Greetings and welcome to the CECO Environmental First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Tracy Krumme, Vice President-Investor Relations. Thank you, you may begin.

Good morning, everyone. Thank you for joining us on CECO Environmental’s first quarter 2016 conference call. On the call with me today are Jeff Lang, Chief Executive Officer and President, and Ed Prajzner, Chief Financial Officer and Secretary, as well as Martin Pranger, President of our Energy Technology Segments, and Steve Fritz, Vice President and Head of CECO's recurring revenue business. Steve will briefly discuss our recurring revenue business and both Martin and Steve will join us for Q&A. Before we begin I would like to note that we have provided a slide presentation to help guide our discussions. This presentation can be found on today’s webcast and can be downloaded from our website at cecoenviro.com. I would 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, including our Annual Report on Form 10-K for the year ended December 31, 2015. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today’s presentation will also include references to certain non-GAAP financial measures. We’ve reconciled the comparable 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’d now like to turn the call over to Jeff.

Good morning and thank you for joining our call. Please turn to Slide 3. Ed will walk you through the financial details in a moment, but I wanted to provide my perspective on Q1. CECO advanced all three of our strategic imperatives in Q1. Revenues grew, margins improved and we reduced our leverage ratio. We showed improvement in Q1 2016 despite some soft macroeconomic conditions in our Asia, North America and EMEA regions that we’ve messaged in the fourth quarter. We delivered record revenue $103 million slightly above Q4 as expected, bookings were $120 million in Q1 20% higher than our $100 million in bookings in Q4 and Q3 respectively and better than we anticipated. Our backlog continues to decline reaching a record level of $228 million up 8% sequentially and 49% year-over-year and we delivered $0.18 of non-GAAP EPS in the quarter. Margin expansions remain a key strategic imperative consistent with our operational excellence focus we delivered Q1 improvement in gross margin, operating margins and EBITDA as well as bookings. Growing our recurring revenue is also an important strategic focus, we delivered Q1 growth as expected and are tracking toward a double-digit growth goals. Steve Fritz, will talk more about that shortly. Net repayment and deleveraging our balance sheet is on track that remains a priority. Consistent with previous quarters we’ve been paying down debt at a level of 2 times or greater our required quarterly principle commitment. We paid down $7 million in the first quarter of 2016 lowering our net debt to EBITDA ratio to 2.6 times from 3 times in Q4. We are tracking well towards our stated goal of 2 times gross debt to EBITDA leverage ratio and expect to achieve this before the end of 2017. We also delivered strong free cash flow generation…

Thank you, Jeff and good morning. Given our total revenue run rate recurring revenue makes up about 25% of our total revenue. This is derived from our $5 billion of product and systems installed and in use in large manufacturing plants of our customers. That install base of products and systems needs replacement parts, maintenance, typical enhancements, retrofit and services. Therefore my role and responsibilities are to help ensure our organization enables customers to obtain replacement parts maintenance, services and technical support of this installed base of products and systems. We call this our recurring revenue business and to be clear for investors this is not a separate business segment as sales are attributed to all segments energy, environmental and our fluids business. Coming off of a strong Q4 in 2015 with recurring revenue sales with sequential revenue growth, our recurring revenue grew by double-digits in Q1. More importantly our recurring revenue quotation pipeline, what we call our activity increased 15% sequentially, which validates our recurring revenue growth expectations. As we stated before and by our own stringent definition our low customer connectivity approximately 12% represents significant growth upside. We measure our connected customer as one we transacted business with in the past 12 months. That is how CECO defines connected customers versus drifted or unconnected customers. So you can see that we have a growth opportunity, if we can move some of the 88% drifted or unconnected customers to this connected group. As it added incentive for us to accomplish growth at recurring business operating margins for recurring revenues are typically much better than original equipment sales margins. With an opportunity to leverage our $5 billion of installed base of more than 300,000 units, we continue to invest in our aftermarket employees. We recently hired a Director of Services…

Thank you, Steve. Now please turn to Slide7. As I mentioned, we are delivering on our shareholder value creation with the performance of Peerless. Peerless delivered $31 million in bookings, $25 million of revenues and $5 million of EBITDA in Q1. While revenues were down from last year, you’ll see a significant improvement of $4.7 million of operating income non-GAAP, up from an operating loss of nearly $2.7 million in the comparable quarter 2015. Highlighting our core strategy of running Peerless as a large integrated division within our energy technology segment, we deliver significant margin expansion exceeding our Q1 expectations. This is due to operational streamlining, to improve project management discipline with the renewed pricing standards and much more external strategic fabrication centered on an asset-light business. We have exceeded our $15 million target of cost out synergies and we believe the total value is now closer to $18 million. We’re now on track this year due to pricing standards, rigorous project management expectations, cost containment. But our primary focus at this juncture is sales in growing market share. We’re now more focused on sales, investing in sales engineering efforts, sales resources and in general the front end of the business to grow. Turning to Slide 8, please. Creating shareholder value, the entire CECO leadership team is focused on three core strategic areas. Number one, is growing market share organically and recurring revenue. While we have demonstrated good progress with recurring revenue growth, we need to deliver improvements in our engineered equipment side with better organic growth. This is done due in part to some softness in the regional macroeconomic environments. Number two, as we have communicated paying down debt, deleveraging the balance sheet and expanding EBITDA remain key priorities. Bring the debt to EBITDA leverage ratios to a two…

Thank you, Jeff, and good morning everyone. As mentioned, I will highlight in more detail with a GAAP and non-GAAP performance for the quarter for both our consolidated results and three segments. As a reminder, our non-GAAP adjustments includes several items such as acquisition and integration expenses and the impact of acquisition asset valuation adjustments on the income statement, including higher depreciation amortization and earned out expenses. Our non-GAAP presentation is intended to provide better trend analysis and assessment of our core business performance. Beginning on Slide 9, I would like to provide a little more detail on the summary that Jeff provided earlier. Our revenue was $103.2 million for the first quarter of 2016, an increase of 27% year-over-year and 2% sequentially. Bookings were $120.1 million up 28% year-over-year resulting in record backlog of $228.1 million, which is up 49% year-over-year. Bookings were also up 20% sequentially. Our non-GAAP operating income was $10.9 million up sequentially from $10 million. Our adjusted EBITDA of $12.7 million was up 48% sequentially from $12.2 million. And non-GAAP EPS for the quarter was $0.18 per diluted share. Our strong free cash flow allowed us to pay down $7.1 million of debt in the quarter, which is twice CECO’s required quarterly debt repayment obligation. On Slide 10, you will see our revenue trend for the past five quarters. Revenue was up 27% year-over-year and up 2% sequentially. Although down 3.5% organically on a constant currency basis year-over-year, due to primarily project timing, weakness in Asia and softer demand in some North American industrial markets. On Slide 11, please see our booking and backlog trends for the past five quarters. We are pleased with our increased level of backlog at $228.1 million as of March 31, 2016 up 7.4% from year end and up nearly…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital. Please go ahead with your questions.

Hey, good morning everyone. Thanks for taking my call.

Good morning, Gerry

I was wondering, if you could give me a little bit more detail on some of the margins in this segment, specifically and it’s probably relates to where margins expansion is going to come from in the future. But I remember 2015 energy segment had that big salary gas project, margins were a little bit lower in that segment. I want to see how energy finished out Q1 2016 and we can see some margin improvement and how that’s going to build up?

Yes, Gerry, good morning. If you refer to Slide 12, that’s kind of our margin slide. We’re thinking the trends on gross profit and operating margins could be indicative for the remainder of the year given what’s going on. A lot of the good things we’re doing to gross margin coupled with some of the soft things that are going on around the world regionally. So we are thinking the margin – the margins were experiencing Q1 could be indicative for the remainder of the next couple of quarters.

Okay. Perfect. And then you did talk about a little bit about macro head – I guess macro headwinds buffering some of the segments. I mean is that’s been specifically into the environmental services segment and does that continue to be China and just – I would say lower industrial production in the U.S.?

Correct. You’re exactly correct.

Okay. Any – what is the tone in the end market, is that still trending down or any signs of stabilization?

Right. Good question. If you refer back two months ago when we communicated Q4’s results and outlook. If you refer to Slide 6, on our Q4 earnings deck our outlook in the market in our few activity is very consistent with what we messaged two months ago Gerry. In our view, there’s a lot of good things going on in CECO, there’s a couple – there’s a few regional macro things that are a bit of a drag on the business. But primarily what we stated in the outlook in March of 2016 is pretty much what we’re seeing today in the outlook. Nothing is really changed and how we view the outlook for the rest of the year.

Got it. I appreciate it. I’ll jump back in queue.

Yes.

Thank you.

Thank you. And our next question comes from the line of Brian Drab with William Blair. Please go ahead with your questions.

Good morning, congrats on a solid set of results in a tough environment.

Thanks, good morning, Brian.

Just only question on bookings up 20% sequentially is that what you would expect from your normal seasonal trends or can you talk a little bit more about what drove that sequential increase in the quarter?

If you look at the past couple of quarters I kind of view it as the last two quarters of bookings average was around $110 million per quarter Brian. And as we very consistent with our last quarter message, we expected a little more bookings in Q4. And it happened that those bookings we expected in Q4 some of them fell into Q1. So Q4 was $104 million, Q1 was $120 million of course the team is – we are very focused on organic sales and recurring revenue. That’s one of our top three initiatives. But I kind of view it as our average bookings run rate for the past two quarters is $110 million is kind of how we think about it.

Okay, great. And then just maybe a few more questions to help us model. I’m not sure how much detail you are able to give us in any of these metrics but organic revenue was down low single-digit in the first quarter. Do you expect that we’ll see that kind of low single-digit decline throughout the year or how do you see organic revenue trending – organic revenue growth or declines trending throughout the year?

We’re viewing it pretty consistent from our message a couple of months ago. There is a lot of things that are driving growth within the business as we talked about our natural gas business is growing and the activity is up probably 10% or 15%. Steve just mentioned the recurring revenue pipeline has grown maybe 15% quarter-over-quarter. So there’s a few things that are driving the front-end of our business nicely and there’s a handful of things that are – the Asia – the Asia environment still are soft. The industrials in North America which impacts our environmental technology business is soft. So very consistent with how we message the outlook in March. So I’m thinking the outlook in the next couple quarters could be pretty consistent with what we’re seeing in Q1.

Okay. And then I might have missed this part but talk about gross margins obviously ahead of expectations I think that you said you expect your gross margin to be essentially flat year-over-year is that nearly 500 basis points of expansion in the first quarter. What do you expect for the balance of the year for gross margins, can we sustain these levels?

Yes. We – first off Q1, Q1 2015 had low margins and Q1 of 2016 had very good margin. So but I think if you look at the trend of the past three or four quarters and what we delivered in Q1, I think you should see some consistency from that point on the gross profit in the operating margins. So we view Q1 is pretty indicative for the rest of the year, Ed, do you want to?

Well, Q1, Brian benefitted from some favorable mix, I mean Peerless did quite well in Q1 with some of the recurring revenue picking up that’s helping as well. But as we said that’s being buffered a little bit with some the softness in Asia, taking away a little on the gross margin line. But all-in-all we feel very comfortable that Q1 margins [indiscernible] are fairly indicative of what you’ll see for the remainder of 2016. So that’s a very good I think indicator of what we feel the rest of the year is going to look like.

Okay. And then maybe this one’s for Ed, on OpEx are we seeing further cost synergies related to the PMFG acquisition as we move through the year is this OpEx which was about 20% of sales in the quarter as a good kind of ballpark number for us to expect for the balance of the year in terms of percentage of sales for OpEx?

Yes. That’s definitely a good number if anything – it will all be contingent on the revenue level the ratio. But that the $80 million of cost out synergies for Peerless, we feel very comfortable that’s been achieved on a run rate basis and yes, all that sort of come in and that’s why in the Q1 and that’s why Q1 percentage dropped a little fromQ4. But where you are now the 20.5%, it’s a good number it could be a few bits up and down, as you’re going to go with revenue, that’s a good – that’s a good absolute dollar of SG&A to carry forward now and a good ratio to use Q1 for the remainder of the year.

Okay. Thank you. I will follow-up more later.

Thanks Brian.

The next questioncomes from the line of Ryan Cassil with Seaport Global. Please go ahead with your questions.

Hi, guys. Thanks for taking my questions.

Good morning, Ryan.

If I can just go back to margins for a second here and dig in a little bit, it looks like based on the slides purely said about 19% margin in the quarter, which puts the legacy business as a margin just below 8%. Could you give some color just on the drivers there and you talked about the margin profile remaining it’s kind of steady throughout the year. Is that the way we should think about where the legacy business is right now in terms of margins?

Yes, the weighted mix and bear in mind as well. We kind of said this during the prepared remarks on the slide. Peerless is a division of the segment now. It’s no longer a public company. So there is some costs that it’s being tracked purely now as a division not as it was in the past, so it’s margin maybe a little higher than the rest of the business there is still the corporate overhead that’s not that we track sort of separately that’s not in the segment pieces. But regardless that weighted mix you’re seeing out of margins is pretty indicative. So what you’re seeing for the respective pieces of legacy CECO versus Peerless would hold up going forward as our expectation.

Okay. Some of the – most of the aftermarket being booked or being accounted for in the way you are breaking out Peerless is that going with Peerless at this point?

Correct, all the aftermarket. Yes, Ryan all the aftermarket business that we’re working very diligently on growing expanding the revenues and expanding the margins flows through the business units. So the answer is yes. But I think the Q2, the Q2 margins on gross profit and operating margin is kind of how we’re thinking about the business for the next couple of quarters. There’s a lot of things that impact the margin, volume, leverage, operating expenses. So we’re feeling pretty confident that we can maintain that for the next couple of quarters. As we go through Q2 will certainly give you an update if we see any upside or downside but we’re thinking the margin profile in Q1 is indicative of how we’re viewing the outlook for margins for the next couple of quarters.

Okay. On a consolidate basis. Okay.

Correct.

And then last from me. Could you just talk about the trends in the combined cycle power market whether you saw any improvement there, sorry if I miss that?

Right, the energy business is seeing a lot of activity Martin. Martin Pranger, the President of our Energy Group will speak to that.

Hi, Ryan, good morning, this is Martin. So what we’re seeing in the energy sector and what Jeff already has stated in the script is that we anticipate that over the next decade, over the 10 years the grid installed capacity will grow for gas-fired power plants about 50% and at globally. And there is a couple of reasons for that. What we’re seeing globally there is an abundant amount of natural gas and the carbon footprint for gas-fired power plants and combined type of power plants are roughly 30% lower than the solid fuel power plants and our expect is that the gas-fired power plants are very good and fast ramping up and down and that’s important with more and more renewables being installed on the grid and the renewables are causing more variability. So yes, we see a good upside if you look to the bookings last quarter we saw about 7% organic growth and that’s what we are anticipating for the full year.

Okay, great. Thanks, guys.

Yes, thanks Ryan.

Thank you. [Operator Instructions] Our next comes from the line of Bhupender Bohra with Jefferies. Please go ahead with your questions. Bhupender, your line is live. Please check if you are muted.

Hey good morning, Ed and Jeff.

Good morning.

So my first question on the recurring revenue here. Now the target to grow the recurring revenue to 30% of the total sale by 2018 maybe Jeff I believe you spoken in the previous calls to like about how you want to grow that. Can you remind us like some of the drivers, some of the catalysts like how that is – going to grow to 30% and which particular statement will be see that?

First off, we’re very focused on that deliverable and those action items within the organization but I think Steve would do a better job communicating what we’re doing and how we’re going to achieve that, Steve.

Good morning. Yes, we see growth in all of our segments, we identified growth in the energy segment, environmental as well as fluid and filtration. And we’re going to do that based upon looking at our portfolio and targeting these 10% of our employee population as dedicated employees. So we work on things like winning value proposition for something as simple as selling parts, as well as our additional return on investment types of products and solutions that helps our customers find – increased efficiency gains across each of the portfolio items. So it’s a wide range, we see growth in each of our segments. It’s a three year journey to get to the 30% recurring revenue by the end of 2018 and as far as Q1 is going now it’s supported by our core pipeline. We see some significant progress throughout the year and we’ll continue to invest in that journey.

Okay. So it seems can you remind us like where would be the largest installed base right now. Energy being the biggest segment – that could be the potential opportunity for you to grow the aftermarket business some of that belief so?

Sure. Yes, so our functional makeup of our recurring revenue business about 50% of it does today come from the environmental technology segment. Having said that there is quite a few assets in that installed base. At the same time we have a significant number of assets that are in our fluid and filtration, our fluid and pump business has a large number of installed base assets that we continue to work with our channel partners to grow that area as well. So I think from my perspective here we’re going to grow the environmental business, which basically has the 50% the other two segments are about 25% each. But we see significant growth opportunities across all three.

Okay, got it. Thank you. And just a follow-on for Jeff on the – Jeff you have been talking on the previous calls some of the project the dashboard internally which you track from target perspective can you give us some color like how that looking and how does that actually track until April maybe after the first quarter?

Sure, are you referring to the quotation pipeline?

Yes, I think the quotation pipeline.

Of course, we’re in a nutshell we view the outlook and the pipeline very similar to what it was two months ago when we communicated Q4. Certainly we see the environmental technology sector a little more related to the industrial that outlook is pretty similar the RFQ activity is pretty flat. The energy activity which is linked to industrial, commercial and a couple other excellent end markets is probably up slightly. Modest single-digits that would be our fluid handling sector and then of course the energy segment which Martin is leading we’re showing the RFQ activity is probably up 7%, 8%, 10% on the RFQ dollars in quotes. But by and large and then of course Asia activity is relatively muted and a little slow, we see that is very consistent this year but we’re certainly trying to achieve flat revenue and flat bookings in Asia in the down market. But in terms of the outlook in the RFQ activity we view it very consistent from two months ago. And how we’re looking at our bookings and revenue.

Okay, thank you. And the last one on pricing we haven’t talked about pricing here, can you give us some color like how the pricing actually look in the quarter for two different product fluids versus the energy versus the environmental if you can give us something. Thank you.

Right, right, good question, the pricing management has been probably up a little bit. But keep in mind with commodity prices coming down in 70% of our manufacturing footprint is external fabrication there is a lot of capacity now to have manufacturing fabrication improvement in your pricing. So if commodity pricing has come down and sale prices have come down we’re able to improve our gross margin to maintain gross profit integrity through the pricing challenges that occasionally we see. So gross profit showed some uplift in the quarter and I think that was due to pricing management and our global supply chain and our ability to leverage our strategic fabrication partners around the world.

Thank you.

Thank you.

Our next question comes from the line of Gerry Sweeney with ROTH Capital. Please go ahead with your question.

Hey, I just wanted to, a couple more follow-up across little bit higher level than just a little bit of the – little bit detail. On the higher level side on the energy, midstream executing very well, bookings were up – I believe its 12% quarter-over-quarter. Yes, I know this is a late cycle play, I’m just curious, how that area plays out, maybe not this quarter but next couple of quarters do you have any inside into that, obviously lower prices for long time may impact some of the spending on that front, just any thoughts on that front?

Are you referring to the midstream natural gas distribution?

Yes.

Yes. The pipeline business, no, we’ve studied that quite a bit in preparation for the call. In our RFQ activity over the past couple of quarters for our midstream pipeline business is consistent and relatively flat. We track the number of quotes and the number of dollars per quote and we’re showing a consistent pipeline from the past quarter when we message. So we don’t see that improving, we don’t see that declining it’s pretty consistent, the midstream pipeline activity that we’re focused on in the energy sector.

Is there an opportunity for the fluid handling, to we move them to that segment at, any thoughts on the opportunities?

Not so much in the midstream. We have a broad distribution channel for our fluid handling and filtration business and there are opportunities in the energy sector as you know you’ve talked with our energy sector President, Gerry, here we go. But not so much on a midstream.

Okay

But there are opportunities across…

A couple little details. You’re having about $33 million of cash on the balance sheet. How much do you actually need to sort of run the business on a day-to-day basis?

Good question, Gerry. Lot of the cash is not domestically held it’s in at our various international locations. We do work to pull it back and repatriated to U.S. as much as we can. You’re probably, ideally none of that foreign cash was there you could operate it may be $20million as a minimum number, I mean it’s definitely larger than we needed to and we do continue to pour back in domestically as long as it’s cash neutral or through advantage that – but 20 million about the lowest you can probably effectively drive the cash balance on hand.

And then, real quick, you did mention, I think you sold two assets in the quarter, one that you sold $11 million, two when did they close, three…

Gerry, in my script we message – for several quarters we talked about selling non-core assets and we talked about continuing our asset-light model which has a very favorable effect on our balance sheet and our leverage ratios. We signed a letter of intent to sell two manufacturing facilities. One was the CECO facility, one was the Peerless facility. To sell it and lease it back to continue running our processes. We signed LOI last week and we have anticipation to close on that transaction in July. The gross proceeds would be around $11 million and obviously the net proceeds would be something less than that given closing costs and so forth. So we’re hoping in Q3 that closes. And the net proceeds of that transaction would be to pay down debt and delever the balance sheet.

Got it I appreciate it. Thank you.

You’re welcome.

Thank you. [Operator Instructions] Our next question comes from the line of Julie Li with Drexel Hamilton. Please go ahead with your question.

Good morning, thank you for taking my question. My first question is also on recurring revenue to improvement that strategy do you expect to add more sales in to the team and if so will that – should we expect more SG&A expense in the future quarters?

Hi, Julie, this is Steve Fritz. Yes, thanks for the question. We do expect to continue to invest in our dedicated aftermarket employees. As we stated we are at 10% now. We’re tracking the bookings per head and these are – dedicated aftermarket employees, they have very quick payback periods. Right, so yes, we will expect to invest, we hope to do that in each of our segments moving forward throughout the year. And we see very quick payback on them based upon the relative nature of book in terms for recurring revenue.

Great, thank you. And my next question is Asia market, end market. I’m wondering if you have a similar product structure in Asia compared to other regions, in terms – into environmental and fluid and energy?

We do.

Okay.

CECO Asia is a region and it’s a platform to sell the three business segments portfolio into the end markets, that’s the strategy, and similar in North America, similar in EMEA. So yes, we do and we’re very focused on selling our portfolio to the end users in all the parts of Asia principally in China.

And I’m wondering if most of the headwinds you just mentioned softness from industrial market, have a bigger impact into the environmental segment in China?

Sure, right. That is correct.

And can you share more color on the competitor space, did you see a similar impact on competitors or how is your pricing compared to your local competitors in China. And are you gaining more market share in the past few quarters?

Correct. Very good question. When we compete against the China national or private companies we do very well. One of the things that has led us into Asia for the past 10 years is CECO’s technology is very good. It’s above average, we have R&D taxation and innovative tax benefits around the world acknowledging that our technology is well received and there’s demand for it. So I think the CECO technology is better than what our competitors are providing on the ground in China and that’s a driver of our business. That’s part of our integrated solution strategy, that’s part of the one CECO that we’re delivering there. Number two from a cost perspective, we continue to refine our supply chain and our fabrication model in Asia to remain very competitive. We’ve consolidated our manufacturing footprint, we also have several external strategic partners. That build products for us of high quality and low cost and we’re certainly leveraging that low cost region and we’re very competitive from a pricing perspective and we’re going on our 12th year there. So we – 99% of our employees are Chinese National, we use all China manufacturing. And so we’re in good shape from a cost perspective.

Thank you very much. That’s very helpful. I’ll jump back in the queue.

Yes. Thank you

Thank you, ladies and gentlemen. This concludes today’s question-and-answer session. I would like to turn the floor back to Jeff Lang.

Thank you for joining our call. Have a good day.

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.