we have historically thought of turnarounds as being really required unless you want to blow your plant up. And you've mentioned on the call here today that that these are largely required, but is there a regulatory, put to just general safety and running your plant smart, is there a regulatory requirement that some of these facilities are beginning to bump up against, or is that not part of the equation?

41:27 I think if you're just talking about refining and FCC cyclones in general, there are some regulatory associated with it, regulatory compliance associated with it. But for the most part, you're talking about equipment efficiency, you're talking about The process associated with the refining component that the cyclone participates in. So it's more process requirement than it is regulatory requirement on the refining side. Now, in other areas, obviously, as you know, Bill, across a variety of our other markets, both in energy and industrial, et cetera, now regulatory compliance, and demand start to step up notably, and especially in various parts of the US and various parts of the world, they can vary.

42:18 But if you're looking at other parts and products of the market, then regulatory becomes a bigger component of why we're there.

42:29 Okay. So just to make sure I'm clear, the real key here with refineries and turning around the FCC is that the efficiency decreases and ultimately it's an economic decision to do the turnaround and upgrade the cyclone.

42:49 Is that correct? Couldn't have said it better ourselves. Great. Thank you both for the time. Thank you, Bill.

42:56 This concludes our question and answer session. I would like to turn the conference back over to Todd Gleason for any closing remarks.

43:05 Thank you and thanks everybody for the time and the questions. We look forward to following up with others throughout the day and in the next period of time. We hope everybody stays healthy, continues to stay healthy. I want to again thank our very many SECO employees that are out working hard for our customers and our constituents in their communities every day. Keep up the great work. and obviously it's an interesting time in the U.S. election cycle. So I think, you know, we're all interested in that becoming a more normalized environment. So we look forward to being in touch with everybody and we'll continue to drive for both our customers, our employees and our shareholders. Thanks and have a great day.

43:51 The conference has now concluded. Thank you for attending today's presentation.

43:55 You may now disconnect.