CECO Environmental Corp. (CECO) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the CECO Environmental Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. And interact this 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 your host Mr. Ed Prajzner, Chief Financial Officer. Thank you. You may begin.

Good morning, everyone. Thank you for joining us on the CECO Environmental third quarter 2016 earnings conference call. On the call today are Jeff Lang, Chief Executive Officer and President; Ed Prajzner, Chief Financial Officer and Secretary; in addition to Steve Fritz, President of Recurring Revenues; and Payman Khales, President of the Environmental Technology Segment. Before we begin, please note that CECO has provided a slide presentation to help guide our discussion. The call will be webcast, along with our earnings presentation on our website at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the website under the Upcoming Events tab. CECO would like to also 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. CECO encourage as you to read the risks described in our SEC filings, including our Annual Reports on Form 10-K for the year ended December 31, 2015. Except to the extent required by applicable securities laws, CECO undertakes 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. CECO has 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 now, I would like to turn the call over to Jeff.

Thank you, Ed. Good morning, everyone 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 Q3 and the first nine months of 2016. CECO has made progress in our main strategic imperatives in Q3, including gross margin 33% in Q3 and operating margin expansion 14% in Q3 on a non-GAAP basis. As well as maintaining low working capital resulting in very positive free cash flow generation, enabling us to pay down substantial term debt roughly $50 million in the quarter and reducing our leverage ratio. We showed improvement in Q3 2016 despite soft macroeconomic conditions in our Asian, North American industrials, and EMEA regions. As we previously messages in the first half of 2016. We delivered revenues of $101.6 million a 3.4% increase over the same period last year. Our backlog remains consistently strong at $219 million. Our operating income improved sequentially for the third quarter in a row in our team is delivering in concentrating our initiatives to enhance earnings for our shareholders. Our adjusted EBITDA hit an all-time high of $16.2 million for Q3 which is a positive signal illustrating that we are delivering on our operational excellence commitments. Even with market challenges improving the operating leverage we have built into the CECO model. I am pleased to report that our team is delivering on our commitments to shareholders our deleveraging process has been successfully executed to date, lowering our net debt-to-EBITDA ratio to 1.6 times which is down from 3.6 times at the time of closing on the Peerless acquisition roughly one-year ago. Debt repayment and deleveraging of our balance sheet is on track actually ahead of schedule and remains a top priority. Consistent with previous quarters we've been paying down debt at a level of greater than two times our required quarterly principal commitment. We paid down $15.4 million of term debt in the third quarter of 2016 and lowering our net debt-to-EBITDA ratio and that is primarily attributed to the team's focus on working capital optimization. Margin expansion also remains a key strategic imperative. Consistent with our operational excellence focus we delivered third quarter improvement in gross margin operating profit and adjusted EBITDA. Growing our recurring revenue is another important strategic focus. We delivered on our third quarter recurring revenue growth as expected and we are tracking toward our double-digit growth goals. Recurring revenue in Q3 was $26 million, 27% of our total revenues and our objective is to achieve 30% by the end of 2018. Please turn to Slide 4. Our outlook in business conditions remain consistent but very challenging in line with our first half of 2016 message. Global natural gas power remains active although midstream natural gas pipeline activity has slowed from last year. The Global Environmental segment tied to industrials has been challenging, but the global refinery and petrochemical activity continues to deliver strong bookings in the quarter coupled with the segments and excellent aftermarket deliverables. Payman will speak more to that in a few moments. The Fluid Handling and Filtration segment end markets has also been challenging in 2016 and has impacted this segments results year-to-date. Although fluid handling and filtration bookings were challenged in the first half of 2016 Q3 was sequentially better than Q2. The segment is now accelerating and gearing up for the EMEA regional global growth activities and opportunities and expanding reoccurring revenues at a faster pace to drive growth and margins. We need to improve this segments level of harvesting of its installed base. We have also redeployed key leadership specifically our President, Gerry D'Alterio will focus exclusively on growing the global growth for fluid handling and filtration and Chris Brown, VP and General Manager has been promoted to lead this segment. We have the right leadership in place to grow globally and domestically. Again bookings in Q3 were improved sequentially and that was a positive signal in a challenging industrial market. But 2016 performance improvement has been centered on improving market share in delivering our value equation and unique technology offerings to end users. The numbers imply that we are making progress in our key initiatives. In Q1 and in Q2 we communicated the CECO story, our growth strategies, the value equation of our portfolio, total market sizes and the global growth market share opportunities that we are rigorously pursuing. Please kindly refer to those documents as needed in your review of our business and we are always available to our shareholders. In summary, CECO is a diversified global provider of leading engineered technology solutions in three core areas; number one, natural gas power generation emissions management and pipeline distribution, environmental air pollution control technology and three, fluid and filtration Technology. We have a broad portfolio of integrated solutions, well known reliable brands for critical, complex processes and a strong reputation for flawless execution, enabling us to hold key market positions in most of the identified niche markets that we serve. Customers place orders with CECO due to our excellent technology, high reliability within critical applications, competitive global supply chain and excellent project execution. Please turn to Slide 5. CECO is making progress in 2016 even though we face some global and regional end market challenges. As mentioned in the past you will see that we have strategically evolved into a more diverse business, more favorable product mix, with 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 47% of total revenues. Our Environmental Air Pollution Control business makes up approximately 38% of our revenue base with the Fluid Handing and Filtration segment representing the remaining 15%. We have strategically balanced the global footprint with approximately 40% of sales outside of North America. Five years ago, CECO’s international business was roughly 18% of the total and we were too dependent on the domestic U.S. economy. Of the 40% international revenues today 25% comes from EMEA and 15% from Asia. Asia represents a significant long-term growth opportunity as we have low market share and a large total available market and our technology solutions are needed to solve their growing challenges. Our goal is 50% over the next few years to continue our global revenue diversification and derisk the portfolio. Looking now to our end markets, 35% of our total revenues and likely our largest near-term growth opportunity is in 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 and Filtration segments represents 32% of the total revenues. The chemical and petrochemical refinery sector, part of the Environmental segment, represents 25% of revenues. Lastly, solid fuel or coal represents approximately 8% of our revenues with the U.S. and Asia in particular, where coal is the dominant energy source. And of course, our attractive recurring revenue base that we classify as our aftermarket parts and service business has grew to 27% on the year-to-date basis of our total revenues across all three operating segments compared to 20% one-year ago immediately after the Peerless acquisition. Growing the recurring revenue business is on track and is an important strategic focus of ours, which applies to all of our three operating business segments. Please turn to Slide 6, I would like to turn the call over to Steve Fritz, our President, leading our recurring revenues growth strategy for CECO.

Thank you, Jeff and good morning. Our recurring revenue continued on a double-digit growth trajectory for 2016 with our continued performance in Q3. As we have stated previously, we have strategically targeted improvement on our recurring revenue percentage from 20% of our total revenue coming from recurring revenue in 2015 to 30% in 2018. Our 2016 year-to-date recurring revenue performance is approximately 27% of our total revenue at CECO. As we have discussed in the last two quarterly updates, we target our $5 billion of products and systems that make up our installed base. Our teams are focused and committed to proactively reach out to this installed base in their daily actions. We lead with services that provide value to our customers. We are providing solutions and delivering value to this installed base across all three of our segments and each continue to see growth opportunities across the entire organization. On a year-to-date basis, our Environmental Technology segment continues to be the largest contributor towards recurring revenue. Our Energy segment has had a nice growth in recurring revenue in 2016 and has also shown sequential growth in recurring revenue percentage in each quarter in 2016. As stated earlier by Jeff, our Fluid Handling and Filtration segment has significant upside that we are working daily and with continued investment in resources. Our operating portfolio inside of our recurring revenue business continues to grow to support our customer's needs. Our goal is to provide solutions that range from on time and reliable parts delivery that provides customer assurance as the original equipment manufacturer up through additional value such as productivity and asset availability improvements. We are leveraging our significant aftermarket footprint across our three segments and we continue our aftermarket and university sessions that shared best practices across our entire aftermarket organization. When we provide value in one business, the ability to transfer that success to another business is often there and available. By continue to focus on improvements to the availability, reliability and efficiency of our customers operational assets and systems, we find various ways to show value. This is the core of our strategy to stay connected to our customers in our installed base by creating a win-win solution our partnerships with our customers are strengthened. As we provide value to our customers, we also look closely at our pricing. We focus on standard tools across each of our segments to set these pricing standards. By focusing on this, we have seen margin expansion sequentially quarter-over-quarter in our aftermarket recurring business. As our recurring revenue strategy continues to mature in each business. We are actively expanding our teams. The continued integration of dedicated aftermarket personnel uncovers opportunities for other employees past what we call original equipment business. An example this will be the commissioning of a new product in which the original equipment sales person hands off to the aftermarket employee for the upcoming lifecycle needs of this asset. We seamlessly move from one stage of the lifecycle to the next and ensure our connectivity with our customers remains a priority. By staying connected through stages we position ourselves positively with the customer. In many cases our dedicated aftermarket employees seek ways to help our customers and then provide pull through opportunities for us in our original equipment portfolio. We will continue to solve our customer's problems by providing solutions that include replacement parts, maintenance, technical enhancements, retrofits, assessments and other services. Our investments in helping our aftermarket teams included enhancements to our CRM solutions, analytics of customer by industry as well as new solutions. I look forward to answering any of your questions in the Q&A following the call. Now I will turn it back to Jeff.

Thank you, Steve. Now, please turn to Slide 7. Given we have now accomplished the one-year anniversary mark since the acquisition we will no longer be speaking specifically to this acquisition. But more to the global energy sector where in Peerless operations are included. We're delivering on our shareholder value creation commitment with its performance. In the first nine months of 2016 Peerless as delivered $14 million of adjusted EBITDA. While pro forma revenues are down from last year, you'll see the significant operating improvement achieved with result in a $13 million of operating income on an non-GAAP basis up from an operating loss of greater than $10 million for eight months immediately prior to the acquisition by CECO. Peerless is now a large integrated portfolio within our Energy Technology segment. Our OneCECO solutions strategy is branded Peerless starting to our customers the large natural gas turbine OEMs. We have delivered significant margin expansion running past the cost out synergies and exceeding expectations. Finally, and as we promised to our shareholders very similar to the 2013 large metro acquisition we compress the Peerless purchase multiple to the 6.5 times to 7.5 times range after only 12 months and that multiple will continue to come down in full-year 2017 as we achieve the 20 million of EBITDA commitment. Please turn to Slide 8. CECO is focused on and delivering on three core strategic imperatives. Number one is growing market share and recurring revenue both engineered systems and aftermarket. Year-to-date our growth is down 4% on an organic basis for the first nine months of 2016 versus last year. As gains in the aftermarket were more than offset by declines in the engineered equipment. Again we are facing challenging regional markets, but a growing market share remains our goal. Clearly our team is started with bringing in more business and no one within CECO including these remotely satisfied with our bookings and revenue levels. Number two, as we have communicated, paying down debt, deleveraging the balance sheet and expanding EBITDA remain key priorities. Bringing the gross debt-to-EBITDA leverage ratio to below two times is taking place. Our deleveraging process is well ahead of schedule and each dollar of debt reduction has the potential to translate into an increase dollar of shareholder value. So this remains a core deliverable for CECO. CECO levered up to acquire Met-Pro in 2013 and again in 2015 to acquire Peerless. We successfully integrated both businesses and significantly improved EBITDA generation. Now once again, we are deleveraging the balance sheet to a more normalized leverage level. Number three, margin expansion activities, improving cash flow generation and working capital reductions were achieved in year-to-date 2016 and are interwoven into our operational fabric and the commercial order intake activities. Ed will speak in more detail on our progress and goals for this area. CECO has an attractive business operating system, low working capital, strong free cash flow and minimalized or asset-light manufacturing characteristics, which is an important aspect of our 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. Our team strives diligently to obtain project, progress payments and/or milestone payments from beginning to end of a project to enhance our free cash flow. As we messaged in Q2, we completed the sale leaseback of one manufacturing facility in Q3 for gross proceeds of $3 million. As promised, those net proceeds of the sale leaseback were 100% applied to the debt repayment and de-leveraging of the balance sheet. In summary, we paid down $12 million of debt as per our normal quarterly aggressive repayment plan plus an additional $3 million from the sale leaseback, totaling $15 million of debt repayment in the quarter. Before I turn the call over to Ed to provide more detail on our financial performance, I would like to reiterate that CECO remains rigorously committed to best-in-class operating standards, performance and metrics, market share growth and exceptional cash management generation practices to expand our earnings to create more shareholder value. We are emerging as a business that can grow and do well through challenging regional economic cycles, which has driven many of our strategic changes and choices at CECO. With that, I will now turn the call over to Ed.

Thank you, Jeff and good morning everyone. As mentioned, I will highlight in more detail both the GAAP and non-GAAP performance for the third quarter and first nine months of 2016 for both our consolidated results and three business segments. As a reminder, our non-GAAP adjustments include several items such as acquisition and integration expenses and the impact of acquisition, asset valuation adjustments on the income statement, including incremental depreciation, amortization and earn-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 $101.6 million for the third quarter of 2016, an increase of 3.4% year-over-year. Bookings were $96.2 million, up 8.3% year-over-year, resulting in backlog of $219.3 million, which is up 3.3% year-over-year. Operating income was $10.5 million for the third quarter compared to an operating loss of $2.2 million in the same period last year and $8.6 million operating income sequentially. Our non-GAAP operating income was $14.4 million in the third quarter compared to $13 million in the same period last year and sequentially. Our adjusted EBITDA was $16.2 million for the third quarter a record high compared to $14.1 million in the prior year period and $15.5 million sequentially. GAAP earnings per diluted share were $0.17 in Q3 and non-GAAP diluted earnings per share were $0.24 for Q3. Also as Jeff highlighted earlier, our strong cash flow allowed us to pay down $15.4 million of term debt in the quarter and $39.6 million for the first nine months of 2016 resulting in a net debt to EBITDA ratio of 1.6 times as of September 30, 2016. On Slide 10, you will see our revenue trend for the past five quarters. Our revenue was $101.6 million for the third quarter, an increase of 3% year-over-year. On an organic basis, revenue was down 10% year-over-year although down 4% on a year-to-date basis as double-digit growth in recurring revenue was more than offset by weaker original equipment demand in some North American industrial markets and in Asia. Year-to-date revenue was $317 million up 19% year-over-year and given that year-to-date bookings of $325.1 million have exceeded year-to-date revenue, we have grown backlog by 3.3% year-over-year on a year-to-date basis. Continuing on Slide 11, please see our bookings and backlog trends for the past five quarters. We are encouraged with our level of backlog at $219.3 million as of September 30, 2016, up 3.8% from year end and 3.3% year-over-year. Bookings year-over-year were up 8.3% although sequentially down by 11.6%. Our outlook remains consistent but there is some so going into Q4. Year-to-date bookings of $325.1 million or up 26.3% year-over-year on a year-to-date basis. On organic basis bookings were flat on a year-over-year year-to-date basis. Continuing on to Slide 12, our non-GAAP gross margins were 30.4% in Q3 2016 compared to 31.6% in the same period last year. Non-GAAP operating margin was 14.2% in Q3 2016 compared with 13.2% in the same period last year. The improvement in margins is due to project execution, better pricing as well as our favorable mix of greater aftermarket sales. Our continued performance improvement is evidenced by three consecutive quarters of improving operating margin performance since Q4 2015. On Slide 13, our non-GAAP operating income was $14.4 million, up from $13 million in the same period last year. Our adjusted EBITDA was $16.2 million a new record high compared with $14.1 million in the comparable period last year. These overall improvements are attributable to our overall operational excellence. Now moving on to our segment discussion beginning on Slide 14, revenue in our Energy segment was $50.3 million, up 26% from $40 million in the prior year period. The higher revenue was driven by our Peerless acquisition. Global energy bookings of $31.7 million for Q3 were down sequentially from $41.1 million in Q2. Our aspiration is to get back to and/or exceed the Q2 run rate in Q4. Organic bookings were down 15% year-over-year due to Asia and domestic utility softening. In Q3, organic bookings were down 3% on a year-to-date basis. The aftermarket and retrofit opportunities continue to grow in this segment as well as global expansion. Moving on to Slide 15, I’ll ask Payman Khales to address the Environmental Technology segment.

Thank you, Ed and good morning. The overall market conditions for the Environmental Technology segment continue to be challenging as many of you know, but we are making progress in our key strategic focus areas. In the third quarter, our revenues in the segment were $36.6 million compared to $40.6 million for the same quarter of last year. Year-to-date September 2016 revenues were $120 million versus $124 million for the same nine-month period last year. On a positive note, we have strong quarter activity. Year-to-date September 2016 bookings increased 7.7% to $142 million from $132 million for the same nine-month period in 2015. Our OneCECO integrated solution strategy is on track and our aftermarket and services growth strategies are taking shape and contributing positively to the segments results. Our organic bookings growth in the challenging, domestic and global markets validate the strength of the team and our ability to execute our strategies to deliver positive results. Our year-to-date incoming order rates resulted in strengthening of our backlog for three quarters in a row in 2016 which will convert into revenues in the coming quarters. While the market conditions and outlook remain challenging, we continue to focus our efforts on growing market share by delivering value to our customers to our OneCECO integrated solution strategy, a superior application expertise that helps solve our customer's critical problems more effectively, and ongoing efforts to increase customer connectivity through services and aftermarket strategies. While we have made excellent progress with our aftermarket initiative, significant upside opportunity remains given the large installation base. The combination of this initiative is helping us strengthen our leadership position in our key served markets. We are making progress in our operational excellence activities and we continue to shift more manufacturing production to CECO’s obsolete models that helps deliver more value to our customers while providing an improved balance sheet. Our customers benefit from increased production capacity and flexibility, while helping us to eliminate the internal incumbrances that enhance margins and working capital. Long-term growth of the environmental technologies business in China continues to be core to our plans and while the overall economic conditions in the region remain challenging. We maintain our focus to improve our go-to-market activities and overall execution to accelerate our growth efforts in the region. I look forward to speaking with you during the Q&A session. I will now turn the call back over to Ed.

Thank you, Payman. Moving on to Slide 16, revenue in our Fluid Handling and Filtration segment was approximately $15 million for Q3 versus $15.4 million sequentially. Bookings were down $15.8 million in Q3 versus $14.8 million sequentially showing very good improvement in the quarter. North American markets have been adversely impacting the segment, but we are making changes to pull in more business and recurring revenue remains consistent. Fluid handling and filtration has begun to expand into the EMEA region during 2016 leveraging the Peerless EMEA footprint to drive growth in 2017. As Jeff noted earlier we have made leadership investments to address both the global growth while remaining keenly focused on our domestic Fluid Handling and Filtration business. On Slide 17, we illustrate our focus on debt repayment and deleveraging. We paid down $15.4 million of term debt in Q3 2016 and $39.6 million on a year-to-date basis and $57 million over the past 12 months. The favorable debt repayment process is representative of the CECO free cash flow and working capital excellence that our focus team and business model is capable of delivering on a consistent basis. Our net debt leverage ratio reduced to 1.6 times as of September 30, 2016 from 1.8 times as of June 30, 2016 and from 2.6 times at March 31, 2016. Our goal is to continue paying down at least $7 million per quarter for the remainder of 2016. We are on track with lowering our leverage ratios as previously committed that being to be at less than a 2 times gross debt to trailing 12-month EBITDA leverage ratio by the end of 2017. On Slide 18, we show a trend of our cash flow generation for the past two years compared to the current year. We begin with gross free cash flow for the each period as reconciled to cash from operations. Our ability to generate cash flow is very strong, with $11.2 million of cash on a gross basis for Q3 2016, which resulted in $8.8 million of cash from operations after accounting for cash paid for interest expense and income taxes. This in turn allowed us to pay down $15.4 million of term debt in Q3 2016, which included the $3 million of proceeds from the sale leaseback transactions. Lastly, on Slide 19, you will see our condensed balance sheet. As I mentioned earlier, total bank debt was reduced from $152.5 million to $133.4 million as a result of our debt repayment of $15.4 million. We also maintain cash and cash equivalents at $41.8 million at quarter end. Net working capital, excluding cash and cash equivalents, was $26.9 million at quarter end. The team is diligently working on generating free cash flow by lowering net working capital. This is a priority for us and we will utilize our strong free cash flow, which is fueled by working capital improvement initiatives to accomplish this objective. We are focused on further improving our working capital practices and wisely managing capital expenditures to maximize free cash flow for debt repayment. Our working capital as a percentage of revenue is favorably trending downward year-over-year. At this time, we would now like to open up the call for your questions. Operator, please open the phone lines.

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brian Drab from William Blair. Please go ahead.

Good morning, Jeff, Ed and team.

Hey, good morning, Brian.

Good morning.

Thanks for all the detail first of all, so very detailed slides and just a good amount of information. I wanted to ask about gross margin is well above the expectations or at least our expectations for the quarter. Really the best gross margin result we’ve seen in a while from you guys and I'm wondering is it sustainable, given these factors that contributed to the good performance pricing execution, increased aftermarket sales those don't sound like one-time factors what can we expect as we move forward?

Hey Brian. First half I think we outperformed a little bit in the quarter with margins. Even though that is our objective. I think the way to look at Q4 and Q1 would probably take the year-to-date September total numbers the year-to-date September average gross profit NOI and I probably think about CECO in those slides probably in the 31% and 12% margin range.

31% gross and 12% operating?

Yes. That’s what we're showing for year-to-date September.

Right, okay. Great. And then I thought I'd take advantage of having Steve on the call and you know Steve you're already gave again some good detail. But I was wondering if you could maybe talk about a specific example of an aftermarket opportunity and maybe just help us understand how that might have been handled in the past at CECO versus how it’s handled today and I know that you have years and years of experience doing this sitting yourself round and maybe you could even talk a little bit about - more about the best practices that you're bringing from your past experience?

Sure. Our aftermarket portfolio gives us opportunities to do a lot of different transactions Brian. So, again that the standard parts business were remaining firm there and diligent and supported our customers. A lot of that is making sure that we stay connected in -those are. As you look at broader part of the portfolio we have had some increased diligence on covering opportunities for our customers to help solve their problems, getting them to mid find out where they're at and that might be for example something like a retrofit to a current asset that’s already in the installed base. These assets are operational today maybe there's a problem, maybe there's a little bit of a compliance issue or maybe there's some energy savings to uncover some cost savings, those are all things that we can accomplish with our retrofit strategy so it kind of ranges across the portfolio.

Okay, thanks. And then I guess one last question. I think the revenue came in below what you are expecting for the quarter, it sounds like that's the case. And I know that in the past Jeff and Ed you said that about 75% of your next quarter is in that backlog. I'm just wondering can you talk a little bit about what did you see in the third quarter results in the downtime to at least start our expectation heading into the third quarter.

Yes. I think some of the project completion probably drag down a little bit. We're expecting a little more POC revenue recognition in the quarter. So a little bit on that because the bulk of our business is percent complete accounting and we have to process that through fabrication and through our strict accounting processes, so a little bit of that. Probably some of the other ship and bill opportunities that we have was a little bit soft in the quarter. So those are the two things that come to mind as to why we didn't hit the revenue target we were targeting.

Should we think that some of that got pushed from third quarter into fourth quarter? Nothing canceled just delayed or should we not expect that uptick sequentially in the fourth quarter as a result of any push out?

No nothing big like that. I think the run rate you see for revenues is probably kind of how we're looking at it for the next couple of quarters on the revenue side. Again the intake, the booking side is not exactly where we wanted to be right now. We're seeing some challenges on that side of the equation. But I think the Q3 revenue is probably how we're going to see it play out for a couple of quarters.

Okay. Thanks very much.

Our next question is from Gerry Sweeney from ROTH Capital. Please go ahead.

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

Good morning, Gerry.

I want to take a step back maybe go a little bit higher level. I mean obviously done a very good job of executing on the margins, integrating PMFG. But out there on the horizon is the sort of organic growth that everybody looks for at some point and I know end markets were a little bit challenging. But as you look at your portfolio today and you look at maybe your people systems et cetera. And I also with the understanding that organic growth is a process that takes some time, once you invest in it to get results, but are you missing anything. Do you need anybody, is your plan on track. Are you going to shift around assets or people i.e. Gerry D'Alterio et cetera. Can you give us a little bit more of your thoughts on how we develop this over the next two, three, four, five, six quarters?

Sure. I think first off the year-to-date bookings were flat organically. So that's the first benchmark. Year-to-date revenues are down 4% organically. In terms of positioning ourselves to pick up more revenues, we’re continuously doing that, we're continuously looking at all what we need from a product perspective. The move you mentioned Gerry D'Alterio shifting Gerry to focus globally on the Fluids and Filtration business is going to really help us put a stronger presence in the EMEA and the Asia region because he's now exclusively focused on the distribution channel on EMEA, launching products into EMEA, adding resources, so that will have an organic impact in 2017 for that segment. So we are counting on that. Across the other portfolios, the energy sector clearly – the globe is exiting coal, adding natural gas turbine power that's been taking place a long time. We expected more energy business, more natural gas energy business in the quarter and of course in Q4. So we had a little bit of delays in some of the larger energy projects from the big OEM's so that probably put a little bit of sluggishness on the energy sector in the quarter and perhaps in Q4, but in terms of repositioning the Company, adding resources, adding products, investing in products inorganically or organically. That’s a continuum. So I hope that gives you a little color Gerry and what we're trying to do.

Got it. And then now sort of shifting down a little bit lower. This maybe more for Steve Fritz. As much as you can discuss gross margins in the aftermarket segment or aftermarket focus, I imagine they vary from segment a segment, but on average where do they run versus maybe gross market versus gross margins in aggregate for CECO?

In our portfolio as we've talked about before is broad, in general as an aggregate they're higher than original equipment, but it really depends upon the solution that we provide when we have different areas and different items those gross margins have a wide swing. In general they are somewhat higher than the original equipment that allows us to basically take care of the value that we bring and that value is for parts it's assurance of the asset is running appropriately or it might be productivity for the assets, so it really depends upon the portfolio.

Got it. And then finally just one quick follow-up, not follow-up, but housekeeping item. Any other I guess assets that could be monetized are you basically through that process?

We're pretty well through that process Gerry, there's a little bit of land that Peerless owned and little bit of land that Met-Pro had owned, but there is small in proportion to the major sale leaseback shifts we made this year, so pretty much through with any of that.

Got it. Thank you. I appreciated that guys.

Thank you.

Our next question is from Sean Hannan from Needham & Co. Please go ahead.

Good morning. Can you hear me?

Hey, Sean. How are you?

All right. Doing well. And thanks for taking my question here. So first thing I'm not sure if I may have missed this in some of the commentary. What was the organic decline on an ex-currency basis in the quarter?

On bookings or revenue are you asking Sean.

Revenue. Bookings would be great too, but I was focused around revenue.

Yes. Revenue was down about 4% for the year-to-date organically about 10% down for Q3.

Yes. I was looking on an ex-currency basis.

Currency had very, very little effect so we did not do any constant currency calculations this quarter it was very, very modest effect.

Okay. That's good for now. And then secondly just trying to understand a little bit around the commentary for revenues as well as how to think about margins moving forward. There are a number of puts and takes in all of your segments and I took the perspective from Jeff that we should be looking at in aggregate generally flattish topline forecast for the next few quarters. If I look in the mix it seems that [indiscernible] prior question it seems that aftermarket has had some pretty good momentum. And I'm just trying to understand you know how we are not able to sustain at least some of that margin as we move forward here? Thanks.

We continually to improve our supply chain and our cost pricing model. We continue to pursue jobs aggressively as need be we think the year-to-date September gross profit and operating margin profile is kind of where we think we're going to shake out over the next couple of quarters. There's certainly opportunities to improve margins, but there's also opportunities to maybe take a little bit of a trim to pursue certain projects. So there's puts and takes on margins every day we think on the sales side we want to remain proactive. And so our thinking our outlook is the profile should be similar to the year-to-date September numbers on over the next couple of quarters. So that's kind of how we're thinking about it and every day we're doing all we can to pull in business optimized margins and work the supply chain channel.

So for the aftermarket piece of the business is it reasonable to assume that in this near-term, medium-term period at the aggregate revenues are flattish that that is a dollar number should continue to at least improve a little bit from here are and thus profitability offset a little bit by some of the investments you're making elsewhere.

That's correct. That's correct.

Okay. All right that addresses my primary questions. Thanks so much.

Sure. Thank you, Sean.

Our next question comes from Ryan Cassil from Seaport Global. Please go ahead.

Hey, good morning.

Hi, Ryan.

Most of my questions have been answered here. Could you clarify and I'm sorry if I miss this what the aftermarket growth was during the quarter?

Yes, we are still tracking towards double-digit growth for the year Ryan.

Okay. Sounds good. And then you mentioned some slowness in the fourth quarter. Perhaps you could just give a little more color by that whether it's you know in the natural gas power business or industrial manufacturing or just kind of talk by end market where you're seeing that would be…

Sure, Payman, you want to take that one.

Yes, sure. Let me let me take this Ryan. Good morning. As we message on the macroeconomics to continue to be challenging. I think we all see that the industrial manufacturing and to see what not. Capital is a little tight especially as it relates to larger projects. We continue to execute on our strategies. We feel that the strategy sound and we continue to execute on that specific to environmental technologies are once you going to get a solutions has been gaining momentum attraction. We continue to work on it aftermarket of course as services and gain momentum we continued to an asset and look at China as a message before its very core to our long-term strategy. So as our focus really Ryan is on executing on our strategies to make sure - that making sure that we can accelerate or gain of share in the marketplace. We’re focusing on delivering value to our customers. On the natural gas perhaps I can pass it to Jeff.

Sure. So Ryan I hope that gives you a little color and some of that applies to the natural gas outlook. Clearly there's a lot of activity going on in natural gas activity right. Some of the big OEM's have pushed out some projects from Q4 into Q1 we continue to leverage our brand as Payman said our strategy our OneCECO brand in the natural gas universe it's the Peerless-Aarding brand that has an excellent reputation for performance reliability and relevant technology. So we continue to chase all the global activity we've reshaped how we pursue that business from an account base across the globe and assigned a sales leader to each account, but it's a little spotty a lot going on in the Middle East right now from the natural gas perspective but some projects have been delayed we continue to sharpen our competitive supply chain and do all we can to pull in business. It's a long-term strategy we've had a little slowness in the quarter here and then perhaps in Q4. So but long-term we're going to be a key player. We look at our competitive offerings and we think over time we can emerge as a leader in that portfolio in that sector. So I hope that gives you a little color.

Okay. So it fair to say just based on that you're kind of seeing or you're preparing for kind of slowness in broad based across the end markets and projects and that's where you're kind of going to go after to maintain share on some of those projects here in Q4 and Q1.

That is correct.

Okay. And then just get a higher level picture here. You’ve brought down leverage, pretty significantly in the past year. How are you thinking about as that's come down M&A now versus you know focusing on the organic growth and the business you have, is there any change in thought now that you're sort of in a more comfortable range?

Well certainly those are Board topics and Board decisions, but first and foremost we want to make sure, we bought an excellent business that needed a lot of improvement. Then the team did exactly what we need the team to do, improve the business, drive, drive EBITDA, bring down the purchase price multiple and clearly send a message that we delivered on our promise and we're very pleased with the Peerless starting business. So that's the first order of business. Now we just brought in a new President of Peerless to help drive the organic growth domestically and globally and really start stepping on the accelerator and making sure we have optimal sales practices in place and move into a higher performance business, so to create value that's our role here. Now the debt-to-EBITDA leverage is coming down at a faster pace. We certainly should hit the $20 million of Peerless and bring that purchase price multiple down to a six next year. And I'm sure at some point in the next couple of quarters the Board will be evaluating when is the optimal time to do, to evaluate M&A. But those are clearly Board decisions and I think that's something the Board will be evaluating Ryan.

Okay. So it’s fair. I mean do you have an M&A pipeline going that you're spending much time on now. Is it really that organic focused that's kind of driving your M&A?

Yes, Ryan no M&A activity we pretty much hunkered down in 2016 to improve the business and deliver on our promise. So we do not have an M&A pipeline in the works today.

Makes sense. Thanks guys.

Yep.

Our next question comes from Bhupender Bohra from Jefferies. Please go ahead.

Good morning. Can you hear me?

Good morning.

So my question actually revolves around the Energy segment here which was I believe the revenues are up like about 26%. Most of that came from the PMFG acquisition. It seems like the PMFG the revenue run rate if you look at the year-to-date has been pretty nice. I mean it's kind of consistent actually 25, 25 and then 24 in the third quarter. Now if you [ex-out] PMFG maybe it can actually clear the revenue on the legacy business. Was that down like 30% in the quarter, I mean if I ex-out like PMFG?

Organic bookings on energy would be down 15% year-over-year, quarter-to-quarter down and down 3% year-to-date on an organic basis the Energy segment.

Yes. I was actually asking about organic revenue for the segment.

I’m sorry revenue wise, if you shift out Peerless from a year-over-year, it will be down that range or slightly yes organic revenue would be off for energy.

Okay. Can you, I mean yes, I’ve seen actually booking organic booking kind of decline for the last two quarters about, let say 50 in this quarter and 24 last quarter. Maybe Jeff you can actually just give us some color into and how your other businesses Zhongli and then Harding actually are doing within that Energy segment?

Actually Peerless is relatively flat year-over-year organically. Zhongli is actually up a few percent and Harding is actually doing quite well year-over-year. So we're showing as a company, year-to-date bookings are flat for CECO Environmental year-to-date September, year-to-date bookings are flat and revenues are down roughly 4% on an organic basis.

Thank you. For the Energy segment?

That would be total.

Okay. Yes. I was asking about the energy it seems like something happened this quarter, the decline was pretty sharp actually compared to fluid handling and the environmental business. I don't know if there was something?

Obviously you can see on Slide 14, the quarterly bookings trajectory, but the organic bookings for the energy sector year-to-date is down 3%.

Okay. Got it. And Jeff you have talked in the previous conference call about like a dashboard, internal dashboard which where you look at the projects and how you see over the next few quarters, do you have any color on that like are we seeing, I mean you have mentioned like there are some push outs and some deferrals of projects. Any other color on your dashboard which you think would be worth to note here?

Sure. We are seeing a little decline, some push out. I think for the fluids and filtration sector actually we're seeing a little bit of uptick, in bookings and RFQ for the quarter maybe the next couple of quarters I think that has to do with some of the changes we’ve made domestically and through international. So we're seeing a little uptick with the fluids and filtration. Payman described the Environmental Technology segment as a little soft. So we're seeing some RFQ activity decline and some RFQ activity being pushed out a little bit globally to clean the petrochemical refinery aspect of the environmental group which we've had some great bookings year-to-date, some great organic bookings year-to-date to the segment. So we're seeing a little bit of sluggishness in the RFQ dashboard. On the energy sector, I tried to message that in the script a little bit. We remain very excited long-term for the natural gas turbine OEM activity. The last quarter was just a little off, we had a couple of projects that were delayed and we are expecting a better Q4, but again it's tied to the big OEM’s booking the natural gas turbine and then CECO winning the downstream exhaust in environmental omission systems contract. And some of those were coating and some of those could be pushed into Q1. But it is active, but challenging I’ll just say that.

Okay. Got it. Thank you.

Thank you.

[Operator Instructions] And our next question comes from Sean Hannan from Needham & Co. Please go ahead.

Yes. Thanks for taking my follow-up here. Just wanted to see if I could dive into Europe a little bit, obviously this is an expansion effort on your end. You talked about this a little bit last quarter as well. At this point of the game, can you provide a little bit more of updated thoughts tactically how you expect to be able to really capture the topline and some of those expansion efforts? And I think that the degree of the investment was not view to be all that substantial, but obviously kind of reducing here that there's going to be a little bit that's going to impact the margins near-term. So if there's a way to address that side of the equation that would be great as well? Thanks.

Sure. Sean, regarding the Fluids and Filtration segment expansion into EMEA; we have added regional sales management talent and resources in EMEA. We're working on – we've launched two product lines into EMEA. We're working with the Peerless EMEA footprint which is enabling some of the sales and service and transactional base. We are shifting a lot of our focus to Dubai where we have a very strong team. We've also Gerry D'Alterio is looking at signing up new distribution internationally. We're looking at potentially building or private labeling one of our main comp lines in the EMEA region. We're looking at two different opportunities right now. And we're doing similar things in Asia with our Asia footprint principally on the filtration line, the Mefiag and CECO filtration line. So there's a host of things. We're pushing down the street if you will to help enable sales next year and we're counting on some pretty good upside with distribution and some direct selling through the Fluid Handling and Filtration segment both in EMEA and in Asia. The reason we can do that is these are large trading areas and over the years the segment has focused principally on the domestic market and have done well. So we're making a major investment with resources and products into the rest of the world and I'm pretty excited about it.

Okay. Great. Thanks very much for taking all that questions today.

Yes. Take care Sean. End of Q&A

This concludes the question-and-answer session. I’d now like to turn the floor back over to management for any closing comments.

Thank you for joining our call today.

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