Good morning, ladies and gentlemen, and welcome to the Second Quarter 2014 CECO Environmental Corp. Conference Call. My name is Kayla, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Shawn Severson of The Blueshirt Group, CECO's Investor Relations firm.

Thank you. Good morning, everyone. Thank you for joining us on CECO Environmental's conference call and webcast to discuss the financial results for the 3 months and 6 months ended June 30, 2014. On the call with me today are Jeff Lang, CEO and President; and Ed Prajzner, Chief Financial Officer. Jeff and Ed will be reviewing their financial results and will also provide an update on the company's strategy and outlook. Please note that in addition to traditional reported GAAP earnings, we provided non-GAAP financial measures in our press release today to enable better assessment of the ongoing nature of CECO's core operations. Jeff Lang's comments will primarily focus on these non-GAAP financial measures, and Ed will address the differences between GAAP and non-GAAP financial measures in his remarks. Following our prepared remarks, we will open the call for questions. This call is being webcast and can be accessed at CECO's website at cecoenviro.com. The webcast will be posted on CECO's website for replay approximately 2 hours following the end of this call. The replay will stay on the site for on-demand review over the next several months. Before we begin, I'd like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact 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, including our annual report on Form 10-K for the year ended December 31, 2013. Except to the extent required by applicable 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 have reconciled the comparable GAAP and non-GAAP numbers in the press release today. And with that, I'd like to turn the call over to Jeff to begin the discussion.

Thank you, Shawn. Good morning, everyone. We appreciate your continuing interest in CECO Environmental as we continue our journey to build a great company and grow our business. I'll provide an overview of the quarter and year-to-date June and some brief financial highlights. And Ed, our CFO, will discuss the financial results in more detail, and then we'll close with an update, some strategic comments and open it up for questions. Revenues in the quarter increased $22 million to $67 million. We're approximately 50% better than last year. The Met-Pro acquisition contributed roughly $23 million to the quarter, which was not included in the prior year period. Organic growth is picking up pace, a little flat in the first half, but July was better. On a consolidated basis, bookings were $57.7 million for the quarter versus $46 million last year, an increase of roughly 24%. I would also like to highlight that we had a very strong start in our third quarter, with July seeing roughly $30 million in bookings. As our bookings press release highlighted, our energy businesses is taking off nicely, which is the Aarding and EFFOX business, with more activity to come, and we're very excited about that business. Our backlog remained strong, reaching $96 million in the quarter, up from $78 million a year ago, down slightly from Q1 and some of the backlog-related timing issues we talked about in Q1. Year-to-date, July bookings were roughly $150 million, so we're gaining very nice momentum and building backlog, I might add, as we turn into the Q3 and Q4 in the second half. Gross profit in the second quarter increased to approximately $21.5 million, up $14 million from the prior quarter -- the prior year quarter, representing a 50% increase year-over-year. Non-GAAP operating income increased almost $10…

Thank you, Jeff, and good morning, everyone. As mentioned earlier, I will highlight both GAAP and non-GAAP performance for the quarter and the first half of 2014. Non-GAAP adjustments include acquisition and integration expenses, the impact of acquisition asset valuation adjustments on the income statement, which results in higher levels of depreciation and amortization, as well as earn-out payments made to the principles of Aarding. Our non-GAAP financial presentation is intended to provide trend analysis and a better assessment of our core business performance. Let's now turn to Q2 and the first half, the first 6 months of 2014. Year-to-date revenue was $123.8 million, a $45 million increase or a 57% improvement from the same period last year. Gross margin was 32.2% for the second quarter, essentially flat with Q2 of last year's same quarter. Although gross margin decreased from 34.8% in Q1 2014 on a sequential basis, on a 6-month basis, our gross margin is up 90 basis points on a year-over-year basis to 33.3% versus 32.4%. Selling and administrative expenses, excluding the non-GAAP expenses set forth in our press release today, increased $3.7 million to $11.7 million and decreased as a percentage of revenue to 17.8% from 18.2% in the second quarter last year. We continue to run a lean business enterprise with continuous improvement, which is integral to our CECO Environmental operating model. We expect our SG&A percentage to increase in the second half of this year as we invest in our organic growth. Operating margin was 10.8% in the quarter, up significantly from 7.4% last year. Non-GAAP operating margin, adjusted for the items I mentioned earlier, was 14.9%, up from 13.9% last year. Again, we expect continued improvement going forward given our operational excellence, consolidation and simplification initiatives. Now let's turn to the balance sheet and…

Thanks, Ed. We are pleased with CECO's overall results for Q2 and year-to-date June as we continue to grow our business and our year-to-date backlog and execute on our core basic objectives. I would like to take a couple of minutes to update our audience on the progress we made in the quarter, on some of our initiatives and how we're focusing on driving shareholder value, and then we'll open up for any questions you may have. First and foremost, sales excellence and sales focus to drive organic growth. Despite modest end-market environments in the second quarter, we did manage to increase revenues 50% versus last year. Our organic sales initiatives are beginning to take hold, and we expect our team will drive even further success forward and have a stronger Q3 and Q4. We're very pleased with our year-to-date July bookings of $150 million. Revenue actions and drivers, of course, are the global natural gas activity, China -- our China air pollution control segment, domestic large industry -- industrials, recurring revenue expansion. We did launch 2 new products this year that are starting to take shape, driving business. We've added sales capacity and sales engineers across many of our segments, and of course, our OneCECO sales initiative, which I'll talk more about in a little bit. The team is on heightened alert around bookings growth and revenue opportunities. Number two, of course, operational excellence, plant optimization, margin expansion is very important to the CECO model. We'll continue to improve margins and are close to reaching our 2014 aspiration of 15%. The CECO environmental operating model, which I believe is a competitive advantage, is starting to take shape as we see better margins as a continuum, and that is our goal. As we grow organically and with additional acquisitions, our…

[Operator Instructions] Our first question is from the line of Brian Drab with William Blair.

So maybe the first question, you mentioned that in the second half, we should see revenue improve. I guess can we put a finer point on that? Do you think that we'll see the quarterly run rate in the second half of the year up from the second quarter? Or is it second half of the year revenue better than the first half? If you just put a finer point on that.

Yes. I think if you look at the history of CECO, and actually, there's been a lot of excellent research written around CECO, we always -- Q1's a little bit slower than Q2. Q2 picks up pace, Q3 is better than Q2, and Q4 finishes strong. So we're expecting additional revenues and bookings in Q3 and Q4 better than the first half.

Okay. So typical seasonality should hold this year, it sounds like.

Yes.

Okay. Good. Okay. Good. And then there's this issue in the first quarter, around $7 million in revenue, that was going to be delayed into the balance of the year. I'm not sure whether I missed that this morning or did you comment on whether that $7 million has shipped in the second quarter?

I think some of that was digested and processed in Q2, and maybe some of that is still hanging into Q3. But I think that's in good shape.

Okay. Okay. And then maybe just the last one for me. Organic revenue, as you said, it had -- and according to my forecast, was a little bit below what was expected. But I guess that means that Met-Pro is doing a little bit better than expected. Can you just talk a little bit more about what you saw from Met-Pro, what the growth was there, and maybe the drivers?

I think both businesses were probably tracking similarly. The way I'm kind of looking at it, Brian, is year-to-date rev was around $124 million in book -- in actual revenues. I think Met-Pro was probably around $42 million of that. So we saw year-to-date revenue pro forma last year is $121 million. We picked up a few million on that. But I think the CECO and the Met-Pro businesses are tracking similarly in terms of organic growth. And July was very nice, and we see the outlook being stronger. But we're expecting revenues and bookings to be slightly stronger in Q3 and slightly stronger in Q4.

Your next question is from the line of Ajay Kejriwal with FBR Capital Markets.

This is Dan Shapiro filling in for Ajay. Just quickly on gross margins, I think you had given a 34% to 35% number on your last call for '14, and margins came in a little late this quarter, at least for our model [ph] . So I was just wondering if that outlook has changed at all for the full year.

No. Actually, the way we're looking at that, Dan, is last -- full year 2013, our gross margins were 32%. Year-to-date June, we're tracking at 33%. So our message for the past few years is we want to grow 100, 150 basis points on gross profit and operating margins, and we're doing that. So Q1 was slightly higher than Q2, but that could have been a little bit of favorable mix from 1 quarter to the next or perhaps, project mix flowing from Q1 to Q2. But we're on track to see a nice uptick in gross profit year-over-year. And I think 33% is a good way to look at CECO, given our mission to grow revenue and bookings. So I think we're on track for a nice growth this year on both gross profit and operating margins.

Got it. And then maybe on China, could you just provide some details on maybe how much China contributed as a percentage of revenues, and maybe your expectations going forward?

I don't have that number handy, but I do know that China is having their -- having a record year for CECO. We are trying to hit or exceed $20 million in revenue and bookings for the full year. There's a lot of exciting, strategic things going on in China under Brent Becker, our President of Asia. We've added additional sales engineers. We've launched additional projects -- products. The Me Sieg [ph] business, which was part of Met-Pro is now fully integrated with CECO China. We do have a couple of small, smart, accretive bolt-on acquisitions in the due diligence stage. We've got -- we have some new strategic alliances. There's just a lot of exciting things going on with China right now. And I would say China's impact on CECO's business this year will be much better than it has been in years past. We're on our 10th year in China now, all organic growth, and we're being well received. And there's a lot of inorganic things we're studying, as well. So the short answer is $20 million this year is our aspiration for China.

Your next question comes from the line of John Quealy with Canaccord Genuity.

So first, the $96 million in backlog, and I'm sorry if you said this, when is it expected to ship, if you could give us sort of a '14, '15 and beyond '15 look?

Good question, and we study that and we discuss that frequently, John. The way we're thinking about it, of course, year-to-date June was around $96 million in backlog. We had a big bump in July with bookings and backlog, so we think we picked up quite a bit, maybe $10 million or $12 million in backlog. And the way we're thinking about our backlog is potentially $20 million of that would be for 2015. So we're thinking we have a $90 million number that could be processed and digested in 2014.

Okay. Great. And then back to the gross margin question. So roughly speaking, blended gross margin in that backlog, is that, that sort of 33% range that you're talking about? Or is there some variance to that, sort of 32%, 34%? How do you think about that?

We think it's pretty good. We think it's pretty good to where we're trending. Some of the new business that we're pursuing, particularly on the energy side, might be slightly lower in gross profit for all candidness. But there's opportunities to improve that, and most of that will trend into 2015. But we focus on project execution, margin expansion and everything we're doing. So our goal is to hit that 33% this year. And of course, for the past 5 years, we've expanded margin, and going into '15 will be no different.

Okay. And my last question on the recurring business on the revenue side, did you break that out? And again, if you could just give us some update on how's that tracking to plan in terms of increasing then. I think it's about 30%-ish or so in a yearly basis, how that's tracking to your 50% midterm, long-term goal?

Yes, good question. Our aspirations are to build a reoccurring revenue aftermarket business, so that it reaches that -- a bigger portion of CECO's total mix as we grow. That will take some organic strategies, as well as some inorganic opportunities to reach that. But in general, the short answer would be the reoccurring revenue business from the installed base and the KB ducting business is probably trending in the first half very similar to the engineered equipment. So obviously, you bring up a great point, we need to make sure we step on the accelerator on that in the second half. However, we did add probably 3 or 4 additional sales engineers to drive the reoccurring revenue side of our business in Q2, which should have a positive impact on the second half. So we do expect the reoccurring revenue aftermarket portion of our business to end the year better than the engineered equipment side. Great question.

Your next question is from the line of Sean Hannan with Needham & Company.

So just a question here in terms of organic growth. So I think that -- sorry, I don't know if the line is going in and out. Organic growth, I think that's been a little bit elusive for you guys on a sustained basis at least for some time. So you folks certainly have done a great job in terms of working through M&A. But Jeff, now, you sound pretty positive on organic growth actually coming in. So I suppose ultimately, the question is this. Do you feel that this is relevant, really, for the near-term horizon such as September or maybe the back half of the year? Or do you think that there's maybe something, a bigger picture that's unlocking budgets, moving projects forward, something bigger, either from a general demand environment perspective that's helping to provide the necessary undercurrents?

Yes, I think that's a good question, Sean, and the organic growth piece is very important to our strategy, and we're very focused on that. I think this -- the brief bullet is through July, we booked around $150 million in revenues, $150 million in bookings. That number is up versus bookings last year, though we don't want to get into publishing too much of Q3 numbers right now because it's all not in. But we're very pleased with the $150 million in bookings through July. However, where is that coming from? Some of the drivers are China, global natural gas. We are seeing some nice uptick from the OneCECO sales strategy and we hope the reoccurring revenue will do a better job in the second half. We did have a couple of businesses that are -- that started slow. Our FKI/Buell cyclone business, which is a wonderful business and it's had a great couple of few years, started slow this year. So they need to do some catch-up on the organic side. Our Strobic Air business, that's been around for half a century, started off very slow this year. They need -- and we've got a new management team in there that's doing a terrific job and we're seeing some nice bookings trends there. So we have a few drivers that are showing nice organic growth and we've got a couple of businesses that started slow that are going to have a better second half, but we're looking to maintain our message on organic growth. I think we've messaged the 15% in revenue growth each year, 7.5% from organic and 7.5% from inorganic as a mix, and we're aspiring to hit that by year end.

Okay. That's great color. Secondarily, when you talk about the second half of the year, you focused on a pretty specific in terms of up-revenues, up-bookings and up in terms of income, I think operating income dollars or maybe EBITDA dollars. I'm not sure if I recall exactly what that focus was. But on that piece of it, can you be a little bit more specific? And is there any implication here that margins could temporarily take a step back before moving forward again in the longer-term picture?

Yes, sure, Sean. From a specificity perspective, we -- I read we've had some great research, reports written on CECO, and I look at -- I study those and I look at those and I think the consensus has us at $270 million for the year. And that would be a nice aspiration for us. That would be a nice challenge for us, and that's probably within our sight. Regarding margins, the way we think about our business is, for 2014, is in the 33% gross profit business, in the 18%, 18.5% SG&A. And we're already knocking on that 14%, 15% operating margin door, so we're probably going to hold true to those numbers. And I think the 29% tax rate seems to be pretty consistent for this year.

Your next question is from the line of Scott Graham with Jefferies.

So it looks to me, I think, like others are also sort of trying to triangulate toward is that the organic growth in the quarter, it looks like it was down 3 because I believe only the Met-Pro acquisition was the one that has not yet anniversary-ed. And when we consider that some of the $7 million shift ahead from first quarter dropped into the second quarter, obviously, the base business dropped even more than 3%. And Jeff, you started to talk about some of the weaker businesses. Cyclones and Strobic Air, obviously, there had to be some others. Could you list those for us?

I don't have the full list, but we have 3 or 4 businesses that are outperforming and we have a couple few that started slower. And again, the FKI/Buell started slower. The Strobic Air started slower, and we have a metals business, Busch, that started a little bit slower, but their booking activity is going to catch up. So I don't want to paint too much of a picture around that because I see these businesses catching up. But on the revenue side, Scott, we're looking at the $124 million in revenue for the first half, and our math is showing we did $79 million last year with $42 million this year from Met-Pro. That puts us at $121 million. So we're showing revs slightly up or flat for the first half. On the bookings side, we're showing, if we throw in July, which is material, we're showing the $150 million compared to a much lower number year-to-date July last year. So we think there's some upness in the bookings. We think there's some upness in the operating margins. So there are some nice trends, and we typically do better in Q3 and Q4, so we're feeling pretty confident about the second half.

Okay. Yes, I was really trying to get more on the second quarter. I guess maybe we'll -- offline, we'll compare math on the first half because it looks to me like organic was down as opposed to your suggestion that it was maybe up. In any case, I'm happy to do that offline with you. The other question I had is -- relates to what you're seeing out there legislatively, Jeff. We had sort of CASPR start and stop. Is there any update you can give us off of your intelligence on CASPR more than what's been published out there by the agencies? Anything else new that would be out there that could help you guys in the U.S. business?

No, I think you're on it. The Jefferies research report was very good. I think you know a lot about that, and you've researched that. I probably can't give you any more color other than we have 2 energy businesses, 1 driving the global natural gas piece, which is doing very well, and the other is our core EFFOX business, which is the traditional power business, which is doing very well. The best utility plants in North America are continually upgrading to meet and exceed the CASPR regs. And they are doing that and EFFOX is a premier brand and participates in all that activity. So the best utility plants are exceeding -- are meeting and exceeding that and that's driving some activity. But where EFFOX is growing is really globally. They're doing a lot more in China. They're doing a lot more India. But I haven't seen anything other than that. We're principally only tied to the utilities from an environmental perspective, and our energy business is doing solidly.

Your next question is from the line of James Medvedeff with Cowen and Company.

I wanted to ask -- there is -- on the sales in Q2, I noticed that there was about a $5 million increase in the balance sheet item for uncompleted contracts or sort of unbilled revenues and I wonder how that might figure into the revenue number for the quarter.

A good question. We see no impact to that. We do watch, obviously, the cash flow side of that and the whip changes. But we do not see any current P&L impact coming from that swing from the net overbuild to the net underbuild that you see on a 6-month basis.

Okay. Okay. I was thinking maybe there was some revenue that just barely missed the end of the quarter.

No.

Okay. My second question is are you able to provide the revenue breakdown by the 3 major segments?

You'll see that in the 10-Q that will be filed today. But as we said earlier, it's roughly tracking 50% APC and then 25% energy and fluid handling, but you'll -- the Q will be filed later today, and you'll have the full segment details contained within.

Okay. And then looking forward, looking at the order book and the pipeline, and again, not -- well, looking at the order book and the pipeline, how would you say that might track over the next 2 to 6 quarters, that mix?

Regarding bookings intake or regarding business segment mix?

Business segment mix actually in revenue.

The past couple of years, if we studied the air pollution control and the energy and the fluid handling, I would say -- I would characterize it around 50% of our revenue is going to be in the air pollution control business, roughly 50% -- 25% in the energy segment and 25% in the fluid handling. I think that's a good way to characterize our business. And as we grow, I think you're going to see similar growth patterns in both. We are seeing a very nice uptick in the energy side, so perhaps, that could move up to 30% of the business in the next 12 months. But that's the way I would view the mix of the revenues by business segment.

Okay. And then finally, I'm just trying to sort through some of the moving parts here on margins. I believe you said in H2 -- in the second half of the year, operating expense as a percentage of sales would probably tick up from Q2 due to some investments, and then -- but also, operating margin would be higher. Is that what I heard? Did I hear that correctly?

Not 100%. But first off, we'll start with the first part of your comment. The first part of your comment is correct. We were expect -- SG&A is going to increase. Right now, we ended Q1 and Q2 around $11.7 million each quarter. I think we finished Q2 maybe 18 -- 17.8% or 18% SG&A as a percent of sales. We have made some investments in sales capacity, sales engineers, general management and a few other investments to grow our business. You'll see that on the P&L in Q3 and Q4. So -- and we do have scheduled investments in additional sales and business development and general management, so I suspect that $11.7 million to go to $12 million, $12.5 million in Q3 and maybe $12.5 million, $12.8 million in Q4. We are expecting SG&A to go up to drive growth, and -- but we will, of course, stay below the 18.5% as a percent of sales. And we measure that -- we pay close attention to that. On the operating margin side, we've messaged we wanted to get close to 15% this year, along with driving a lot of organic growth, and that is a priority. So I think the first half, we were 14.5%. Non-GAAP, we almost hit 15% in Q2. So we're feeling pretty good about the margins. And we're not messaging any additional growth up and beyond that, but as some of the other research analysts mentioned, the organic growth piece is very important to us right now.

Your next question is a follow-up from the line of Sean Hannan, Needham & Company.

So just on operating margins, and I know that -- I've probably asked you this many times before and I just wanted to circle back to you at this point. So you did a great job in terms of essentially hitting this 15% target, which you've really communicated as part of a longer-term goal for the model. As you guys continue to get additional momentum within the business, as well as driving out additional synergies from deals that you've done in the past and efficiencies, et cetera, at what point can we start thinking about whether we can start targeting another number that would be higher, or would that just be unrealistic?

Well, good question, and we talk about that all the time here in the strategy camp. First off, there's going to be more SG&A hitting the P&L in the second half. We continue to invest in growth, the business development, the sales engineers and our HR team. We have a great HR team that's very focused on working with the business partner -- business leaders to add great sales capacity to grow. So that's going to pick up. And some of it took place in Q2, more of it in Q3. So I think that's going to have an impact, a very smart impact on growing our organic growth. So that will probably moderate to hit the 15% this year. But as we go into 2015 and 2016, we do have aspirations to continue growing margins. And I think when we get to that higher revenue, that higher revenue number of $270 million, $300 million, $330 million, that will have an above-average impact on our operating leverage with the CECO model. But we've got to make sure the revenue volume comes at those attractive gross profit margins, then we can expect operating margin uplift. So that's kind of how we're thinking about it in the short term and in the midterm, Sean. I hope that helps you.

That does sound helpful. So -- and maybe I'm putting words in your mouth, but should we expect some type of a directional update on the expectations for that, perhaps in February when you're concluding your '14 year?

I think that, Sean -- that's fair, Sean. Next year, we will -- as Jeff said, we continually look at that. We will recalibrate. We think the 15% is our aspiration. Still, we will recalibrate next year, again, based on the run rate of revenue. As we said, as the organic revenue comes, we will revisit that and potentially re-benchmark that. But for now, that's a number you should definitely stick with.

Yes, and to add to that, Sean, Ed's spot on, as we continue to pursue all opportunities around the planet with business developments, some of it might be at terrific gross profits, some of it might be at very, very modest gross profit, but we still want to strategically pursue that business. So we'll recalibrate as we turn the page into next year. But make no mistake, we want to be a company that's noticed for margin expansion and everything we do. I think in the next 12 months, we really want to step on the organic growth accelerator.

[Operator Instructions] Your next question is from the line of Edward Schwartz [ph] of Schwartz Investment.

It appears to me that you are aggressively paying off your debt, barring any needs for debt for acquisitions. Could you be positioning the company to be sold?

No, that's not at all what we're doing. We're trying to build a great company with global organic growth and building a very attractive reoccurring revenue model. The reason we're paying off the debt is because that's what we promised, that's what we messaged a year ago when we acquired Met-Pro, that we would bring the debt-to-EBITDA down to 1:1.5 as a ratio, and that's our goal. We're -- we've made a lot of headway in roughly paying down $10 million of debt in the first half. Our net debt is around $61 million, and if you -- if we can pay off another $5 million to $10 million in the second half and get the EBIT up to $40 million, $45 million as the research analysts have estimated, we're going to have a very attractive debt-to-EBITDA ratio of 1:1.25 or something like that. But more importantly, when we do that, we deliver on our promise, but more importantly, we can reset and do it again. The Met-Pro CECO merger and the whole financing arrangement was quite good, and it's working out very well, and we want to potentially do that again. So that's the purpose for the low debt-to-EBITDA ratio and paying down the debt, is because that's what we -- that's how we want to write our balance sheet.

And at this time, there are no further questions. I will hand the call back over to you for closing remarks.

Thank you all for your continuing interest in CECO Environmental, and we look forward to talking to you again regarding Q3. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.