Good day, ladies and gentlemen, and welcome to the second quarter 2008 CECO Environmental earnings conference call. My name is [Carmine] and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Dennis Blazer, CFO. Please proceed.

Good morning. Also joining us on the call this morning will be Phillip DeZwirek, our CEO, and Richard Blum, President and Chief Operating Officer. Before we begin, I would like to caution investors regarding forward-looking statements. The U.S. Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Any statements made today that are not based on historical fact are forward-looking statements. Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain. We therefore caution the listeners that there are a variety of factors that could cause business conditions and results to differ materially from what is contained in our forward-looking statements. For a description of some of the factors which may occur that could cause actual results to differ from our forward-looking statements, please refer to our 2007 Form 10K and in particular the discussions contained under Item 1, Business; Item 1(a), Risk Factors; Item 3, Legal Proceedings; and Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations. Now I'll do a quick review of our financial results, which will be followed by comments from Mr. Blum and Mr. DeZwirek, and we will then open the call for questions. For the three-month period ended June 30, 2008, net sales decreased from $59.2 million to $57.4 million. Gross profit increased from $9.9 million to $10.8 million. Gross profit as a percentage of sales also increased by 2.1 percentage points from 16.7% to 18.8%. Selling and administrative costs increased $1.8 million to $8 million, operating income decreased from $3.3 million to $2.1 million, and net income for the quarter was $1 million compared to $1.1 million in 2007. Earnings per diluted share were $0.07 compared to $0.08 in 2007. For the six-month period ended June 30, 2008, net sales increased from $102.7 million to $104.3 million. Gross profit decreased from $17.7 million to $17.5 million. Gross profit as a percentage of sales decreased slightly by 0.4 of a percentage point from 17.2% to 16.8%. Selling and administrative costs increased $3.6 million to $14.8 million. Operating income decreased from $5.8 million to $1.3 million. Net income was $0.5 million compared to $2.3 million in 2007, and earnings per diluted share were $0.03 compared to $0.18. And now I'll turn the call over to our Chief Operating Officer, Rick Blum.

Thank you, Denny, and good morning, everyone. The first thing I would like to talk about is the addition of two new companies to the CECO organization. I spent the last two days in Montreal with the people at Flextor. Flextor is in the same business as our Effox subsidiary and, as we said in the press release, we intend to operate those two companies together as one operational entity. The reasons this acquisition makes sense are that first, there is very little overlap in the two company's customer bases, and second, Flextor adds to our international business. Flextor has customers in Europe and Israel and throughout Latin America. If you call the company's offices in Montreal, you will find that they can do business in English, French, Spanish and Portuguese. They are truly an international company, and we intend to expand that capability. We recently announced that Effox secured a project in Saudi Arabia and that we will build part of that job in China. By combining Effox and Flextor, we are on our way to building the best organization of its kind in the world. Next week I will be going to California to welcome aboard the people at A.V.C. Specialists. A.V.C. going to operate at a subsidiary of Fisher-Klosterman and well report to the people at Buell, a Fisher-Klosterman subsidiary, in Lebanon, Pennsylvania. We see a lot of opportunity in the replacement parts business in the ESP market. It is a market Buell is already in and this acquisition gives us a larger customer base in it. A.V.C.'s business fits perfectly with that of Buell. We've said before that we intend to continue growing by acquisition. The targets we have in mind are equipment-oriented companies such as Flextor and A.V.C. Both Flextor and A.V.C. enjoy higher margins…

Thanks, Rick. As Rick mentioned, we're still in the process of resolving the large H.M. White contract, and that lack of resolution has obviously affected our results and has disappointed both our shareholders and, of course, our management. That being said, I want to assure you that we are doing everything we can to get that matter behind us. But looking forward, we feel we are taking the right steps in what is going to be a continuing acquisition program and taking the right steps in growing our existing businesses and making them more efficient. In order to keep building our platform and executing our strategy, we're confident that CECO will have a bright and profitable future. And I'd like to discuss the position that CECO is in right now. We have, of course, grown extremely quickly over a short period of time. We have acquired seven companies - six or seven companies; we lose track because sometimes a sub is a sub of a sub - but we have acquired at least six companies in 18 months. We now have established a platform in the United States, Canada, China, India, Chile, Brazil and Mexico. When I say a platform, we actually have facilities in all of those countries and offices. Our SG&A, if you looked at our statement, was slightly out of control. It's really a factor of growing as quickly as we did in as short a period of time and not having enough time to consolidate and get all the refinements and all the savings that are involved in that period of time. Our margins after a long period of time have now begun to increase. In the last quarter, if you look at our margins, that's a substantial increase despite the fact that the H.M. White…

(Operator Instructions) Your first question comes from Theodor Kundtz - Needham & Company.

I got on the call a little bit late, so I missed some of what you may have said. We have a conflicting call going on here. This large contract, it sounds like you took another charge in this quarter for this and I thought that was all written off in the first quarter. So I'm a little puzzled why it's passing over into this quarter, if it is. It sounded like it was. And so if you can maybe explain that and maybe help us, if you could size this for us, what are we talking about here in terms of the - it sounded like another $0.5 million charge here in this quarter. So maybe you could clarify this for us and where this whole thing stands and what the dollar amount is we're talking about.

As far as the dollar amount, yes, you are correct, Ted. Let me back up. First of all, the customer is very happy with the job, and that's an important fact. It's also a fact that we're hanging our hat on. We did take additional charges. They basically involve the fact that we are still on the site. There have been delays, mainly around training of the customer's personnel to operate the equipment, delays that - we frankly feel they've been caused by the customer. In other words, we're ready, they're not. Beyond that, we are in continuing negotiations with the customer over the issues of the unreimbursed costs that were caused by customer delays, the fact that there was a strike by the customer's employees, and beyond that, issues of scope, in other words, were we supposed to give the $10 worth of stuff and they got $11 and we want to be paid for $11 instead of $10. It's really no more complicated than that, but it is taking longer to get those negotiations settled than we would like.

So you have an ongoing expense here training these folks? So we could see this in the next quarter?

No, by - I said that last quarter. Don't laugh. It's not funny. No, I think we will. We plan to be off that site within weeks. And we're down to the point where we have hardly any people there, so it's not that -

Okay, so the charge this quarter will be minimal - or the expense, excuse me, the expense this quarter that you've already put into this thing.

I would hope that at the end of this quarter what we will show is some income instead of expense when we resolve the issue. The issue that we - the additional charges that we took, again, revolve around the fact that we are negotiating now. We had some hard extras, if you could call them that, that we negotiated with the customer, took some charges because some of those things we're not going to get, and then had the ongoing expense. But that all revolves around our strategy because we have this large claim - claim is not the proper word because it's not legally a claim; that would be the last step - but we have put all of that in the format that the customer requested that we present it, and it is in front of their people now and moving through the process, which means the operational people, the purchasing people, etc. And it takes time. It takes more time than we thought it would.

Can you possibly size this for us?

Can I give you an estimate of what we hope to recover?

Yes.

At this point I'd really rather not. The order of magnitude of what we asked for is quite high. If we would get all that it would be, you know, it's in negotiating.

So it would be booked as what?

Revenue.

Revenue and income.

Just as revenue with no cost associated?

Yes. Yes.

So there'll be a spike in your margins. Will you isolate it out as to what it is when you report it?

What was the question?

Will you isolate it out when you do record it as revenue? Will you isolate it? Will you give us some idea of what it would be to show us -

Yes. Yes. We will definitely disclose that.

It's going to flow right to the bottom line.

Settle that and we'll disclose it.

[Inaudible] flow to the bottom line because we have subs that will get some of the money because our subs are on a pay when paid, so our subs don't get paid unless we get paid. So there is some of that. There will be some expense related to the claim, so it won't fall 100% directly to the bottom line.

And then could you turn to just maybe talk about the - maybe you covered this; I apologize for not catching all the call - but maybe just a little bit on the international outlook that you're seeing and what kind of activity you're seeing overseas?

Well, we're seeing more and more the acquisition of Flextor, as I said earlier - and I'm happy to repeat it because I'm excited about it - the acquisition of Flextor gives us a whole new dimension, especially in the power industry because Flextor's business, while they do some business in the United States, most of their business is not here and they have a very strong presence in Latin America. They have a legal entity in Chile. They have a legal entity that's almost done being set up in Brazil. They do business in both those countries and elsewhere in Latin America. They fabricate through subcontractors in Latin America, so they make their products down there. The market down there in power is behind where the market is in the U.S., in other words, controls that are already typically in place here are not there or are being put in place. They are, Effox and Flextor, are dealing together now with international customers in the power industry. As a matter of fact, when I was in Montreal this week the Presidents of Effox and Flextor were speaking with a customer in Europe who wants me to go over there for a day and meet with them. We're hoping to actually have the meeting here in the U.S. when he comes here next month. So all of that and then, you know, as I said, we're fabricating Effox product in China now or we will be soon starting. We're making CECO Filters products in China and have sold two projects already and fabricated - we fabricated the first one in India because we weren't ready to start up in China, and then fabricated the second one in China. And all of that is growing at a pretty good rate. We are extremely optimistic about our prospects in Europe and Latin America and in Asia.

Now could you just address - last question and I'll get off - maybe the bookings issue. The bookings, I don't know what they were for the quarter in total, but they look like they were pretty healthy.

Well, our backlog dropped.

Dropped a little bit, but it didn't drop that much.

It dropped, what, about $3 million, Denny?

Yes, $3 million, right.

We're continuing to book at a fairly healthy rate. We've kept the backlog up around in the '80s, high '80s. We hope to keep it there going forward or maybe even to build it. We've been doing it without hitting any grand slam homeruns. We haven't had any, you know, there's no $50 or even $30 or $20 million project sitting in that backlog. It's all - we're hitting doubles and triples. And it's been very healthy. The people at, you know, Effox is on track to be a company that might be twice the size of the one we bought. We have a good growth pattern historically at Flextor. This is a company that built itself up to a $15 million business over a five, six, seven-year period. A great group of people, young, energetic people, people who are used to doing business internationally, used to all the issues of - even the traffic manager there is a young lady who, in their business, since most of their product leaves the country, you know, a whole additional set of issues involved in getting product out of one country and into another, and it's just a normal day at the office for them. In fact, when I was speaking with their proposal manager who's actually a native of Brazil and she was talking to me about how it is such an advantage to be able to call down to the customer and the customer, in their culture, they want to talk rather than e-mail, they want to speak to people. And they really appreciate the fact that they're speaking in their language and not in English. We feel that's a great advantage. We see our international business doing nothing but grow.

So you sound fairly positive that you can increase the backlog, that's the tone I'm getting, that the bookings look like they're running pretty strong and you would expect going forward to continue that, at least 1:1 kind of booktobill ratio. Is that a fair statement?

A 1:1 would be, yes. To jump it exponentially is going to take some large -

Wasn't thinking exponentially. I'm just thinking 1:1 with the increasing sales you've got going, you know, so you can increase the bookings.

Yes. We need to, you know, when I look at Effox, we've been knocking the ball out of the park. We're seeing a lot of refinery opportunities. I was with the President of Buell and Fisher-Klosterman yesterday in Montreal and we were at another facility where we do some subcontracting and [building] of our products. We have the ability through this subcontractor to take something of any size, literally, to the port. If it can fit on a ship, it can be made in this facility - it's not our facility - and put on a ship and shipped anywhere in the world. In the refinery business, that's an advantage. We're discussing strategies to grab more of the pie in some of these projects.

(Operator Instructions) And there's no further questions at this time.

Okay, we'll give it another few seconds. If nobody has any questions, we will end the conference.

I would like to add one additional comment, Phil, with regard to the recent acquisitions that we've made. We have made five acquisitions in the last 17 months, and I think it's important for everyone to know that the last acquisition was partially funded by subordinated debt which was provided by our Chairman, Phil DeZwirek, which certainly is a great indication of his faith in the company and our future. And I think that's an important point for people to keep in mind.

I'd like to add to that [inaudible] that, you know, I have a very long history with CECO as it stands. I was the founder. I've seen it grow from $200,000 to approximately $250 million or plus over a fairly brief period of time, especially with our spurted growth through acquisitions. And we're proud of the fact that we remained, outside of bank, debt free for the last few years after, you know, spending a lot of time eliminating a lot of debt. And when it came time to do these acquisitions and when we're in a position when the banks are in more trouble than the customers, the banks have run out of money, and we tried to do whatever we can through our banking facility and yet keep enough money to run a rapidly expanding business, it was really both a pleasure for me to keep funding this company and keep whatever debt we have in friendly hands which, in this case, happened to be myself and ensure that CECO can continue to expand without having the limitations of a lot of companies in this present economy, especially when there are so many opportunities because of the limitations on banking and venture capital and underwriting that the general market is not providing. I feel that the opportunities for CECO are so great that whatever help we can get from friends and family and people who believe in us that we will be able to continue our expansion program at a very advantageous time, which is now and the foreseeable future. So hopefully everybody will benefit from this support. And so that's it. We'll give you one more chance for a question, having this little bit of knowledge, and then, if not, we will cut off the call.

Your next question comes from [Eric Pisoro] - Regent Group.

I would appreciate it if you could further address the financing in terms of, you know, do you have a process whereby you're sort of shopping that opportunity to finance the company before you're committing to that financing?

We certainly did. Well, first of all, we shopped with our banks and there was - which was our first, you know, the first gate we went to. It wasn't large. It wasn't large enough to get an underwriting of anything of that nature because the cost of doing it would have been way out of proportion to the size of the financing. It was only $5 million. And the legal fees and the accounting fees, if you do it on an outside basis, on a $5 million deal could cost you the same as on a $50 million deal. So that was a factor. And Denny, you can ratify this because you had the discussion, but we did ask our banks what, on a mezzanine financing, what interest rate they would charge us, and was it 15% or 16%, Denny? What was the number?

It was 16% to 20%.

Yes. It was going to be, in this current environment - and this is, of course, a debenture that is subordinated to all the bank collateral. And the outside quote was 16% to 20%, and this was done at 10%. So I don't think you could have shopped much better than that.

Plus the warrants, though.

There's no warrants. It's convertible.

Convertible, that's what it was? Convertible at the stock price?

It's convertible at whatever the stock was on the day it closed, which is a higher price in the current market, I can assure you of that.

In terms of forecasts for the year, can you give us any guidance there?

We don't give guidance. We hopefully and certainly anticipate that we'll be doing a lot better than we're doing right now.

And you have a follow up question coming from Theodor Kundtz - Needham & Company.

Maybe we can just address the gross margin trends here a little bit. They've popped up very nicely. Is this kind of the range you can expect to see going forward or do you see anything impacting that excess recovery from General Motors? But ex that, what do they look like?

I'm going to let Denny answer this because this is a lead-in question but before that I just want to say that, as a matter of business principle and philosophy, we are trying to ascertain that every company that we acquire, unless it's an extremely special situation, has a higher margin than what has been our traditional margins and certainly that has kicked in. And Denny, you can take over from there on that answer.

That's basically a discussion we've had on almost all the conference calls and essentially our gross margin percentage is the result of product mix. But as Phil said, all of our recent acquisitions, the five acquisitions we've made in the last 17 months all have higher margin percentages than our typical historical business. Additionally, once we get this large project out from under our feet, that will have an impact upward on margins as well. We can't really predict what the range will be, but we would anticipate that margins will continue to increase over the next 12 months. And again, as I said, it depends on the product mix which of our divisions are actually selling the most product in a particular reporting period. But we do anticipate an increase.

I mean, this large project really shouldn't be impacting margins anymore.

No. Although, you know, as we said, it impacted margins.

It has, right. It should be totally gone.

It significantly impacted our first quarter.

And Denny, just on the SG&A levels, then, you kind of bumped up to a new level here, and I assume that's just C&E, you know, again reflecting the acquisitions, etc. We could just take a look at that in terms of, as a percent of sales, it's not so bad. It's really - you think of it hanging around this level? Or ideally we'd get some operating leverage out of this as we go forward.

We definitely anticipate operating leverage as we go forward. We are acutely aware of the need to focus on these expenses. As I said, we've done five acquisitions in 17 months. We typically are not consolidators. We don't go in and take our acquisitions and roll them up into corporate. However, there are a lot of opportunities for synergy. Part of what is slowing us down somewhat, as we mentioned in the press release, is the Sarbanes Oxley compliance. A lot of money's being spent on that. A lot of time and effort is being spent on that. We are also incorporating a new information technology system, and we have essentially postponed integrating the system piece of our acquisitions until we get the new system in place and feel more comfortable that we can use that as our platform and start bringing these new acquisitions on board. So we are heavily focused on this and are aware that we need to get that cost down.

But going forward from this level, you're sort of indicating it would move up a little bit because of these extra charges going through, the Sarbox, which is going to continue for you. The information technology platform, that could kind of flow through. That could be more of a one-time or, you know, several quarter impact. I'm not quite sure.

I would anticipate that we'll plateau at this point. I don't see any significant increase from where we are right now. I think as we start to realize the synergies it won't come down as quickly as we would like because of these other issues that we're dealing with, but I don't anticipate it'll go up higher before that.

Okay, you're talking on a dollar basis or a percentage of revenue basis?

A percentage of revenue. Of course, we're still in acquisitive mode and there's always a chance that we'll throw another acquisition into the mix.

Oh, I know that, but excluding acquisitions, right?

Yes. Yes.

At the base business here now.

Yes.

Your next question comes from [Larry Herme] - Oppenheimer.

[Inaudible]

We can't hear the connection.

I might have missed this in previous calls or today, but the property for sale, is that still for sale?

Would we sell it at the right price? The answer is yes. Is there any deal on the table at the moment? The answer is no. The people who have been talking to us for years - it's been going on for four years at least - have not been able to put their financing together and at the moment we have no intention of moving from Oakley.

So that property's still occupied?

Oh, yes. That's our main plant.

I didn't understand. I thought it was empty.

No, it's not empty. It's where we operate. And a lot of the facilities around us are abandoned and their value is a lot less. To us this land is - in order to sell this facility we have to get enough out of it in order to buy another one or build another one.

With the real estate market being what it is today, realistically this thing is on hold.

It's on hold.

Yes.

As busy as we are at the moment, I don't want to move. I've got enough stuff going on.

I second that.

Your next question comes from Ted Wheeler - [Volkagen Research].

I'm the rookie on the call here, but I just, I guess, in hearing comments about having the platform ready to go and kind of well-positioned in a terrific market, and I think about a few acquisitions over the past few years and I look at the revenues and it seems to me the organic growth is negative. And if you're going to continue to make acquisitions I guess I'm wondering, is there a disconnect here? Is there some timing issues? Or just is there any need to sort of reassess a little bit considering, I guess, I think that the organic growth is not positive?

There have been two things that you have to take into account. As I said in my remarks, our contracting operations are not at plan for '08. They are being affected by the general state of the economy in the U.S. Secondly, when you look at our revenues, we had that large contract that we booked in '06 which primarily shows up in our revenues in '07. It was about $50 million. It was a little in excess of that. And that contract is a, you know, we have replaced that essentially with other business from either our acquisitions or internally. And thirdly, we have had a downturn in the ethanol market. We did book an order very recently, but the amount of new business that we are getting from that market is nowhere near what it was a year ago or even six months ago because of everything that's happening in that industry.

As I understand it, then, this comparative issue with the large contract maybe behind us, and the ethanol business also might be at a low enough level that the positive things that are developing under the radar, so to speak, might become more visible and we'll see some growth. Is that a way to think about it?

I think, yes, that's a good way to think about it.

And we have no further questions.

All right. I want to thank you all for coming and listening. And you all know that if you need individual attention or ever need to contact us, we are available at most anytime by phone or by appointment. So I'd like to thank you again all very much and call the conference call over. Thank you.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.