CECO Environmental Corp. (CECO) Q1 2016 Earnings Report, Transcript and Summary

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 coupled with working capital improvement in the quarter versus year end 2015. Ed will talk more of those metrics but this is an essential component of driving shareholder value and we expect continued improvement. Turning to Slide 4, I’d like to take a moment to reclarify our strategy, market positions and growth opportunities. CECO is a global provider of leading engineered technology solutions in three core areas. One natural gas power generation, machines management and pipeline distribution. Two, air pollution control technology and three, fluid and filtration technology. We have A, a broad portfolio of integrated solutions. B, well known reliable brands for critical complex processes and C, a reputation for flawless execution enabling us the key market positions one, two and three in most of these identified niche markets we serve. Customer place orders with CECO due to our excellent technology, high reliability within critical applications and excellent project execution. CECO primarily serves global industrial customers who manufacture products for a wide of range purposes. To simplify they tend to use our solutions for three reasons. One, to be plant efficiencies, critical processes and environmental improvements. Two, to manufacture systems in the energy segment, primarily natural gas related and three, to move fluids within sophisticated manufacturing plant applications. Hence CECO is organized into three business technology segments, energy, environmental, fluid handling. Each segment has its own P&L with a dedicated leadership team pursuing operational excellence, margin expansion and sales focus both on engineered equipment and aftermarket business. Energy technologies, with the acquisition of Peerless last year, our energy technology segment by design is now our largest business segment comprising nearly 50% of our total revenue. We are a leading provider of engineered technology equipment for downstream of the natural gas turbine energy plants, the natural gas pipeline midstream distribution market and traditional energy or coal markets. As you can see from the data points on the right, we are a small but critical provider in a very large market with significant upside. We have approximately 7% market share in a $2.8 billion annual total available market for natural gas power and natural gas pipeline that is growing 5% a year for the next two decades. The world energy outlook, the international energy agency and the large natural gas turbine providers estimates natural gas-fired power generation capacity to grow globally by 50% over the next decade. As evidence that our strategy has some traction, our pro forma energy business bookings were up 7% in Q1 despite a drop off in some coal related projects. We believe we are well positioned to capitalize on the growth opportunities within this niche market. The energy sectors customers include GE, Siemens, Dominion Resources, Duke, MRC, Sempra and Spectra Energy to share a few names with you. We believe we’re well positioned to capitalize on the growth opportunities within this CECO niche market. The estimated $2.8 billion available niche market size represents approximately 600 natural gas turbine sales per year, coupled with numerous new pipeline expansion projects and pipeline upgrades to pursue as a company. Our strategy is to increase our market share by focusing on the natural gas, largest turbine manufacturers and midstream pipeline companies to become their provider of choice on natural gas projects. We provide superior emissions management technology. Global supply chain management and flawless execution which our customers have identified as key value drivers. As mentioned our energy sector President, Martin Pranger is joining the call today during the Q&A session to talk about our natural gas growth opportunities in this segment. Environmental technologies, our environmental air pollution control technology segment is our second largest segment comprising 34% of our revenue. We have assembled the portfolio of leading technologies for complex industrial environments including scrubbers, oxidizers, cyclones and dust collectors and the breadth of our portfolio provides us the value add to offer customers integrated solutions to meet their critical plant requirements. The primary environmental technologies often work in concert to eliminate pollutants or recover process catalysts or process resources so we’re able to offer customized, reliable and efficient end to end solutions. We call it one CECO to meet the most stringent environmental processes. We believe this gives us an edge in the market place. We have an appropriate 5% market share in a $3.7 billion annual total available market served that is forecasted by industry analysts to have a five year compounded annual growth rate of 4.5%. So as with our natural gas business we have developed a strong position in this growing environmental products market. The environmental segment work closely with customer such as DuPont, Intel, Aleris, AMD, Exxon, Chevron, General Motors, Honeywell and Newcore to name a few. Fluid handling and filtration, fluid handling and filtration is our third largest segment comprising 16% of our revenue. Our fluid handling technology is our mission critical niche applications that are required by many chemical, petrochemical, commercial and large process industries. We offer premium centrifugal pump technology that handle difficult liquids that are abrasive corrosive at a very high temperatures. We also offer wide range of industrial chemical filtration products such as specialized exhaust systems for laboratory fumes. Although the fluid handling and filtration segment is our smallest in size it is our highest operating margin business and we are excited to expand and investment in this segment. Given approximate 4.5% market share and $1.6 billion annual total available market that is forecasted by industry analysts to have a global five year compounded annual growth rate of 3.5%. Fluid handling customers include Boeing, Dow, General Motors, Georgia-Pacific, Coke Industries, Tyson and Sea World to name a few. Turning to Slide 5, you’ll see we have strategically evolved into a stronger diversification. Through the diverse end markets as illustrated in the pie chart providing a solid foundation to drive growth through various economic cycles, within our three business segments our energy group is the largest contributing nearly 50% of the total revenues. Our environmental business makes up 34% of our revenue base, with fluid handing and filtration segment representing 16%. We have a strategically balanced global footprint with approximately 40% of our sales outside of North America. Five years ago CECO’s international business was approximately 18% of the total and we were too dependent on the domestic economic situation. Of the 40% of international revenue today, 25% comes from the EMEA and 15% from Asia. Asia represents a significant long-term growth opportunity, as we have low market share in a large total available market. And our technology solutions are needed to solve their growing challenges. Looking now to our end markets, 35% of our total revenue and likely our largest near-term growth opportunity is the combined natural gas power and midstream gas pipeline market which is in our energy segment. Industrial manufacturing spread among the environmental and fluid handling filtration segment represents 32% of total revenues. The chemical and petrochemical refinery sector, part of the environmental segment represents 25% of revenues. Lastly, solid fuel power or coal represents approximately 8% of our revenue, with USA and in Asia where the coal is the predominant energy source. Last but certainly not least is our attractive recurring revenue base. We classify this is aftermarket parts and service business and it represents 25% of our total revenue across all three operating segments. Growing this recurring revenue business is an important strategic focus of ours, which applies to all of our operating businesses. Turning to Slide 6 please. Our recurring revenue strategy is a key focus and on track and with that I’d like to turn the call over to Steve Fritz, our Executive leading the recurring revenue business for CECO.

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 and have added additional regional aftermarket sales manager roles and numerous aftermarket inside sales resources. Our dedicated group of 105 aftermarket specialists represents 10% of our total employees and are focused on building stronger relationships with both customer groups those that are connected as well as the drifted customers. Our goal is to demonstrate value at every stage of our customer’s engineered equipment lifecycle and stay connected on an ongoing basis. Doing so we’ll ensure that we are consulted first as well as provide pull through opportunities such as engineered equipment sales. As an example, we track weekly recurring revenues by operating division around installed base productively improvement, outbound sales calls made, sales or bookings and gross profit. Our CECO aftermarket university training is an enabler to gain more traction. We started the year with targeted goals of double-digit recurring revenue growth and feel confident that this is achievable. Our business leaders in aftermarket resources continue to use weekly metrics to better understand daily actions, so we can help our customers optimize their total costs of the assets they purchased from CECO in the past. Our dedicated aftermarket employees are making more outbound calls and creating a greater aftermarket pipeline in order for us to capture this growth and enhance connectivity with all customers. We are driving margin expansion through similar standardization efforts in pricing, costing, and supply chain management with tighter controls. By focusing on pricing standards, supply chain excellence and branding improvements we expect to show continued improvement and meet our targeted goal of 30% recurring revenue by the end of 2018. I report to answering any of your questions during the Q&A session later on in this call. Now I’ll turn it back over to Jeff to discuss the excellent progress with the Peerless acquisition.

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 times is taking place quarterly. Our deleveraging process is on track and each dollar of debt reduction has the potential to translate into an increased dollar of shareholder value. So this remains a core deliverable for CECO. Number three, margin expansion activities, free cash flow generation and working capital improvements were achieved in the quarter. In our interwoven into our operational fabric and commercial order intake activities. Ed, will speak in more detail on our progress and goals for this. From a high level gross free cash flow was $12 million in Q1, total working capital was 19% of revenues, showing improvement of one full percentage point in Q1 versus Q4, validating our focus on cash management activities and running our business. Finally, we view our asset-light business model as an important bright spot in competitive advantage. Greater than 70% of our manufacturing fabrication is achieved through external strategic manufacturing partners, while improving our global supply chain. This provides us with a more nimble, higher variable cost and lower fixed cost model, which is a differentiator to many industrial technology companies. To support our team, we recently signed a letter of intent to sell a leaseback two manufacturing facilities for gross proceeds of $11 million. As we strive to close on these potential transactions in Q3, the net proceeds would be applied to the debt repayment and deleveraging the balance sheet. And with that, I’ll turn the call over to Ed, to provide more detail on our financial performance.

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 50% year-over-year. We’re also pleased with our $120.1 million of bookings in Q1 2016, up 28% year-over-year and up 18% sequentially. Organic bookings were down 5% year-over-year due to weaker market conditions, primarily in the environmental segment and Asia. Our outlook remains consistent before it was at the end of 2015. Continuing on to Slide 12, our non-GAAP gross margins were 30.9% in Q1 2016, consistent with Q4 2015 at 3%. Gross margin was up significantly over the prior year period due to favorable revenue mix and project management excellence as well as Peerless gross profit being higher than expected and pricing management. Non-GAAP operating margins improved sequentially to 10.6% from 10% in Q4 2015, due to favorable mix of greater aftermarket and the Peerless revenue. Moving on to Slide 13, EBITDA was $12.7 million for Q1, up 48% from the prior year period and 4% sequentially. Non-GAAP operating income was $10.9 million for Q1, up 45% from the prior year period and 8% sequentially. These improvements are attributable to operational excellence as well as Peerless improvement being ahead of schedule. Now moving on to our segment discussions beginning on Slide 14, revenue in our energy segment was nearly $48 million up 97% from $24.3 million in the prior year period. The higher revenue was driven by our Peerless acquisition contributing $25 million of revenue in Q1. Aftermarket and retrofit opportunities continue to grow in this segment, as well as global expansion, organic revenue was down 6% year-over-year on a constant currency basis due to project timing of revenue recognition. Energy bookings of $63.9 million for Q1 are up 141% over the prior year period, with performer bookings up 7% in Q1. Our midstream natural gas pipeline business up $12 million in Q1 and order of fuel activity remains consistent with Q4. Moving on to Slide 15, revenue in our environmental segment was $39.1 million, down 6% from $41.7 million in the prior year period, but up 14% sequentially from $30.3 million in Q4 2015. Bookings at $40.5 million were down 21% over the prior year period attributable to some North American softness and Asia slowdown. Also note that Q1 2015 was an exceptional bookings quarter of $51 million. Nevertheless we are pleased with Q1 bookings, which were up 34% sequentially as some projects expected to book in Q4 were booked and closed in Q1. Moving to Slide 16, revenue in our fluid handling segment was $16.6 million for Q1 up 9% from the prior year period, all of this growth being organic. Bookings were down slightly on a year-over-year basis to $15.7 million from $16.2 million in the prior year period, but up sequentially 6% from $14.8 million. Our fluid handling segment has had margin expansion and recurring revenue growth and plans to begin expanding globally into EMEA during the second half of 2016, while leveraging the Peerless EMEA footprint. On Slide 17, we illustrate our focus on debt repayment and deleveraging. We paid down $7 million in debt in Q1 2016 lowering our net debt leverage ratio to 2.6 from 3.0 at December 31, 2015. We are on track with lowering our leverage ratios as previously committed. On Slide 18, we show the trend of our cash flow generation for the past two years and the comparable quarters. We begin with gross free cash flow for each period as reconcile to cash from operations. Our ability to generate cash flow was strong with slightly over $12 million on a gross basis in Q1 2016, which resulted a $9.4 million of cash from operations after interest expense and income taxes, which allowed us to pay down $7 million of debt in Q1 2016. We continue to maintain a very low level of capital expenditures. Lastly on Slide 19, you will see our condensed balance sheet. As Jeff mentioned earlier CECO was focused on lowering our leverage level to a targeted debt to EBITDA ratio of 2x by the end of 2017. As of March 31, 2016 we had net debt of $137.2 million comprised of gross debt of $170.6 million less cash and cash equivalents of $33.4 million. This represents a net debt to trailing 12 month EBITDA ratio of approximately 2.6 times as of March 31, 2016. The team is diligently working to bring this ratio down as committed. This is a priority for us as we will utilize our strong free cash flow, which is being fueled by working capital improvement initiatives to accomplish this objective. We’re also focused on further improving our working capital practices and wisely managing capital expenditures to maximize free cash debt repayment. Working capital as a percentage of revenues is favorably trending downward both sequentially and year-over-year. At this time, I’d now like open the call up for your questions. Operator, please open the lines.

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.