CECO Environmental Corp. (CECO) Q4 2016 Earnings Report, Transcript and Summary

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 at GE in a multitude of P&A, Audit and Acquisition integration roles across their industrial profile. Matt has a unique plan of financial acumen, Lean Six Sigma mindset and insatiable curiosity to learn and improve processes. We are excited to have him at CECO. Now Matt and I are new at the home, it's absolutely clear that we have a strong team working along side of us. If you have been following CECO for a while you will know that over the past four years as we've grown three times in size, we've attracted key talent through acquisition and internal development. Many of you have heard from our senior leadership team in the past, and if so, you know that they have a deep knowledge of our applications and products, a diverse range of backgrounds from name brand industrial companies, and strong entrepreneur capability. I feel confident that we have the right team in place to lead the next wave of growth, deliver value to customers and shareholders and build upon our past successes. Turning to Slide 5. Now I'll walk you through the financial details in a moment but I did want to offer my perspective on our fourth quarter and full year of 2016. Notwithstanding weaker bookings in the quarters, I believe we made good progress during the quarter and the full year and did so despite global macroeconomic and geopolitical headwinds. We accomplished much of what we said we would do in 2016. We delivered record quarterly gross margin of 35.6%, up 520 basis points year-over-year due to favorable project execution, greater mix of aftermarket sales and benefits from our operational synergies related to Peerless acquisition. EBITDA of $16.3 million was up for the fifth consecutive quarter, demonstrating our operational expertise. Non-GAAP fully diluted earnings per share was $0.35, ahead of expectations. We delivered working capital and cash flow improvement generating nearly $17 million of cash from operations and lowering our year end working capital to 16% of revenue, down 140 basis points year-over-year. Matt will talk more to these metrics but it is an essential component of driving shareholder value and we expect continued focus in this area. We made great progress with debt repayment and deleveraging our balance sheet, consistent with previous quarters we paid down debt at 2x a greater our required quarterly principal commitment. We paid down $10 million of debt in the fourth quarter. Going forward, this will remain an important priority; however, we are getting closer to our stated target of 2x total indebtedness to EBITDA by the end of 2017. We finished 2016 having achieved 2.5x ratio we provide yesterday with a substantial margin to our existing bank covenants. While we had successes in the quarter, we did under perform as it relates to bookings and backlog. Quarterly bookings were down 23% year-over-year and backlog was down 6% year-over-year. We are disappointed with this declining trend. Our backlog remain healthy at $197 million, our book-to-bill ratio is also weaken which frankly needs improvement. While the weaker market conditions have contributed this decline, we will not sit idly by. This is a clear priority and we are taking steps to reenergize bookings and ensure that we are doing all we can to drive improve results. Due to this weaker market conditions, we recorded a non-cash intangible asset impairment charge of $58 million in the fourth quarter which Matt will discuss in detail. Moving to our full year performance on Slide 6. We delivered record results in gross profit, gross margins and adjusted EBITDA, demonstrating our operational excellence. Non-GAAP fully diluted EPS was $0.99 per diluted share for 2016. We achieved our stated goals for the aftermarket business delivering year-over-year double digit recurring revenue growth and margin expansion. Our net cash flow from operations was approximately $70 million enabling us to pay down nearly $50 million term debt. We also paid our shareholders in the form of dividends aggregating to $9 million in 2016. We are confident in our cash generation capabilities and our Board approved 13.6% quarterly dividend increase to $0.075 starting in March of 2017, rewarding our shareholders with our success. Reported revenue was up over 13% for 2016 due to inclusion of Peerless for a full year where as organic revenue was down 3% for 2016. Bookings of $403 million were up nearly 13% year-over-year yet down 6% on an organic basis. We are disappointed with the lack of organic growth and are taking actions to deliver better performance across the business segment with this being a key priority. Turning to Slide 7. As we look toward macroeconomic conditions, it's obvious the market is not going to give us a free ride to success. Overall, general industrial market appeared to be improving and unfortunately from a sluggish 2016. Industrial economy held down by weak global demand has been below average for the past 2.5 years when energy prices first collapsed. There is a bottoming trend in the US markets and therefore good possibility for growth in later 2017. Industrial markets in Asia remain under pressure due to excess capacity in many key industries. Global capacity utilization for manufacturing remain the few percentage points below longer than average hence we continue to expect lower overall demand for original equipment. Modest growth is expected in our global power generation with a shift in mix continuing to natural gas. While coal power production continues to slowdown, aftermarket opportunities do exist that we can and will pursue. Midstream oil and gas market continues to improve with a rebound in pricing as the market rebalances. Natural gas pipeline activity appears to be improving. We remain positive regarding the long-term prospects of our energy segment given the shift towards natural gas. The Petrochem markets which impact both our environmental and fluid handling and filtration segment have been slow for the past few years. There has been a rebound in oil prices and it seemed consensus among analysts that 2016 saw the bottom of the depressed stage of this industry cycle, and going forward things will start to look up with opportunities expected in North America, Asia and the Middle East. Global oil and gas CapEx is expected to increase in 2017 while refinery CapEx is expected to be muted due to capacity over build. The capacity over-build has refiner scaling back their 2017 budgets which reduces capital projects. Refiners may even postpone their turnaround or look to alternative means to repair equipment in place to minimize cost. This has a direct impact on our leading Emtrol-Buell Cyclone business. Otherwise petrochem volume is expected to grow mid to single digit over the next three years which could give a bit of lift to other environmental and food handling businesses. In light of these macroeconomic conditions, we will make it a priority to proactively pursue sustainable growth opportunity to ensure we are delivering value to our shareholders. Now few of my early actions and observations since stepping into the CEO chair outlined on Slide 8. In my first few weeks, I have received a super reception from our leaders and associates across the company showing their passionate support for the business. It's been busy time and a good start. We assembled the global leadership and are kicking off a strategic plan refresh to align our outlook and pivot for growth. The great news is the team is embracing the heightened market orientation and is energized about leading our next phase of growth. As I indicated earlier, I am fortunate to have such strong, talented and dedicated team in place. I've had the opportunity to meet with several customers across the US and in China. This has been particularly rewarding. Taking an outsider approach and getting in front of customer gave me deep understanding of our competitor strength and the challenges we face as we build our execution capability and add a renewed push for growth. Feedback from our customers has been positive and that they value and need our products and services. We also heard other comments such as our terms and conditions are too stringent and it can be time consuming to reach closure on terms. This suggests that our guys are working hard to protect the interest of the company and manage risks, while at the same time pointing some areas which we can improve. This feed back was welcomed and should lead deposit of changes. Customers visit have also uncovered other opportunities where we can do better. This was underpinned by an early visit with our Kirk & Blum service engineer to meet one of our top customers at their Lerwick, Bill Kentucky Packaging and Film Printing location. The high speed film processing gives out fumes such that K&B guys called upon for custom -- work and service engineering contracts that keep this facility safe, clean and growing. It was impressive the amount of work our service engineer Doug has been contracted to do over the years at this facility. Doug is at the top of the head of facility speed dial and has full run in the plan. And while on site we also discussed that this process produces Volatile Organic Compound or VOC that must be neutralized. When asked about the Regenerative Thermal Oxidizer or RTOs, we learned that they had five on their site yet we had never made a push to become the supplier of choice. We apparently failed to capitalize on the long and deep relationship of K&B guys and transfer that value over to our Ed West RTOs. However, since leaving the customer site, we do have our team making progress educating the customer on the merit of our ad waste RTO products. I've also visited several of our business units engaging our leadership teams in a series of operating reviews. It is obvious we have deep application knowledge and strong brand. Our team is very capable of executing even complex projects and has a solid cost orientation. Yet it time our growth has been constrained by limiting internal metrics. You can be sure that we are shifting away from necessary restrictions without losing execution vigor which should in turn a growth. Then I made a priority to spend a week in China earlier in our tenure. We visited four of our locations and met with a few customers and vendors. And despite the slowed investment outlook and challenging environment, our China team was passionate about growing the business. They see future opportunities to export our products as Chinese companies seek to expand their reach in the wake of slower domestic demand. I'm encouraged that we can use our global network to capitalize on this shift. Overall, I'm pleased with the progress that both Matt and I have made in our first week. Turning to Slide 9, the time is right for our leadership transition as we renew our aspirations for the next wave of growth and sharpen our focus on what it takes to win over long term. The significant strategic actions taken over the past four years have built the solid foundation for CECO. We've tripled our revenue in four years through strategic M&A, position the company in a number of strong market and adjacencies, enhance our talent and product offering and expanded our geographic reach. We've demonstrated discipline in cost execution, delivering acquisition cost synergies and maintaining cost containment throughout the organization, added by our asset light operating model. We've monetized non-core assets and use those proceeds to delever the company while maintaining nimble customer responsiveness with aligned external fabrication partners. Additionally, we've invested in and reinvigorated our aftermarket business with a needs driven approach that supports customers while enhancing our margin profile. In spite of our strong ability to drive internal improvement, our top line organic growth has fallen short. Quite frankly, this is not good enough and we are not satisfied. As a result, we need to take the necessary steps to reinvigorate the focus on customers and build growth engine that can deliver long-term value to our shareholders. With the solid foundation now in place, I along with the leadership team and the Board have set our sights on building a larger, more impactful organization that consistently delivers growth. And we have our share of work to do. This includes a strategic plan refresh that will ensure our investments are linked to growth market and differentiated customer impact. We'll start the market place and delve deeply into the problems and questions our customers are facing. We expect to do so by harnessing the breadth and reach of our organization and the application knowledge across the business units. Using an outsider approach, we aimed to creatively provide solutions and deliver value to customers who are creating additional value for CECO. And by outside in I mean looking at all aspects of the business from an external market point of view to ensure that everything we do has a positive impact on our customers and that customers' success translate into value creation for our shareholders. Now until this effort takes almost shape, I can tell you that we are leaning into the market and leading from the front to ensure we prioritize our customers and market impacts. My goal will be connect every part of CECO with our customers and attempt to energize bookings. We've a great deal of application knowledge that we can apply to the equipment and aftermarket business and a tremendous opportunity to provide solutions to mission critical projects. We have begun to leverage our installed base, creating value added innovation and investing in world class original equipment in order to maintain a leading edge solution for our customers. As an example, our combined Peerless aarding business unit recently won an innovative retrofit contract at one our gas turbine combined cycle power stations. Our team worked closely with the customer to design and manufacturing additive ambient air injection system that helps the facility wrap up quickly with reduced waste and improved power plant efficiency. This is a great win for our team with a less than one year payback for the customer. And the best news is this solution is repeatable and can have a similar impact at other customers and installed base. We'll leverage this type application capability and look to invest in technological innovation. We need to be challenging the status quo because we owe it to our customers, distributors and suppliers to constantly improve every part of the company finding a way to do things better, faster and at lower cost. Lastly, as we look to align resources to highest growth opportunities, we want to ensure that our efforts are yielding the highest returns. By evaluating and taking these necessary steps, we should deliver reliable and sustainable growth which will in turn generate attractive shareholder returns. It has been an exciting start and I'd like to thank the Board for calling me into action. I am extremely energized by the opportunity and potential in front of the company. It has been great hearing from the customers and seeing the positive response from our leadership to pivot for growth. As I indicated, it will not be an overnight shift but I do look forward to updating the investment community on the achievements and progress along the way. Now I'd like to turn the call over to Matt Eckl, Chief Financial Officer of CECO. Matt?

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 we are seeing sequentially in each of the respective markets. Revenue was down 1.3% in the quarter due to lower bookings on short cycle original equipment and project milestone timing. Gross margin was up 5.3 percentage point for the fourth quarter, driven primarily by synergies realized in our Peerless business unit and cost containment. Our operating loss was $50.5 million in the fourth quarter, negatively impacted by the goodwill and intangible asset impairment recorded in the quarter. That had an impact of approximately $1.60 on a GAAP diluted earnings per share basis. We will discuss this later in the presentation. Net cash from operating activities in the quarter was down 22.2% in Q4 year-over-year. Q4 non-GAAP operating profit was up 45.5% to $14.7 million and adjusted EBITDA was 33.6% to $16.3 million. Non-GAAP diluted earnings per share was $0.35, ahead of expectations. Moving on to our full year financial performance on Slide 12. Our bookings were $402.8 million for the full year. That's an increase of 12.6% year-over-year although down 5.7% organically. Revenue was up 13.5% for the full year although down 3.3% organically due to macroeconomic challenges. Revenue was up in the energy segment but down in our environmental and fluid handling and filtration segment. Gross margin was up 2.6 percentage points for the full year due to project management excellence. Operating loss was $25.6 million for the year being negatively impacted by the previously mentioned intangible asset impairment recorded in the fourth quarter of 2016. Diluted earnings per share on a GAAP basis was a loss of $1.12. Net cash from operating activities was $69.6 million, allowing us to pay down nearly $50 million of term debt and pay $9 million in dividends to shareholders. Full year non-GAAP operating margin was up 1 percentage point and adjusted EBITDA was up 1.4 percentage point. Non-GAAP diluted earnings per share improved by $0.02 year-over-year. So, look, all-in-all CECO had a great operating performance and fantastic execution throughout 2016. Stepping back to our multiyear view, please move to Slide 13. Here you will see CECO's gross margin expanded to 32.5% and adjusted EBITDA rate improved by 440 basis points for a full year 2016. Cyber actionalization laser focused on operating cost and strong project discipline continues yield in the form of profitability. I am convinced with the right growth and scale we should continue to see our margins grow. I am going to focus on Slide 14 for a while as we discuss our backlog and bookings trend. As I mentioned earlier, Q4 is our first like-for-like comparison due to our pause on acquisition during 2016. As you can see bookings down in the fourth quarter to $77.7 million with full year bookings of $402.8 million and any near backlog of $197 million. Some of the slowdown is attributed to pressure in oil and gas markets. EMP CapEx spend has been down three consecutive years due to the decline of oil. Recent analysts estimate anticipate 5% to 7% increase in spend in 2017 led by stabilization of oil prices. This mild recovery should help our North American short cycle businesses and be promising for our global long cycle energy businesses in the future. US Industrial production is expected to grow approximately 3% in 2017. This should help our environment business as well. But it's too early to tell the impact. Our US industrial and production is expected to grow, feasibility is low at this point for our environmental segment. With all that being said, we can't just settle for market left. We also need to grow with our unique value proposition. At a recent leadership session of our environmental segment, I was very excited by the enthusiasm displayed by our sales team collaborating on ways to drive our sales initiative. It was evident and clear to me that in my first interaction with this team, that we have a very deep brand specific application expertise. The transformation becoming a value solution provide as evidenced in Dennis' comments earlier regarding Kirk & Blum are just beginning to show green shoot. I am really excited about the opportunities ahead for CECO. On Slide 15, you'll see our revenue trend for the past five quarters. Everything on this chart is organic. Our revenue was $100 million for the fourth quarter of 2016, a decrease of 1.3% year-over-year. For full year 2016, organic revenue was down 3.3% year-over-year as double digit growth in recurring revenue offset weaker original equipment demand in North American and Asian industrial market. We saw minimal FX impact. Looping to Slide 16 now, our non-GAAP gross and operating margins are trending up. Non-GAAP gross margin in Q4 had 35.8% were up fantastic 4.8 points year-over-year and non-GAAP operating margin on a similar basis was up 4.7 points. That's fantastic execution. Non-GAAP operating margin was 14.7% in Q4, 2016 compared with 10% in the same period last year. The sequential improvement in margins is due to favorable project execution, greater mix of aftermarket sales and benefits from operational synergies related to Peerless acquisition. Our continued performance improvement is evidenced by four consecutive quarters of improving operating margin performance since Q4 of 2015. On Slide 17, we achieved an adjusted EBITDA of $16.3 million for Q4, up from $12.2 million in the same period last year. Our non-GAAP operating income was $14.7 million compared with $10.1 million in the comparable period last year. These improvements are attributable to overall operational excellence. I intend to continue to drive this mindset into 2017. Now moving on to our segment discussion beginning on Slide 18. Revenue in our energy segment was $52.3 million, up 3.6% from $50.5 million in the prior year. Global energy bookings of $35.8 million for Q4 were up sequentially from $31.7 million in Q3 or 12.9%, but down 35.3% year-over-year from $55.3 million in Q4 of 2015. As mentioned in leading commentary, I believe the bookings may have trough at $31.7 million in Q4, 2016 with the 13% improvement quarter-over-quarter. Moving to Slide 19, revenues in our environmental segment were $33.4 million compared to $34.2 million for the same quarter last year. Market conditions and outlook remain challenging in environmental as was evidenced by our low bookings of $25 million in Q4, 2016 compared to $30.3 million in the prior year, down 17.5% year-over-year and 48.7% sequentially. The first half of 2017 stands to be tough comparable due to a few large projects awarded in the same period in 2016. However, we are working to shore up our environmental backlog to show year-over-year growth for full year 2017. To do this, we must continue our efforts on customer connectivity to services and aftermarket parts as our customers seemed to be shifting the spending habit from CapEx to OpEx. Our final segment is Fluid Handling and Filtration on Slide 20. Revenue in our Fluid Handling and Filtration segment was down 15% year-over-year. But if you look at our bookings of $16.9 million were up 14% year-over-year and at 7% sequential improvement. We are encouraged by the bookings trends we are seeing over the last few quarters. Based on what we are seeing in the North America markets, we are optimistic that this segment can continue to grow sequentially into first half of 2017. Yes, some of this left is tied to the market improving, but I am convinced that our sales strategy initiatives led by our segment leadership is starting to pay dividends. Of all of our businesses this one has the greatest opportunity for growing recurring revenue. We just need to make additional investments. We are doing that by adding an international focus and leveraging our Middle East footprint with dedicated sales resources. On Slide 21, we illustrated our focus on debt repayment and deleveraging. We paid down $10.1 million on term debt in Q4 of 2016 and $49.7 million for the full year. The favorable debt repayment process is representative of the CECO free cash flow model and working capital excellence. Our bank defined leverage ratio reduced to 2.5x as of December 31, 2016 from 2.9x as of September 30, 2016. We are below our current covenance of 3.5x as of year end and our 3.25x threshold through September 30, 2017. Quickly touching on Slide 22, we show the trend of our cash flow generation. Our ability to generate cash flow is very strong with $16.7 million net cash provided by operating activities and $16.4 million in free cash for Q4 of 2016 respectively. On year-to-date basis for 2016, net cash provided by operating activities was $69.6 million and free cash flow was $68.5 million. Coming to Slide 23, you'll see our condensed balance sheet. As I mentioned earlier, total bank debt was reduced from $136.9 million in Q3, 2016 to $126.4 million at the end of Q4, 2016, as a result of our debt repayment of $10.1 million. We also maintained cash and equivalents at $45.8 million at year end, up from $41.8 million at the end of Q3. Net working capital excluding cash and equivalents was $20.8 million at year end of 5% of sales, down from $26.9 million or 6.5% of sales at the end of Q3. Comparing my prior experiences, CECO is a topnotch operator of working capital. For a long cycle businesses our project management team is superb in managing our PAC billings and cost. There is still improvement opportunities when comes to air and AP and inventory. I hope to bring some of my experience to drive continuous improvement in these cycles and look forward to updating you on our progress here in the future. On Slide 24, we've summarized our Q4, 2016 intangible asset impairment. It was a total of $57.9 million comprised of $53.7 million in goodwill and $4.2 million of trade names. This charge related primarily to our Met-Pro acquisition in 2013 which is mostly in our Fluid Handling and Filtration segment. The net impact of this charge was a net loss of approximately $1.60 per diluted share in the Q4, 2016 period. As noted, we are facing end market challenges; they are putting pressure on our prior year projections triggering these impairments. Our GPS business has seen three consecutive years of revenue decline mostly on the heels of the recent oil price crisis. I am very familiar with this market and would say that at the time of acquisition this market was very optimistic. At this point, market rebalancing feels more like a U shape recovery. This is evidenced by peers in this space that have also taken impairment charges issue cautionary verbiage or lowered their estimated fair values. It's important to note that while these impacts are GAAP operating income and EPS, it does not impact our ongoing business, cash flow or banking covenance. Lastly on Slide 25, I am pleased to report that CECO has concluded the internal controls were effective as of December 31, 2016. I want to take a moment to personally thank Ed for assembling a great team over the past year and for fully remediating prior weaknesses. Shareholders should feel assured that we've invested heavily to improve the vigor of our financial reporting and controls. We've upgraded our controllership team, we've invested in our internal audit team, we've added challenge to our business finance team to partner and grow the business. We've put a significant amount of effort into this process and will continue to do so in the future. Our reputation and integrity is of the utmost importance to me. While we are compliant, we still have opportunity for improvement in our systems and processes. With the right discipline investment we can move from an organization that is closing the books compliantly to one that is driving enterprise value creation for CECO by removing waste on our processes, supporting business decision making and directing our planning and forecasting processes. Again, I am really excited to be here and start my journey with CECO. I look forward to updating you on our progress, more immediately I am looking forward to our Q&A session today. At this time, I'd like to now turn it over to Dennis for his closing remarks.

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.