Greetings and welcome to the CECO Environmental Corporation Fourth 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. It is now my pleasure to introduce your host, Ed Prajzner, Executive Vice President, Corporate Development for CECO Environmental. Thank you, Mr. Prajzner.You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us on the CECO Environmental fourth quarter 2016 conference call. On the call today are Dennis Sadlowski, Interim Chief Executive Officer and Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we have 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. I 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. We 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, 2016 which will be filed by no later than Tuesday, March 14, 2017. Except to the extent required by applicable securities laws, we 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. We have 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 presentation. And now, I would like to turn the call over to Dennis.

Thank you, Ed, and good morning, everyone. I am pleased to be addressing you for the first time as Interim CEO here at CECO Environmental Corporation. And before I begin with our prepared remarks, I along with the Board would like to thank Jeff Lang who led the company as CEO over a solid seven year stretch. As you know, Jeff departed the company at the end of January. We are thankful for his many leadership contributions and wish him well in future endeavors. It really is a fantastic time to be stepping in from the board to lead to the CECO team and join the company at this pivotal time as we seek to invigorate growth strategy and take the necessary steps to deliver long-term value to our customers and shareholders. Beginning on Slide 4, for those who do not know me just a few words of introduction. I jointed CECO's Board of Directors on May of 2016 having previously held a number of senior leadership roles including CEO of Siemens Energy and Automation, Head of LSG Sky Chefs North America and CEO of International Battery. My early career included a variety of roles at General Electric and Thomas & Betts. For those who do know me, you will know that I have a strong passion for customers, learning and development and winning through team. I feel good about my experience having led other large industrial companies with a strong market focus to drive financial performance. Also on our call is our new CFO, Matt Eckl who joined us on January 9. Matt came to us from Gardner Denver where he provided financial leadership for its $1 billion energy segment which included manufactured pumps, long cycle engineered systems and aftermarket services. In addition, he spent more than 10 years…

Thanks, Dennis. And good morning, everyone. I am really excited to be here at CECO. This is a unique period in CECO's history as we pivot towards organic growth. In my first 60 days, I spent a majority of my time deep diving into our year end financials, reviewing controls and visiting our operations. I made a point to visit about five customers, spending each of our segments to understand how we can serve them better. I came to CECO because I understand the vision of the Board to grow and I believe I can help CECO to do just that. In my short time, I am very encouraged with the inherence strength of CECO's business. We have a bench of great talent as well as strong balance sheet, cash reserves and products with nice margins. I look forward to giving you progress updates as I learned more and get to meet our shareholder base. As an anchor point I'll now discuss highlights of our recent performance, adding color as we walk through the slides. Detail will include both GAAP and non-GAAP performance for the fourth quarter and full year 2016 for our consolidated CECO results in three segments. As a reminder, our non-GAAP adjustments include but are not limited to acquisition and integration expenses, earn out expenses and goodwill intangible asset impairments. Our non-GAAP presentation is intended to provide trade analysis and assessment of our core business performance. A bridge of non-GAAP items is referenced in the appendix. On Slide 11, you will see here headline performance and year-over-year comparables for the fourth quarter. We had a strong operating quarter despite macroeconomic headwinds. Our bookings were $77.7 million for the fourth quarter of 2016, a decrease of 22.6% year-over-year. In the segment section, I'll provide some commentary to what…

Thank you, Matt. Let me wrap up by saying that the Board and I believe in CECO, our financial strength and most of all our people. CECO has great operating metrics and asset like business model and a deep bench of disciplined operators. Together with a better focus on delivering top line growth and value our customers, we should be able to build the stronger and more effective CECO. I look forward to engaging with all of you as well as the entire CECO team as we work to revitalize the business and deliver value to our customers, employees and most importantly our shareholders. And with that I'd now like to turn the call over to the operator and take your questions.

[Operator Instructions] Our first question comes from line of Brian Drab with William Blair. Please proceed with your question.

Good morning, Dennis and Matt. Looking forward to working with you. Hey the first question I had is just can you give us a sense for what you believe is the right long term level of organic revenue growth in the industry? In kind of the pollution control industry, energy industry in general I think longer term a lot of your investors are hoping for mid single maybe even high single digit organic revenue growth. I am just wondering what you think is reasonable or possible?

Yes. I think that mid single digit is a number that we believe is out there over the medium to long term. And we are seeing that underpin with lot of the activity that we see in Asia, here in the US. So we are comfortable with that over long term. In the near term, we are pretty pleased with our performance that we just delivered because it was a lot more challenging than that. I think in the last year that we are coming out of and so we have some work to do.

Okay. Great. And I guess long term what do you think the right gross margin level is for us to modeling -- this is a great fourth quarter, I don't imaging that we should be expecting that type of gross margin in 2017 or maybe we should but if you could comment on maybe 2017 gross margin and beyond.

Certainly, this is Matt. Hey, Brian, nice to meet you. We love Q4's margin rate and it was due to favorable project mix and is better than expected. We executed in the energy business. I'd say for 2017 and beyond, we are looking at 2016 year-to-date average you should model in.

Okay, great. And then just to clarify I think I have this in my notes I think we could just make sure that we got on the call, I think you said with debt covenant was, what that leverage ratio is but can you just give that one more time and does that step down at some point and what -- is there any timing that we should understand.

Yes. The leverage ratio is 2.5x right now and then our covenant actually that was 3.5x as of year end. So we are well below that. And it steps down to 3.25x through September 2017 and then it drops to 3x there beyond.

Okay. Great. And then maybe just one more question. If I go back to just revenue growth and think near term given the challenge in bookings and backlogs down year-over-year, what do you think is reasonable for us to model in 2017? Is this maybe modest decline revenue in 2017?

Yes, well, with the month under my belt inside the company, it's little early for me to give you too much guidance in that. But we are looking, coming off a year from bookings as you know where we started strong and it got little weaker as the year went on, this year I think we'll see the opposite where certainly be a tough early part of the year what we are seeing. But a lot of the times that we are hearing and seeing would suggest that we see the opposite this year. We are starting slow and picking up. So somewhere in that neighborhood of last year is what we think we will be able doing. Quite frankly, we've a lot of work to do to get there. So but I got a good team, they are energized and I am optimistic about that.

Thank you. Our next question comes from the line Gerry Sweeney with ROTH Capital. Please proceed with your question.

Good morning, Matt and Dennis. My question is just referring back to your commentary a little bit. It sounds like I mean obviously one you had a great margins. But two just on your tour with some of your customers there was also a sense of maybe terms being too tight, maybe a little bit some over focus on internal metrics and then we take look at bookings in organic growth. Is there a potential maybe you are being too aggressive in terms of working margins and not being aggressive enough and going after business? It is obviously a fine line between going after price and going after business but any thoughts on that in terms of as you pivot towards better organic growth?

Yes. Gerry I think I can add a little bit of color to that. And I am not sure it's material in terms of their real impact on the quarter. But step one and pivoting for growth is about building a growth mindset. And it's something we are doing by being out front, by talking to customers, by getting a leadership engaged and frankly by getting the whole company to understand we are behind the sales team and we are going to make an impact. But I will give you one anecdote we were in and operating review and as a part of it I was told we were turning late customers so we had customers that actually appreciate what we do, they want to pay us for profitable orders, this wasn't a price problem and I was told we were at capacity. And feeling that back of it, the capacity limitation were actually something these guys could have managed pretty easily but they were also working towards an internal metric around sales for Head that wasn't doing much for us. So those are the kind of things that we need to eliminate, those are the kind of things I think they can free the mind up to get us going where we want to go. Again, I can't say they were material in some of those yet but that's the starting point that we really want to unleash because we have a great deal of capability in the organization.

So in a sense what you saying is maybe we work some of the metrics, there is some instances of maybe a little bit of friction or maybe some misallocated metrics that may potentially hindered growth.

Yes. And none of the examples that I am thinking about and I've heard in the last five weeks are price where we just dug in on price and that was the end of the story. So some of these still have work to do but I am optimistic that we can get some of this friction eliminated just in our own workings.

Okay. It maybe early still, this question maybe a little bit early in terms of your time on Board and kicking the tires but as you look at to some of the challenges on the organic growth side, I mean do you have enough sales people in place? Organic growth is always been a little bit of a challenge for CECO and even Met-Pro before they acquired them so do you have the right people in place? The right number of sales people, right systems or is that still too early to tell?

Yes. I might have to again lean on a little early to be precise. I've been out with our sales team in energy during a training session as well as the environmental group. And what I find there is that we got lot of hash and people understand and what's been communicated to them and what the rest of our leadership is at the entire company is going to be behind them. We are going to make sure that everybody is connecting to what's happening in the market. And assisting them to make an impact. I can say that in both of those sessions we also had half a dozen new people. So we are making the new ads as we see fit and I think that will continue throughout the course of the year in order to drive the growth that we are after.

Okay. One last question and then I'll jump back in line. Just what was this may be more for Matt, what was the percentage of revenue coming from aftermarket sales?

28% to 30% for our total year 2016.

Thank you. Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Yes. Good morning, folks. Thanks for taking the question here. Just wanted to follow up on one of the points you made earlier in the presentation and calling out hey look in 2016 there wasn't really M&A that came through. So just trying to understand as the M&A window still effective closed for you folks as you focus internally here for a while. Obviously, two new material chief -- it seems to be post and you got some internal changes from a process standpoint to make. So jus trying to understand that as we think about the year at this point.

Yes, Sean. I would just start by telling you that our short-term focus is absolutely about building a growth engine and that's focused on organic growth. And building that on top of the core operating foundation that we have in place here. But absolutely our aspiration support further M&A as we look to building a stronger, bigger and more impactful CECO. In that context we have successfully improved the balance sheet with the debt repayment. So it puts us in a lot better position to consider those options as well. The Board, the team, we are active and we will continue to make that part of our future.

Okay. Next question is there have been some comments out there really referencing some of the potential policy changes within the Trump administration, if it is relates to going back some regulations and derivatively that could hurt some of your prospects now some of that was not all but some of it, maybe a lot of it was although head scratching to be, I had not previously thought of some of the prior regulations as having necessarily driven your business the last few years. Wanted to get your perspective on how to think about these potential regulation changes and as a breakdown as that applies to specific market versus where your core competency and focus is. Thanks.

Okay. Thanks, Sean. I think it's an interesting question and quite frankly it's way too early to be speculative on exactly the detail impact. But from our perspective there is a lot more optimism out there subsequent to the election and in the current administration within the whole industrial environment, particularly here in North America. And I would have to add okay with all of the things and the topics you probably talk it about EPA and regulations and less funding and less enforcement, I'll just say this, all of our customers are good stewards of the environment and they provide their employees with a healthy operating environment. And no matter what kinds of changes happen, they are not going to change that. And in Asia, we are seeing actually more regulation with enforcement being put in place. So I think most of what we are hearing will likely have a positive impact at some point, perhaps shortening the cycle on permitting and the like and allow us to move forward because none of our customers are going to do anything less than they are doing to protect the environment and to protect their employees. And that's what we help them do. So I think we are in a good position.

That's helpful. And I think they are probably are a fair number of states that are much more progressive in terms of regulations anyway so I didn't know if there was any viewpoint you had around -- even the influence you are going to get, even if there was something that would be a down track coming from the federal level which has -- state are still going to have their own tabs.

Yes. I'll give you another example on that. I was out with one of our good customer here in State of Texas, had a facility expansion as their business was growing, and came to us because we are their supplier in their other location. And we spent nine months helping them through the permitting process for ultimately an order for dust collector and RTO that they took three months to execute once we help them through the permitting process. So it's a real unbalance to helping somebody who is in a growth market, who wants to get the right things done, nine months spent and all paper work, three months executing and building the equipment and getting it up and running and helping them to achieve what they want to achieve. Hopefully, some of what we are hearing might improve that balance.

Thank you. Our next question comes from the line of Bhupender Bohra with Jefferies. Please proceed with your question.

My first question on the balance sheet. Could you give us what's the target net debt to EBITDA by the end of 2017 you guys are targeting?

Well, we are still looking at for 2017 to pay down debt at 2x the minimum payment. But if it is our best use of cash we will continue to pay down that debt on a accelerate basis or leaving this door open for innovation other investments. And not necessarily now that we are going to guide a ratio right now at this point.

Okay. But have you talked about like what's your comfort zone in terms of net debt to EBITDA over the long term like where you want to be? The range of --

Sure. We want to be at 2 that I'll continue. We committed that on previous calls in the past.

Okay, got it. And the next question on the portfolio. I think there was a question on the M&A side. I just want to take the opposite side of that. I mean you have done a significant amount of M&A over the last few years, PMFG was one of the biggest one. Have you thought about some of the non core portion of your portfolio in terms of kind of divestures especially the filtration product line within energy and filtration products here which came as part of Met-Pro? Any thinking about any asset based which you think over the long term doesn't stick with CECO portfolio and you think that needs to go.

Yes. Thanks, Bhupendra. So there is nothing on the horizon in the way of divestures or things on the table at this point in time within the company's thinking. I would tell you as I hopefully articulated, our aspirations are to grow and in a much larger way. But along that way as we complete our strategic plan refresh, we would think we would like to invest in all three of the segments as well as the aftermarket. If something does come up though that we find is no longer a good fit for the way we see the world then absolutely we would look to the reverse and seeking a better owner or a better position for that business.

Okay, got it. And lastly I think this question for Matt here; I am going to take the Slide 25, the last slide which you talked about the financial discipline. And the measures taken in 2016 especially with the -- you guys have established like an in-house internal auditing function and I think you point out like segment controller especially for environmental and energy segment. I don't how much -- have you gone through -- what kind of internal systems you had prior to actually establishing this in 2016? Just wanted to get a sense of historically or have we looked at the books like going back four five years? Did we not have internal auditing functions before and this was done after like PMFG or Met-Pro? Any color into that.

Just to be clear so your question is have we done postmortem evaluation of our acquisitions at the business unit level or do we have -- is that what you are asking?

Yes, postmortem as well as some historical perspective why those functions were not done before 2016 or the aarding functions were not there like prior to PMFG or prior to Met-Pro?

Well, I would say that we have in-sourced our audit team to some extent to build the bench strength for the future. I've got passion for that because I believe that we have to take that talent and move them into the businesses. I'd say that from segment standpoint we add these controllers so that they can help evaluate how those businesses are performing and how they are going to grow and how business help our VP, GM grow those businesses in the future. I'd say we do postmortem analysis on those acquisitions. And continues to look at cost synergies and how we can grow them. And we also look for how we can get scaled. We have a lot of redundant systems. And that's something that is to our benefit if we can clean those up, obviously we reduce our control that helps from an internal audit standpoint, also from productivity and efficiency standpoint and shows it up on the financial statements through lower cost. And so that's why we add the segment controller. Does that answer your question?

Yes. Done, that answers my question to some extent and is the Met-Pro, the charge you took on the Met-Pro side, was that part of that postmortem here or should we expect some more stuff in terms of the intangibles and all those kind of things come maybe in 2017 or 2018? Are we in the process of doing that right now?

I wouldn't say that adding the segment controller is what we drove the goodwill impairment effects that you are asking. I'd say it's a function of our annual process where we assess the fair market value of our intangibles and goodwill. Through that process we evaluated our projections and performance against prior projections and adjusted accordingly. I'd say that the segment controller addition is relevant to that.

Okay. Are there any metrics these segment controllers are looking at within the segment or just last question I just want to get some details [Multiple Speakers]

Absolutely and those metrics are evolving as we change their growth organization but from a core operating foundation standpoint, working capital cost, margins are the more prevalent metrics, going forward we look at growth by region, we'll be looking at share, we'll be looking at cost benefit analysis and value proposition to our customer.

Thank you. Our next question comes from the line of Ryan Cassil with Seaport Global. Please proceed with your question.

Good morning, Dennis, Matt. Look forward to working with you guys. I guess my first question, one of the things I try to figure out here is just in the new management team, really what's changed from a strategy standpoint and perhaps it's a bit early but one of the things I noticed was the aftermarket recurring revenue focus in -- on these calls and in the commentary last year was really apparent and it's a little bit more saddle perhaps in your presentation and comments today. Is that a changed where you guys are really focused on that OE side or it's a more of balanced or did I just it might kind often picking that up?

So what I would say Ryan is first off that we really do like the good operating foundation and the good fundamentals that we have in the business. And at the end of the day we are just not satisfied with the level of growth that the approach and the direction that we are getting. That aftermarket is still going to be a core tenet, it's a great opportunity where we can use the application knowledge and skills to help customer while at the same time helping our business. So that's absolutely a part of our ongoing priority. This is really though about pivoting to make the customer the center of our focus going forward. We link our decision making much more to what's happening in the market, where our customers see the world going so that we can get there just in time as Wayne Gretzky would say and be skating to where that puck is going and help them along the way. That's the core of the pivot that we are driving now. And that will underpin and shake the strategic refresh that is going on as we speak.

Okay. Great. Look forward to hearing more about that as we get down the road. I guess -- yes

One thing I thought it might be good to add is I had a recent visit to one of our customers. I was out at chemical blending plant down in Houston that serves petrochem and agriculture market. And I think this will answer your question but as you imagine this facility, it moves a lot of fluid around right, large transfer pumps on site, our pump is mission critical sitting right underneath the blender humming along. And the customer said, hey, this thing is great. The Fiberock pump never fails, we have routine maintenance but you look lead times on part to be great if you get a little faster. Aftermarket component does if we stock that inventory get to the customer faster; we can grow faster market business. We are more passionate about that. So my point about this all is that aftermarket is not falling off the plate whatsoever. And that will be a part of our core operating foundation.

Okay. So perhaps just more of a balanced focus definitely on the OE side but and also on the aftermarket side. I guess my takeaway there.

Absolutely, yes.

And sort of hearing looking at the backlog and the bookings trends ending the year, hearing your comments the first half going to be more challenged but you are optimistic that things will pick up. I know you guys are still transitioning in but it is mid March, is there something you are seeing in the orders that are kind of shaping up in the first quarter that are giving you that optimism that things are going to be looking up six, nine months down the road or is it really thought that, hey, we are going to get in here, implement some of the changes to work to focus more on the customer and those trends will change as we begin to do that.

Yes, well, I think it's a little more of latter. Early start to the year was a little slow and but we see the pipeline starting to pickup in few of the businesses Matt talked about the sequential improvement in Fluid Handling segment and I think that will continue. We are getting some international wins there as well. What we are seeing the pipeline improve in energy to a degree and the only big -- bigger cloud I mentioned our Emtrol-Buell business still has some issues. We are a global leader. We see the whole market. We have high market share in that segment. Serves refining market and that's where we see over capacity that after a great year of bookings last year it will likely be muted considerably this year.

Okay. And one of the things that stuck outs me on the last call was some comments that you guys going to have get pretty competitive on the pricing front. So when orders and clearly orders were down so maybe you guys just remain disciplined on pricing, but I was wondering if you could just give some commentary on the pricing environment. Are you just seeing a whole level of activity or people being increasingly competitive when things are out there? Is it a little bit of mix? Just kind of curious on that environment, maybe it relates to environmental and the refining pieces of the business that are seeing challenges.

Yes. Well, there I would tell you that not seeing anything substantially different than we've seen in the past. We do have competitors and so we have to perform, we have to demonstrate value but that's where I am really optimistic because the team here with the application depth is particularly good at that when we can get in front of the right customers and help them understand where we deliver value both on the product side, on the life time side and even we've begun doing a better job at modelling where we are creating aftermarket for the company something very important to us. So no major shifts. I will add that in the fourth quarter we did miss on a few orders that we were anticipating, couple of orders particularly in Asia in environmental. So that didn't help the fourth quarter numbers but we are not seeing anything that you would have us turn away from our margin expectations going forward.

Thank you, ladies and gentlemen. There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

Thank you. And thank all of you for spending time with us. In closing, I just like to reiterate CECO has a great and strong operating core foundation. And that we delivered a good quarter and good 2016 in a pretty difficult market. Going forward we intend to pivot and build on our strong growth engine aimed at long-term value creation. Thanks again for joining us today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.