CECO Environmental Corp. (CECO) Q1 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the CECO Environmental Corporation First Quarter 2017 Earnings Release. At this time, all participants are in a listen-only mode. A 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, Mr. Ed Prajzner, Executive Vice President of Corporate Development. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us on the CECO Environmental first quarter 2017 conference call. On the call with me today are Dennis Sadlowski, Interim Chief Executive Officer; and Matt Eckl, Chief Financial Officer. Before we begin, I would 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 Web site at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the Web site under the Upcoming Events tab. I would also like to caution investors regarding forward-looking statements. Any statements made in today’s presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2016. 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 in 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’m now in my fourth month as Interim CEO at CECO Environmental and I have to say I like our business more and more with each passing day. The customers that I’ve met with let me know clearly that they value our solutions, products and services. Our employees are energized and enthusiastic about our pivot towards a greater external focus to drive organic growth. And our operational execution, which has of course strengthened CECO, continues to deliver strong growth in operating income margins. We’re making significant strides to achieve our great potential and we’ll need to invest in some further technical depth to fuel our growth as we cultivate the passion for teamwork and valuable customer outcomes as a part of our path forward. CECO is a great business. It serves a number of attractive end-used customer markets; power generation, gas pipeline, refineries, along with both manufacturing and process industries within the diversified industrial category. Our solutions, services and product applications enable customers to optimize their process safety and efficiency, while also improving our shared environment by addressing nitrogen oxide emissions, contaminant such as volatile organic compounds, particulate and hazardous gases. We’re an important part of our industrial customers’ plans for growth, as we provide them more efficient solutions that simultaneously provide for a clean and safe work environment for their employees. CECO and its brands have built a reputation for delivering highly reliable, technically strong products. So our ongoing challenge is to continue and enhance and propel our organic growth engine. One important element of value to our customers is that we can provide lifetime support and service solutions to keep our customers at the forefront of competitiveness. To this end, our recurring revenue aftermarket service teams continue to make progress and are a beacon for organic growth. We measure and track customer connectivity on a regular basis and utilize our deepening customer relationships to expand our offerings to help customers extend the useful life of their technology and to optimize their ongoing total cost of ownership. I’m pleased with the progress that we’ve made in just three months since I stepped in from the Board to lead the company. During this time, we’ve assembled a strategy team consisting of approximately 20 of our top leaders from multiple levels within the company along with external strategy process experts to facilitate and guide us, and have invested significant time on critical assessments of our markets, competitive positioning and internal capabilities. The teams have focused their efforts on two offsite deep dives to assimilate the key trends and begin to prepare us to not only leverage the insights but also to create a learning process across the organization. We’re converting these assessments and insights into the beginnings of our roadmap for how best to capitalize on and position ourselves to generate profitable organic growth. We are coming off a few quarters of disciplined bookings leading to a decline in revenue. Some of this is clearly a tough macro environment in some of our served industries, but we also recognize that we are not maximizing our commercial potential which is why we’re undergoing a process of strategic refresh and reorientation. We still have a way to go to shift from our internal orientation that focuses heavily on streamlining our operations to an outside-in external market orientation that constantly monitors and adapts to customer market trends. Our aim is to become a much faster sense and respond organization, and we’re making some progress. The number of direct customer meetings of our senior team is up substantially, so our leaders are embracing this shift and leading from the front. Personally, I’ve met with over a dozen customers, travelled with our business leaders to China and Europe and hit eight U.S. states along the way. Several common themes are being reinforced in these travels. We’re making service valuable equipment and solutions for the markets to enable our customers growth, we have untapped potential across the units to compete as a stronger application player in our target segments and we will need to add some resources in energy to drive the organic growth engine that we desire. Turning to Slide 5. Results in the first quarter of 2017 are largely in line with our internal expectations, but well short of our aspirations. I am pleased to report some positives with sequential quarter improvement in bookings signaling what we expect to be a pivot point for future growth as well as the strength in our gross and operating margins across the business. Key highlights include bookings of 84 million for Q1 '17 reflect a sequential increase of 8.1% over those in Q4 2016 with improvement coming in all three of our reporting segments. Our 34.5% gross margin percentage for Q1 2017 is up 390 basis points versus Q1 2016. Our non-GAAP operating income margins increased slightly in spite of lower revenues from 10.6% to 10.8% versus the prior period in the first quarter. Non-GAAP fully diluted earnings per share of $0.20 was up compared to $0.18 last year. We used cash from operations to pay down 4 million of term debt in the quarter reducing our total bank debt once again. These positive results demonstrate our ability to translate sales into solid gross margins and cash flows and validate the core operational strengths that CECO has been known for. At the same time, several other financial metrics while achieving our internal expectations were not at all where we’d like them to be both sequentially and versus Q1 2016. Bookings were up sequentially as I noted but were well below the strong results in Q1 of 2016. $92.7 million of revenue for Q1 2017 was down 10% versus the same period last year. Adjusted EBITDA of 11.5 million was down 9.5% versus Q1 2016, but I will say that I’m pleased that our EBITDA margins held up at 12.4% of revenue demonstrating that our business model and team has responded well to the decline in revenue. Backlog of 184 million is down 6.5% from year-end and is down 19% versus Q1 end in 2016. Our strategy refresh and reorientation efforts will not bear fruit overnight, but I remain optimistic as the team is facing the realities and the potential we see with the renewed intensity aimed at what it takes to create value to customers, while we build from, and leverage our core strengths and disciplined execution. Reinvesting in customer responsiveness, new innovative products and the ease of doing business will require focus, time and effort. What I am pleased with is our ability to execute internally. The financial results over the past few quarters give me the confidence that we are both capable and committed to operationally preserve the strong gross margins and non-GAAP operating income margins. The team has done a great job of streamlining operations to scale up and down with the volume of the business generated. Our asset-light operations with strong production partners and rigorous emphasis on managing working capital have provided a favorable flexibility in a period of lower sales volume. The leadership team is committed to the continued focus on these elements across the company. At the same time, upon full reflection, our first quarter results reinforce that building a growth engine that is recognized for delivering strong value to our customers, remains a top ongoing challenge for our team. We are pressing forward on a variety of efforts to transform the ethos of the business from primarily cost discipline to an outside-in focus on customers and markets. As part of the process, we’ve begun conducting formal qualitative customer interviews and utilizing third-party experts to train our leaders in these methodologies for use on an ongoing basis. The interviews provide us with significant insight and we plan to use this as part of our regular operating rhythm. Feedback to-date from these interviews is validated that our emphasis on safety, maximizing process up-time and eliminating contaminants and improving air quality is the right focus. Our operating metrics will remain of great importance. We will increase our emphasis on customer satisfaction using a net promoter score to help shape how we build market share in our fragmented markets. As I noted, our strategy refresh teams have conducted several in-depth interviews with customers across all segments and markets. One such interview triggered a real-time bad news, good news story. The bad news was that we discovered that we had disappointed a significant customer with regard to a new application to improve their air quality management performance. The good news is that we immediately mobilized a small team to address the customer’s technical and logistical concerns. Our responsive service efforts put us back in the good graces of this client, and we’re embedding the lessons learned into a more robust business process. I also had the recent opportunity to meet with executives from one of the largest recycled lead smelters in the U.S., which feeds the production of lead-acid batteries. Lead-acid batteries represent one of the greener technologies for energy storage and that close to 100% of the lead used in batteries in the U.S. and Europe is recycled. At the same time, the prices of recycling lead requires high environmental protection standards, which is where CECO comes in. The customer knows us primarily for a single brand, our Adwest Regenerative Thermal Oxidizers and only realized during this meeting that the Bush International brand of filters used throughout its plants for the capture of fugitive emissions are also produced by CECO. And we did deliver a number of other product applications to aid customers in this industry. Now the executives of this customer set the bar for the industry in terms of worker safety and protection of the environment, so they are pushing for the standard of performance. And upon better understanding the full breadth of our capabilities, they challenged us with an opportunity to address an innovative but difficult filtration need that could improve their process efficiency. This is one tangible example of an interaction that once again demonstrates the untapped potential of our broad offerings. We are now preparing to have a team of CECO leaders from varied applications visit this customer to fully understand what it takes to help them remain the industry benchmark for environmental performance and worker’s safety. Turning to Slide 6. We operate in several healthy long-term markets, some with improving near-term backdrop but overall we’re experiencing a challenging mix of end market activity in a few key segments. Our environmental air pollution control and fluid handling and filtration business segments produce solutions, products and services to a diversified industrial end-used customer markets. Credit Suisse suggest that U.S. industrial were up 3% in the first quarter of 2017. And our fluid handling and filtration business segment has experienced increasing customer activity consistent with this data. But market uncertainties seem to have muted some of the customers served by environmental, air pollution control business. We review a number of monthly economic indicators in the U.S., Europe and Asia in an attempt to correlate them with our RFQ activity that we are seeing from our industrial customers. These indicators include purchasing managers’ index and other indicators related to industrial production, manufacturing, capacity utilization and new orders. Year-to-date, the U.S. indicators have reflected alternating month-over-month increases and decreases without a consistent growth trend, while China’s most recent manufacturing index has fallen to a seven-month low. Our energy business segment serves the national gas-fired power, solid fuel power and midstream natural gas pipeline in used customer markets. Demand for electricity continues to grow globally with natural gas power growing as a cleaner fossil fuel with the ability to ramp quickly with demand. Conversely, developed markets investment in coal will likely be muted. Now coal is expected to remain a strong part of the overall energy mix for the next decade with the bulk of any new investment coming from emerging markets. Our global presence and teamwork helped to position us to remain a strong provider of solutions to their power-gen segments. For the midstream natural gas pipeline market, we produced separators and silencers for compressor stations. And as demand for natural gas continues to grow, the need for pipelines and O&G projects are expected to continue. There’s been a significant legislative push in the U.S. Congress for faster oil and gas infrastructure approval process with more of the near-term focus on oil. So the legislative emphasis bodes well for our future. We’re a global leader in cyclone technology for fluid catalytic cracking units at petroleum and petrochem refineries with our Emtrol-Buell brands. 2017 will be very slow for new projects globally. In February, the U.S. Energy Information Administration suggested that markets are largely imbalanced over the next two years, but the International Energy Agency’s latest five-year forecast reports that global oil supply could struggle to keep pace with demand after 2020. The IEA’s analysis concludes that in the next few years, oil supply will grow in the United States, Canada, Brazil and elsewhere but this growth could stall by 2020 if the record two-year investment’s slump of 2015 and 2016 is not reversed. So we have a great business in a tough part of the cycle with the midterm outlook coming back fairly strong. Turning to Slide 7. Our journey continues and we’re making the necessary steps to win in the long term and deliver valuable customer solutions that deliver sustainable growth. This is the key to achieving our shareholder value creation potential. Starting with the strong operating foundation that we have built over the last few years, we have made significant progress over the last three months on our strategic plan refresh process, with two of the phases of the process completed and the final phase is taking shape through the summer. Our efforts and plans and geared around an outside-in approach and a customer-first culture, and we are already starting to see evidence of this reorientation taking shape. Now before I turn the call over to Matt and the financial details of the quarter, I would like to speak to a couple of recent commercial wins that exemplify the value of our solutions, products and services generate for our customers. One the bigger wins in the quarter demonstrates the strength of our global teamwork. We were awarded a first-time order of close to $3 million from a new customer based on our gas separation capability and reputation for project execution. The project was designed and procured by our EPC client in Japan for an end-use application in Algeria, which will be fabricated in both Europe and the U.S. Our teams from Singapore, China and Dubai coordinated the application needs and the quotation process. Great teamwork and global coordination that customers are coming to expect from CECO. Another win of note employs our Fybroc brand of non-metallic pumps. We are supplying our specialty non-metallic continuous-strand fiberglass reinforced pumps on a groundbreaking solar-powered, saline water plant in the Middle East. Our Fybroc pumps are uniquely qualified to handle high volumes of seawater in a safe and reliable manner without corrosion at this innovate large-scale, solar-powered desalination plant. The plant has been designed to supply more than 20 million cubic feet of water per day employing a leading-edge solar reverse osmosis desalination method. It’s great to be part of such an innovative facility which incorporates an ultra-high concentrator solar PV plant to supply power for the desalination process providing for reduced operational costs and no harmful gas emissions. It’s a great win for our team based on our strong product performance and corrosion resistance, optimized design for maintenance and the ability to serve the global market. In summary, CECO is a great business with strong applications and people that are skilled, talented and energized. As we sharpen our focus on customers and markets, we expect to continue to demonstrate that with improved financial results. 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’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 first quarter of 2017 for our consolidated CECO results and three segments. As a reminder, our non-GAAP adjustments include but are not limited to executive transition expenses, facility exit expenses, acquisition and integration expenses, earn-out expenses and goodwill and intangible asset impairments. Our non-GAAP presentation is intended to provide trend analysis and assessment of our core business performance. Our bridge of non-GAAP items is referenced in the appendix of today’s presentation. On Slide 9, you’ll see our headline performance comparable for the first quarter of 2017 year-over-year stated on a GAAP and non-GAAP basis. We had a solid operating quarter despite macroeconomic headwinds which led to reduced revenues and bookings. Revenue was down 10.2% in the quarter year-over-year due to lower opening backlog and lower aftermarket sales, primarily due to a few large service contracts executed in Q1 of last year. Aftermarket revenue did improve sequentially in Q1 versus Q4 of 2016. Gross margin was up 3.9 percentage points year-over-year for the first quarter driven primarily by a more favorable project mix in the current year. Operating profit was 1.4 million in the first quarter, down 4.4 million year-over-year due to increased SG&A expense and increased amortization and earn-out expenses. SG&A on a GAAP basis was up 2.4 million year-on-year from 20.9 million to 23.3 million in Q1. Approximately 1.1 million of spend is related to one-time executive transition and facility exit expenses called out in our non-GAAP reconciliation tables. The remaining SG&A increase year-over-year is both 50% transient costs associated with strategy refresh and approximately 50% structural as we invested in our back office team to ensure that the strong internal controls in appliance are in place. CFOA in the quarter was down 50% in Q1 year-over-year. This decrease is due to an accounting classification of an earn-out payment that reduced CFOA along with a slight increase in working capital. Our gross bookings were 84 million for the first quarter of 2017, a decrease of 30% year-over-year. It is important to note that during the quarter, we did cancel a $4 million order previously disclosed as acquired backlog. On a good note, we did see our bookings increase 6.3 million or 8.1% sequentially. While one quarter does not make a trend, we are hopeful that our commercial orient and focus is an inflection point towards growth. On my recent visit with [indiscernible] business leaders in Europe, they indicated that we are seeing both volumes and sales wins picking up from our customer connectivity focus. We’ve dedicated insight sales teams specifically to aftermarket and bolstered our outside sales team with two additional sales professionals as a result. Q1 non-GAAP operating margins and adjusted EBITDA margins are 10.8% and 12.4%, respectively, or up modestly over the prior year in spite of the revenue decline. Non-GAAP diluted earnings per share was $0.20 compared to $0.18 in Q1 of 2016. This was driven by strong operating performance and a favorable non-GAAP effective tax rate of 12.5%. Moving on to Slide 10, I’ll discuss our backlog and bookings trend. Starting off on a good note, our orders picked up sequentially in aggregate and for all three segments hitting 84 million, up from 78 million in Q4. While we are encouraged by this uptick, we are not pleased with our book-to-bill performance. Power-gen and refinery market softness are the primary drivers for year-on-year declines. In this regard, Credit Suisse reported declining gas turbine new capacity at the end of Q4 due to a lower demand outlook for 2017 coupled with a decline in refinery CapEx spending in Q1 2017. Recent industry estimates anticipate a 5% to 7% increase in '17 for the downstream oil and gas and petrochemical industries as oil stabilized around $50 a barrel. This is encouraging as our short-cycle businesses such as pumps should benefit in the second half of 2017 and long-cycle businesses such as Emtrol-Buell should benefit later in the year heading into 2018. On Slide 11, you’ll see our revenue trends for the past five quarters. Our revenue was 92.7 million for the first quarter of 2017, a decrease of 10.2% year-over-year and 7.3% quarter-over-quarter. On a sequential basis, both the ETF and fluid handling and filtration segments experienced revenue increases which were offset by a decrease in the energy segment. I’m happy with the sequential improvement of our aftermarket business, although this growth was offset by weaker original equipment demand. Aftermarket was approximately 30% of our Q1 revenue profile. Moving on to Slide 12 now, our gross margin was down sequentially from 35.7% in Q4 but is up 390 basis points year-over-year. Similarly, non-GAAP operating margin, although down sequentially from 14.7% in Q4, is up modestly year-over-year to 10.8% from 10.6%. The year-over-year improvement in margins is due to project mix and execution. I’m exceptionally proud of our project management team; leaders such as Amit Shah in our Peerless business and Bill Dousis in our Effox business that worked tirelessly with our engineers and subcontractors to execute projects under budget while delighting the customer with responsiveness and problem solving. As competition picks up in the power-gen market and project scope sizes become larger and more international, we will rely on the backbone of this team to execute flawlessly. It is core competency of CECO. On Slide 13, we achieved adjusted EBITDA of 11.5 million for Q1 compared with 12.7 million in the same period last year. Although down in dollar terms year-over-year and sequentially, our adjusted EBITDA margin rate improved year-over-year to 12.4%. As mentioned previously, our adjusted EBITDA includes SG&A investments in Q1, we will continue to make sales and service investments that will yield the highest returns driving future organic growth and value creation. More details will be provided as we progress through our strategic refresh. Similarly, our non-GAAP operating income was down in dollar terms year-over-year on the volume but our rate has improved. This consistently is attributable to operational excellence and as volume recovers, we should benefit from operating leverage. Now moving on to our segment discussion, beginning on Slide 14. Revenue in our energy segment was 41.1 million, down 14.2% from 47.9 million in the prior year. Global energy bookings of 40.7 million for Q1 was up sequentially from 35.8 million in Q4 of 2016 or 13.7% but down 36.3% year-over-year from 63.9 million in Q1 of 2016. As you can see on this page, Q1 of 2016 was a tough comparable at 63.9 million as we received a few large orders for silencers, dampers and our SCR products in this period last year. Our pipeline for energy orders is encouraging. We believe that bookings may have troughed at 31.7 million in Q3 of '16 for this segment and we are striving to build on the two consecutive quarterly improvements. Moving to Slide 15, revenues in our environmental segment were 35.9 million compared to 39.1 million for the same quarter of last year. Market conditions and outlook remain challenging in environmental as was evidenced by our low bookings of 26.2 million in Q1 of 2017 compared to 40.5 million in the prior year. That’s down 35.3% year-on-year although up 4.8% sequentially. We believe that U.S. industrial production growing at 3% is a good sign for this business and to capitalize, we will need more feet on the streets and be quicker to respond to customers’ needs than our competitors. Ease in doing business is key to winning in this market. Our final segment is fluid handling and filtration on Slide 16. Revenue in this segment was down 4.8% year-on-year although up 6% sequentially. Bookings at 17.1 million were up 8.9% year-over-year and 1.2% sequentially. We are encouraged by the bookings trends we are seeing with three consecutive quarters’ improvement. Domestically, we are seeing the benefit of improved end markets. Internationally, we’ve added additional sales focus to penetrate new markets with great products and we believe we are taking share there. On Slide 17, we illustrate our focus on debt repayment and deleveraging. As Dennis mentioned earlier, we paid down $4 million of term debt in Q1 of '17. However, our bank defined leverage ratio increased modestly to 2.57 as of Q1 close compared to 2.5 at year-end 2016. Higher other commitments and lower trailing 12-month adjusted EBITDA offset the benefit of paying down bank debt. The increase in other commitments is attributed to letters of credits issued in connection with our growing international business. Nevertheless, we remain well below our current covenant threshold of 3.25 which remains through Q3. Quickly touching on Slide 18, we show the trend of our cash flow generation. Our ability to generate cash flow is strong with 4.7 million of net cash provided by operating activities and 4.3 million in free cash flow for Q1 2017. Lastly, on Slide 19 you’ll see our condensed balance sheet. As I mentioned earlier, total bank debt was reduced from 126.4 million at year end to 122.3 million at the end of Q1. We also maintained cash and equivalents of 45 million, slightly down from 45.8 million at year end. Net working capital, excluding cash and cash equivalents, was 23.8 million at quarter end, up from 20.8 million at year end. We remain committed to maintaining our positive trend of cash flow generation employing working capital best practices. I am pleased that our trade working capital defined as accounts receivable plus inventory less accounts payable plus or minus net progress billings is at a record low of 11.5%. In fact, our net project billings were in a net favorable position as of Q1 close. This cements my previous comments on project executions. On the other hand, we can still do better in accounts receivable and inventory and that will be our focus for the remainder of 2017. With that, I will turn the call back 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 in our people. CECO has great operating metrics and asset-light business model and a deep bench of disciplined operators. Together with a better focus on delivering top line growth and value to our customers, we should be able to build a stronger, more effective CECO. With that, I would now like to turn the call over to the operator to take your questions.

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Ryan Cassil of Seaport Global. Please go ahead.

Good morning.

Good morning, Ryan.

I was wondering just based on where the bookings were and the current backlog I’m trying to partner that with you commentary that things are looking up, I was wondering if you could give us a sense for how do you think the year plays out in terms of the top line? Should we be thinking about a decline similar to what we saw in Q1 for the second quarter and do you think that growth can turn positive or flat now here in the second half? Any color there would be great. Thanks.

Thanks, Ryan, and thanks for spending the time with us this morning. It all starts with new bookings and I think I spoke last call as well that last year in 2016, we started out with great strength on the bookings and went through a period that was much weaker. And this year we started out a little weak in the bookings and we anticipate as the year goes on, building strength and building momentum. That’s what our pipeline shows right now, that’s what our team is anticipating and that’s what I would give you in terms of what we’re thinking as the year goes on. We see kind of a reverse of the trend that we saw in bookings last year. How that translates to sales is always a little dependent than on how quickly customers want us to get started in the project business and as well the mix of short cycle to long cycle that we have.

Yes, okay. But it seems like I guess just based on the start, the bookings trend shifted at first half. It’d be tough to have growth for the full year. But you may see an exit rate at a positive organic growth level if things continue to pick up I guess from here. Is that a fair way to think about it?

I’d say that’s probably a reasonable look right now considering the past three quarters of bookings that we generated. Again, a lot of momentum coming into new bookings and what we’re looking at. We’re seeing a lot of larger projects right now in the forward RFQ look, especially in energy and those tend to be digital. We got a lot of optimism in the team and the global teamwork is really starting to function.

Okay. In the environmental, that’s where you’ve seen that step down and it’s been actually stable over the last few quarters. Are we thinking that’s more of a slower kind of gradual drift higher sort of at this new level, or do you see a bounce back there potentially in demand as we move forward?

Well, honestly, the single largest headwind across the entire business is in our FCC cyclone business. We are absolutely the number one share player. It’s a global market. And we don’t believe we’re losing any market share. If anything, we have a few activities that might suggest we’re even gaining share. But after two very strong years, we’re experiencing a downturn in new projects that hasn’t been seen since the 1980 oil crisis. So year-over-year, bookings just in that field alone could be down as much as 30 million but we do come into the year with a good backlog, but at the same time, as I say, a harsh downward outlook in the near term. We see that same outlook coming back in '18 and beyond. And so it’s still a very good business and promising in the outward periods. This year is going to generate a lot of headwind for us.

Okay, understood. And bigger picture thought here. You mentioned you still need to implement some resources in order to drive organic growth. Perhaps indicative of just your thoughts on where the business is today and where it needs to be and now that you’ve been there for a couple months, I wonder if you could just kind of give us your thoughts on what those resources might be and how long it might take to implement that strategy to kind of get things where you want it to be?

Yes, well, I would tell you that armed with the extra time in the period that I’ve been here, I’d say we have still lots of potential. That would be the number one description of what I see and gets me excited about the business. There’s potential across the people in the markets. For example, in our air pollution control business, we’re still largely competing as a fragmented set of very strong application-focused friends rather than really leveraging that broad case of we have expertise across the gamut of industrial air quality solutions. And so that’s an area that we’re looking at for improving investing. In energy, Peerless, Aarding, Zhongli, Emtrol-Buell added to that as far as environmental. These are strong market-leading positions, great application providers. And across that, we’re finding very good synergy and very good building on the global teamwork and that’s having a good impact. So those are some of the areas. In terms of where we’re making our adds; today, we are embedded in prioritization through the strategic refresh process. But as that goes on, everywhere we find rainmakers and we’ve found a few guys that love the ethos that they’re seeing in the company and wanting to come back to the company and really bring that focus to the market or from the customers into the market. And so we’re making spot additions as we go and we’ll really look at how we perhaps shift and make the tradeoffs as we complete our strategic refresh process. I hope that helps. It’s the blend of kind of short term and a little bit of the outlook work that’s underway.

Yes, it sounds like I could summarize adding some strategic sales leadership and perhaps shifting the go-to-market strategy in some of the verticals. Is that a fair summarization?

Yes. And one of the other things that I would characterize is when I talk about outside-in, that whole philosophy is really being embraced well across the leadership. If I compare the last three months with the fourth quarter of 2016, we have twice the number of direct face-to-face customer touch points from our senior leadership team that we did again in the prior fourth quarter. So it’s being embraced. The leaders are getting out more often, more regularly and we’re finding that that also will create momentum and headroom for our sales people individually who were working the transactional side.

Okay, great. Thank you. I’ll pass it on.

Thank you. [Operator Instructions]. Our next question is coming from Sean Hannan of Needham & Co. Please go ahead.

Yes. Thanks for taking my questions here this morning. So just a follow up on some of the commentary around bookings now. It’s nice to see the bookings up quarterly and I realize you folks are seeing good activity at present. But I think that the first quarter over the last good number of years it’s a typical uptrend that you’re going to see in that first quarter. So I just am looking to see if I can understand maybe a little bit better anything specific in there that’s encouraging or unique that makes it stand out more supportive of the transition that you are trying to put into place here from an overall effort perspective? Thanks.

Thanks, Sean. And I’m not sure I followed completely your question. What we --

I think that the last good number of years, your first quarter of bookings, it’s always up. So I’m trying to understand a little bit better of what is supportive in the uniqueness that we’re seeing here. And anecdotally you’ve mentioned that you’re seeing good activity here but I’m just really trying to understand this a bit better, because quantitatively it seems to mirror what we’ve done in the past? And I’m not saying that in a negative fashion. I’m just trying to get a little bit more color.

So I think I understood the question and it would be hard for me to put into context that we have a seasonal first quarter that is stronger than other parts of the year. With the project nature of our business, I don’t know that the project side has had any real seasonality to it from what I can see. And we started off the year still a little slow coming out of the fourth quarter of 2016 and we’re seeing that momentum pick up kind of month-to-month and week-to-week. I guess anecdotally what I would add and I think I might have mentioned that already was one of the interesting things were seeing particularly in the energy segment business is quite a number of larger projects. So the project size is growing. Certainly these are digital. But knock on wood, I think we were pretty successful in what we were looking at in the first quarter. This one project that was on the cusp of being rewarded, and through some customer reorganization, would fall into then the following quarter, into the second quarter. But other than that, we didn’t see a lot of project losses on things that we were tracking towards the first quarter. As we move forward, I think we’re seeing a similar picture. A lot of good activity, because they’re larger projects, they tend to have a little more – take a little more time before the customers’ commit and get things going. But we’re pretty optimistic that again we’ll see kind of a reversal of the trend on bookings that we saw last year.

Okay. And then earlier you also had mentioned that there was an issue that was encountered with a significant customer in terms of the product and/or quality. I’m not sure if I fully understand what the product or the nature of the problem may have been. And I suppose part two to that in resolving that, can we understand that a little bit better? And what products are you typically supplying into them? Thanks.

Yes. This was in the air pollution control in one of our applications arena. And what – the issue was blend of a technical issue where they were applying our products into a much more difficult operating environment in terms of temperatures and pressures. And so we found an issue that needed to be addressed and we’re addressing it, but it was going a little too slowly. So the team jumped on that. We got some engineering talent to reassess their process, to look at what the triggers were, what the transient temperatures might be and have addressed that. We applied that and subsequently we got a couple of small follow-on orders. So I don’t think it’s material in the context of outlook but it does heighten the intensity that we need to place in managing these things through as we look to build value for our customers. And so it was also I believe mentioned, we are translating that back into a much more robust process in terms of how we look at executing the ongoing orders and any issues that pop up, so they get visibility earlier.

Okay. And then last question here, a little bit more model specific. The strong gross margins that you had in the first quarter I think you had commented this was primarily a function of mix. So just trying to understand how sustainable is that as we look to the next quarter and a little bit forward? And then what type of mix perhaps with some margin perspective are you seeing within the business that you’re currently winning or that is coming to you via RFQ? Thanks.

I’ll take that one. We did mix and project execution in Q1. I think that there could be some moderation in 2017 as a result of our OE orders growing, which we are expecting. And you should still expect 2017 to approximate 2016’s year-to-date average is what I’d say for right now. As far as mix goes, if you looked at the sequential improvement in our fluid handling and filtration business, if that continues down that path and grows as a larger percentage of our total sales, we should see margin rate accretion. And we’re also continuing to grow aftermarket and that should help to boost the mix as well. So hopefully that answers your question as far as the two items that we’re seeing moving our mix profile upwards.

Wonderful. Thanks so much for addressing the questions and all the color, folks.

You bet. Thanks a lot.

Thanks, Sean.

Thank you. We’re showing no additional questions in queue at this time. Gentlemen, do you have any closing comments?

Yes. I’m Dennis Sadlowski and I want to thank all of you for joining us this morning on our call for CECO Environmental. As we look forward, I think we just have a great business, fantastic core operating foundation within our business model. We have invested some energy within the company to pivot and build a growth engine, deliver organic growth and we’re seeing some good momentum on that. We’re very pleased that the progress we’re making with a lot of potential and see translating that into continued long-term value creation for our shareholders. Thanks again for joining us and we’ll talk to you again in 90 days.

Ladies and gentlemen, thank you for your participation. Today's conference has concluded. You may disconnect your lines and have a wonderful day.